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S&P index futures declined as much as 1% on Monday along with Asia stocks (Europe was still closed for Easter) after a torrid 27% rally last week, with investors bracing for what will be the worst earnings season since the financial crisis. Even if EPS do not drop by as much as the catatrophic 30% that Goldman is expecting…

… the decline will last well into 2021 making the S&P now more overvalued than it was at the February all time highs…

… and traders may be starting to realize that. 

The benchmark index ended a holiday-shortened week on Thursday with its biggest weekly percentage gain in more than four decades as the Federal Reserve rolled out trillions of dollars to backstop businesses. Exxon Mobil Corp fell about 1%, while Chevron rose 0.5% and Apache Corp shed 3% in thin premarket trading.

Earlier in the session, the MSCI’ index of Asia-Pacific shares ex-Japan lost 0.3%. The Nikkei fell 1.9%, South Korean shares dropped 1.3% while China’s CSI300 index lost 0.5%.

Asia’s main ex-Japan stocks gauge is up 18% from a four-year low struck around mid-March following unprecedented global stimulus. But the index is off about 18% so far this year as investors are unconvinced that the worst is over for the markets.

Most markets in the region were down, with South Korea’s Kospi Index dropping 1.9% and India’s S&P BSE Sensex Index falling 1.7%, while Thailand’s SET gained 0.2%. The Topix declined 1.7%, with Pipedo and Hokko Chem falling the most. The Shanghai Composite Index retreated 0.5%, with Jiangsu Chengxing Phosph-Chemicals and Join. in Holding posting the biggest slides

Meanwhile, over the weekend, major oil producers agreed to their biggest-ever output cut, which however traders also now realize will not be enough (as Goldman calculated, it only pulls out a little over 4mmb/d in supply in a market that has over 30mmb/d less demand) and crude prices were subdued – trading unchanged from Friday’s close – on concerns even that would not be enough to head off oversupply with the health crisis hammering demand.

Brent futures were unchanged, trading around $31.30 or largely unchanged from Friday’s close; oil prices have slumped more than 50% from their January peak as the novel coronavirus pandemic brought the global economy to a standstill and hit fuel demand.

“The combined OPEC+ and G-20 cuts should set in place a bottoming process for oil prices and significantly limit the tail risk of free-falling into the single digits in our view,” Bank of Singapore, the private banking arm of OCBC, said in a report.

Elsewhere, US Congress faces intense pressure to negotiate an interim rescue package this week as the pandemic’s impact accelerates across the country. Seventy coronavirus vaccines are in development globally, with three already being tested in human trials, the World Health Organization said.

Notably, Dr. Anthony Fauci said that parts of the U.S. may be ready in May to ease emergency measures taken so far. But there’s also the possibility of a Covid-19 rebound in the fall which could be a factor in November’s elections, he said.

“While panic selling we saw last month has faded, not many investors would want to chase stock prices higher given we are about to see more evidence of economic downturns,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui DS Asset Management.

With earnings season kicking off this week, investors will be hoping to get a sense of how bad the hit to global earnings could be as the coronavirus upends the world’s economies. Without an effective therapy or a vaccine for the novel coronavirus, the U.S. economy could face 18 months of rolling shutdowns as the outbreak recedes and flares up again, Federal Reserve Bank of Minneapolis President Neel Kashkari said. JPMorgan Chase and Wells Fargo will kick off the corporate earnings season on Tuesday, with analysts expecting first-quarter earnings at S&P 500 firms to fall 9% compared with a Jan. 1 forecast of a 6.3% rise.

Companies are only now adjusting their behaviour to deal with an expected global recession, which the International Monetary Fund (IMF) has said will be “way worse” than the global financial crisis a decade ago.

In FX, commodity currencies were softer while the safe-haven yen strengthened while the dollar erased earlier declines against other major currencies. The Australian dollar fell 0.2% to $0.63337. The euro stood steady at $1.0937 and the yen gained 0.5% to 107.91 to the dollar.

Market Snapshot

• S&P 500 futures down 1.1% at 2,748.50
• MXAP down 0.6% to 140.65
• MXAPJ down 0.2% to 454.93
• Nikkei down 2.3% to 19,043.40
• Topix down 1.7% to 1,405.91
• Hang Seng Index up 1.4% to 24,300.33
• Shanghai Composite down 0.5% to 2,783.05
• Sensex down 1.5% to 30,707.55
• Kospi down 1.9% to 1,825.76
• Brent Futures down 1.4% at $30.99/bbl
• Gold spot down 0.3% at $1,691.46
• U.S. Dollar Index down 0.1% at 99.39

Top Overnight News

• The world’s top oil producers pulled off a historic deal to cut global petroleum output by nearly a 10th, putting an end to the devastating price war that brought the energy industry to its knees
• The world’s ability to check the coronavirus contagion and fully recover from the worst peacetime recession since the Great Depression may depend on what international economic policy makers decide this week
• U.K. Prime Minister Boris Johnson praised doctors for saving his life during his week-long hospitalization for Covid-19 treatment that has left him too weakened to resume immediate leadership of the government
• The Bank of Thailand is studying a number of unconventional policy options, including a large-scale asset purchase program and some form of yield-curve control, if they become necessary, a senior official said

Asian equity markets were subdued amid the holiday-thinned conditions and oil price volatility, while coronavirus concerns also lingered after the US recently suffered the highest number of coronavirus daily casualties and surpassed Italy with the largest total death toll of more than 22k. US equity futures were also lacklustre after they shrugged off opening gains alongside fluctuations in oil prices following the OPEC+ breakthrough with Mexico in which producers agreed to cuts of 9.7mln bpd for May-June and suggested that total global oil cuts effective next month will total more than 20mln bpd, although oil prices briefly turned negative as some were not convinced including Goldman Sachs which suggested the deal was insufficient and that the cuts were too little too late. In terms of the regional indices, Nikkei 225 (-1.1%) was lacklustre amid the coronavirus-related disruptions to industries and unfavourable currency moves, while KOSPI (-1.0%) and Shanghai Comp. (-0.3%) were also downbeat with the latter not helped by PBoC liquidity inaction and the absence of participants in Hong Kong, which alongside Australia, New Zealand, UK and EU all observe Easter Monday holidays. Finally, 10yr JGBs were relatively unchanged despite the humdrum tone in the region and BoJ’s presence in the market for nearly JPY 1tln of JGBs with 1yr-10yr maturities.

Top Asian News

• The World’s Biggest Pork Producer Is Warning of Meat Shortfalls
• Hedge Funds Stay Bearish on Aussie Dollar as Recession Looms
• China Startups Tumble After Regulator Says Investors Misled
• Japanese Stocks Slide on Stronger Yen, Lower Hope for BOJ Move

Europe remained closed for Eeaster

US Event Calendar

• Nothing major scheduled

After reporting another promising slowdown in the rate of COVID-19-linked deaths yesterday, Spain reported only 517 deaths on Sunday, the lowest number since the country’s lockdown began. Now, with much of Western Europe observing a holiday on Monday, the Spanish government is beginning the process of reopening in the economy, despite still being roughly around the ‘peak of the curve’.

Spain wasn’t the only embattled European country to report some encouraging progress on Sunday: Italy reported its lowest number of new deaths since March 19, as the number of people in intensive care continues to decline.

Yesterday was the first day in weeks that Spaniards were allowed to leave their homes and travel to see family for the Easter holiday. Now, on Monday, construction workers in Spain are returning to work after a two-week pause on their activities, though the government has warned that it could reimpose the lockdown if the spread starts to accelerate once again.

Globally, the number of confirmed infections rose by 72,523 on Sunday, the lowest number of additional cases in seven days. According to Johns Hopkins, roughly 1,859,011 have been confirmed worldwide as of Monday morning. Additionally, the daily death toll on Sunday also dropped to 5,417, as the rate of growth slowed to just 5%, its slowest rate since March 9. The US also saw a significant slowdown in deaths on Sunday, with just 1,528 Americans losing their lives. This is down sharply from a peak of more than 2,000 just two days earlier, and represents a daily growth rate of just 7%, the slowest since March.

The FT

Europe and the US weren’t the only places to report slowdowns in new cases and deaths. Australia and New Zealand plan to keep coronavirus-inspired restrictions on movement in place despite the two countries reporting roughly 50 new cases combined over the weekend.

However, outbreaks in certain regions are only just beginning to accelerate.

As China abruptly ends a Gilead drug trial that had been hailed as ‘extremely promising’ just days ago, the Indian Council for Medical Research is stepping its own race for a cure after announcing plans for a clinical trial using plasma from recovered coronavirus patients to treat those who are still critically ill, as the country’s caseload continues to rise steadily.

Last night, we reported that China reported its largest number of new cases in weeks, as Beijing’s claimed that practically all of the 108 new cases involve foreigners or traveling Chinese nationals returning home ring particularly hollow when one considers that China has reduced the number of people crossing its borders by 90% as part of its efforts to contain the virus. According to Al Jazeera, Liu Haitao, an official with the National Immigration Administration, said the number of cases was still on the rise in the countries along China’s borders, per Al Jazeera.

The BBC’s Robin Brant had some more thoughts on China’s ‘imported’ case problem.

Imported cases have been China’s focus for several weeks now. It believes the main threat now to be people bringing the virus back to the country.

Most of these people are Chinese returning home. The arc of China’s efforts to tackle, contain and end the outbreak went like this: local officials knew about an emerging outbreak but didn’t act; the national government imposed a draconian lockdown of Wuhan; China imposed domestic travel restrictions but insisted that international travel to and from China should not be cut; the virus spread abroad; China believed it had successfully contained the outbreak then switched its focus to people bringing it back here from abroad.

Something like a cat and mouse chase has emerged – despite drastically reducing international flights into China, barring any direct arrivals into Beijing and insisting that passengers now undergo strict quarantine, people found a weak point.

The usually obscure land crossing between Russia and China in the northern province of Heilongjiang has seen a persistent cluster of travellers bringing the virus with them. New ‘imported’ cases there are almost all Chinese coming home. And they appear to be spreading it. The latest official figures reveal 10 new domestic cases, seven of which are in Heilongjiang, home to that land crossing.

After the total number of confirmed coronavirus cases in Russia doubled last week, Russia reported 2,558 new cases of the novel coronavirus on Monday, representing a 16% acceleration over the previous day, a record daily rise, bringing its overall nationwide tally to 18,328. 18 new deaths brought the death toll to 148.

A former chief rabbi of Israel has died with Covid-19 – the highest profile death from the disease in the country.
Eliyahu Bakshi-Doron, 79, was chief rabbi of the Sephardi community – Jews or their descendants from the Iberian Peninsula, North Africa and the Middle East – from 1993 to 2003. He was noted, among other things, for his work in promoting interfaith dialogue.

In Ecuador, one of the worst-hit countries in South America, police removed almost 800 bodies in recent weeks from homes in Guayaquil, the epicenter of the country’s coronavirus outbreak, which has completely overwhelmed its meager health system, per Al Jazeera.

And finally, the Washington Post reports that President Trump is likely to announce restrictions on US funding for the WHO later this week over its handling of the coronavirus pandemic and its persistent kowtowing to Beijing, which Trump argued has jeopardized global health.

As we have highlighted over the past month, the U.S. auto industry is at a standstill as a result of the coronavirus pandemic and ensuing global lockdowns.

With the industry shut down, it is becoming a race against time for many auto suppliers. And May looks like crunch time, according to Reuters.

Kevin Clay, president and third-generation owner of Grand Rapids, Michigan-based Pridgeon & Clay, which supplies stamped steel and stainless steel parts to automakers and which has annual revenue of close to $350 million joked: “I had the audacity or stupidity to say in January ‘I can’t imagine what could happen this year that could slow us down.’”

Now, one of his company’s two plants is idled and the other has a bare bones staff. Clay is in the process of restructuring his business and doing everything he can to stay afloat. He continued: “If we weren’t working on special deals with our suppliers, with our customers and with our banks, then the music would stop for us some time in mid-May, as it will for virtually everybody.”

May is when the “cash backlog runs out unless automakers are able to restart assembly lines,” according to executives in the industry. Fiat and Honda said this week they are looking to restart by May. Tesla also said it is targeting May 4 to resume production.

Steve Wybo, a senior managing director at consultant Conway MacKenzie said: “If the auto industry starts back up in early May, most suppliers should be able to turn the lights back on. But the longer the shutdown lasts, the harder it will be for them to get the lights on.”

One tailwind has been that automakers are going into 2020 with slightly better financials than the 2008 crash. Laurie Harbour, CEO of Harbour Results Inc, a manufacturing consulting firm, said: “If you weren’t strong going into 2020, your challenges are going to be significant for the balance of the year to get yourself back up to speed.”

Bob Roth, co-owner and CEO of RoMan Manufacturing, said keeping his automotive transformer business open was a challenge. He said he had to raise pay to keep his workers by $7 per hour to compete against unemployment benefits. Thanks, government!

Roth commented: “We’re willing to take the margin hit now to keep the business moving forward. But at some point in time, we won’t be able to support higher wages or healthcare benefits for people who aren’t working.”

Recall, about a week ago, we highlighted a dramatic dropoff in U.S. auto sales.

Numbers out of major automakers last week confirmed a worst case scenario: that the global pandemic is doing severe (and potentially irreversible) damage to an industry that was in ugly shape even before the coronavirus outbreak began.

GM saw sales plunge 7.1% and Fiat saw sales drop 10% for the first quarter of 2020, both larger than expected declines. 

Toyota’s sales fell 37% in March, with even its best-selling RAV4 dropping 25%. Nissan had the weakest quarterly results, posting a 30% drop in sales for the first three months of the year. More than 25% of Nissan’s dealers are being negatively affected by state ordinances limiting sales.

Authored by Pepe Escobar via The Saker blog,

COVID-19 driven collapse of global supply chains, demand and mobility will painfully spawn next great tech-led economic models

Is the world on a collision course with the financial and economic equivalent of a meteor impact with shock wave?

Nobody, anywhere, could have predicted what we are now witnessing: in a matter of only a few weeks the accumulated collapse of global supply chains, aggregate demand, consumption, investment, exports, mobility.

Nobody is betting on an L-shaped recovery anymore – not to mention a V-shaped one. Any projection of global gross domestic product (GDP) in 2020 gets into falling-off-a-cliff territory.

In industrialized economies, where roughly 70% of the workforce is in services, countless businesses in myriad industries will fail in a rolling financial collapse that will eclipse the Great Depression.

That spans the whole spectrum of possibly 47 million US workers soon to be laid off – with the unemployment rate skyrocketing to 32% – all the way to Oxfam’s warning that by the time the pandemic is over half of the world’s population of 7.8 billion people could be living in poverty.

According to the World Trade Organization’s (WTO) most optimistic 2020 scenario – certainly to become outdated before the end of Spring – global trade would shrink by 13%.  A more realistic and gloomier WTO scenario sees global trade plunging by 32%.

What we are witnessing is not only a massive globalization short circuit: it’s a cerebral shock extended to three billion hyperconnected, simultaneously confined people. Their bodies may be blocked, but they are electromagnetic beings and their brains keep working – with possible, unforeseen political and other consequences.

Soon we will be facing three major, interlocking debates:

1. the management (in many cases appalling) of the crisis;

2. the search for future models;

3. and the reconfiguration of the world-system.

This is just a first approach in what should be seen as a do-or-die cognitive competition.

Particle accelerator

Sound analyses of what could be the next economic model are already popping up. As background, a really serious debunking of all (dying) neoliberalism development myths can be seen here.

Yes, a new economic model should be revolving around these axes: AI computing; automated manufacturing; solar and wind energy; high-speed 5G-driven data transfer; and nanotechnology.

China, Japan, South Korea and Taiwan are very well positioned for what’s ahead, as well as selected European latitudes.

Plamen Tonchev, head of the Asia unit at the Institute of International Economic Relations in Athens, Greece, points to the possible reorganization – short term – of Belt and Road Initiative projects, privileging investment in energy, export of solar panels, 5G networks and the Health Silk Road.

Covid-19 is like a particle accelerator, consolidating tendencies that were already developing. China had already demonstrated for the whole planet to see that economic development under a control system has nothing to do with Western liberal democracy.

On the pandemic, China demonstrated – also for the whole planet to see – that containment of Covid-19 can be accomplished by imposing controls the West derided as “draconian” and “authoritarian,” coupled with a strategic scientific approach characerized by a profusion of test kits, protection equipment, ventilators and experimental treatments.

This is already translating into incalculable soft power which will be exercised along the Health Silk Road. Trends seem to point to China as strategically reinforced all along the spectrum, especially in the Global South. China is playing go, weiqi. Stones will be taken from the geopolitical board.

System failure welcomed? 

In contrast, Western banking and finance scenarios could not be gloomier. As a Britain-centric analysis argues, “It is not just Europe. Banks may not be strong enough to fulfill their new role as saviors in any part of the world, including the US, China and Japan. None of the major lending systems were ever stress-tested for an economic deep freeze lasting months.”

So “the global financial system will crack under the strain,” with a by now quite possible “pandemic shutdown lasting more than three months” capable of causing  “economic and financial ‘system failure.’”

As system failures go, nothing remotely approaches the possibility of a quadrillion dollar derivative implosion, a real nuclear issue.

Capital One is number 11 on the list of the largest banks in the US by assets. They are already in deep trouble on their derivative exposures. New York sources say Capital One made a terrible trade, betting via derivatives that oil would not plunge to where it is now at 17-year lows.

Mega-pressure is on all those Wall Street outfits that gave oil companies the equivalent of puts on all their oil production at prices above $50 a barrel. These puts have now come due – and the strain on the Wall Street houses and US banks will become unbearable.

The anticipated oil deal won’t alter anything: oil will stay around $20 per barrel, $25 max.

This is just the beginning and is bound to get much worse. Imagine most of US industry being shut down. Corporations – like Boeing, for instance – are going to go bankrupt. Bank loans to those corporations will be wiped out. As those loans are wiped out, the banks are going to get into major trouble.

Derivative to the max

Wall Street, totally linked to the derivative markets, will feel the pressure of the collapsing American economy. The Fed bailout of Wall Street will start coming apart. Talk about a nuclear chain reaction.

In a nutshell: The Fed has lost control of the money supply in the US. Banks can now create unlimited credit from their base and that sets up the US for potential hyperinflation if the money supply grows non-stop and production collapses, as it is collapsing right now because the economy is in shutdown mode.

If derivatives start to implode, the only solution for all major banks in the world will be immediate nationalization, much to the ire of the Goddess of the Market. Deutsche Bank, also in major trouble, has a 7 trillion euro derivatives exposure, twice the annual GDP of Germany.

No wonder New York business circles are absolutely terrified. They insist that if the US does not immediately go back to work, and if these possibly quadrillions of dollars of derivatives start to rapidly implode, the economic crises that will unfold will create a collapse of the magnitude of which has not been witnessed in history, with incalculable consequences.

Or perhaps this will be just the larger-than-life spark to start a new economy.