The Market Today
Coronavirus Chaos: They Will Pay You to Accept a Barrel of Oil
by Craig Dismuke, Dudley Carter
Coronavirus Chartbook (Click Here) – Updated by 9:00 a.m. CT
Tracking the Headlines: Southwest announced that it was postponing its release from April 23 until April 28. New York City announced it was canceling all permitted events through June. Statewide, Governor Cuomo announced a fifth daily decline in new cases in New York and said the data suggests the situation was potentially past the peak. Texas reported a fourth daily decline in new cases and governors from Tennessee, South Carolina, and Georgia announced plans to begin allowing more business activity to resume in the days ahead. Elsewhere, Italy reported a decline in new cases to the lowest level of daily infection in six weeks and German Chancellor Merkel said the country shouldn’t move too quickly to re-open even as some small business resumed activity on Monday. A group of small businesses in the U.S. launched a class action suit against some of the largest U.S. banks alleging those lenders accepted the largest loans applied for under the SBA’s Paycheck Protection Program (PPP) instead of chronologically in order to maximize fees collected. Senate Majority Leader McConnell set up a pro-forma session for Tuesday afternoon as negotiations to replenish the program and provide funding for hospitals and testing continued. Senate Minority Leader Schumer indicated this morning that he believes they have a workable deal.
Existing Home Sales to Fall; Focus Remains on Oil and State-Level Virus Headlines: The only report on the calendar today is the March existing home sales report. Sales are expected to fall 9.0% but are likely to fall even more dramatically in April as activity has been hindered by containment efforts. More important to market-watchers will be the oil action and the various state-by-state announcements today.
U.S. WTI’s Historic Collapse Means Some Will Get Paid to Receive Crude Next Month: U.S. equities fell close to 2% on Monday and Treasury yields ended down modestly from where they closed last week. However, the market headlines were almost entirely spent on the historic developments that unfolded in the market for U.S. crude. Physical inventories of oil have swelled as output has failed to be pared back as fast as demand has collapsed amid the virus outbreak and related stay-at-home orders that have brought global travel to an essential standstill. As a result, oil storage facilities have been overwhelmed by the amount of oil needing to be stowed away, leading to market dynamics that drove the price of U.S. WTI below $0.00 for the first time in history. Once unthinkable, the May contract fell more than 300% from $18.27 on Friday to as low as -$40.32 per barrel before closing off the lows at -$37.63. The implication is that those who purchased the May contract before it expired on Tuesday would be paid to accept delivery of crude next month. The eye-popping plunge resulted in posts about super contango trending across social media as further-out contracts were less effected. Consistent with hopes the virus will slow soon and allow activity to pick back up, the June contract closed at $21 per barrel with the December contract ending at $33 per barrel.
Oil Drop Weighed on Inflation Outlook; Equities Slid and Longer Yields Fell: The energy sector declined 3.67% to serve as the third-worst-performing sector as all eleven groups fell to drag the S&P 500 down 1.8%. The pullback followed the S&P 500’s best two-week stretch since 1974 as investors cheered recent signs the virus could be peaking and certain world economies may attempt to partially restart activity soon. Despite all of the excitement in the oil market and solidly lower equity valuations, Treasury yields ended relatively little changed. The 2-year yield was flat at 0.20% while the 10-year yield dropped 3.6 bps to 0.61%. While nominal yields held steady to start the week, inflation expectations over the next five and ten years tracked oil lower. Market-based inflation expectations based on TIPS yields dropped 12 bps to 0.53% for the next five years and 7 bps for over the next ten years to 0.95%. Away from the excitement in oil markets, the flow of other headlines was relatively subdued on Monday with mostly positive news on the virus front, as detailed above.
Widespread Risk-Off Takes Hold as Historic Supply/Demand Imbalance Roils Oil: A widespread risk-off tone took hold of global markets overnight as the historic carnage in crude continued on Tuesday. The May futures contract for U.S. WTI crude remains a focus as it heads towards expiration later in the day. After yesterday’s seemingly illogical and hard-to-comprehend move lower, the contract rallied more than 100% and spent several hours back in positive territory. Some of the momentum has since faded, trimming the daily gain to 89% just before 7 a.m. CT and dragging the value back lower to -$3.90 per barrel. While the May contract’s volatility on Monday was skewed by limited open interest and proximity to the expiration date, the weakness has spread Tuesday into pricing of futures for June deliveries, reflecting expectations that market imbalances are likely to persist in the weeks ahead. The June contract for U.S. WTI fell more than 20% to $16 per barrel. The June contract for Brent crude has also tumbled nearly 20% to below $21 per barrel, its lowest level since 2002.
Oil Contagion Weighs on Other Markets: While relatively shielded yesterday from oil’s collapse, the weakness has begun to creep into other asset classes on Tuesday. Asian equities earlier closed down 1.8%, Europe’s Stoxx 600 was 2.4% lower, and losses for U.S. futures ranged between -1.0% (Nasdaq) and -2.3% (Dow). The global bond market has moved in a risk-off manner with prices diverging based on the relative safety of the sovereign credit. Germany’s 10-year yield fell 5 bps while Italy’s 10-year yield rose 5 bps. Except for a spike in the middle of March, the 1.98% 10-year yield for Italy was the highest since June 2019. At 7:40 a.m., the 2-year Treasury yield was 1.2 bps lower at 0.19% and the 5-year yield was down 3.0 bps to 0.31%, a new record low. Unfazed by reports Republicans and Democrats had reached an agreement for more small business emergency funds, the 10-year yield had dropped 5.2 bps to 0.55%, within 1 bp of its all-time low close. Adding somewhat to the daily uncertainty was a widely disputed U.S. media report indicating the U.S. intelligence community had information that North Korea’s Kim Jong Un is seriously ill after a major surgery. On the economic front, a measure of current economic confidence in Germany weakened further in April to a low back to 2009, but a glimmer of hope appeared in the outlook. The expectations index recovered sharply from -49.5 to 28.2, its highest level since 2015.