Author: admin

Authored by Bill Blain via MorningPorridge.com,

“In terms of unconvincing rallies, yesterday takes the Tunnock’s Caramel Wafer – Scotland’s National Biscuit.” 

During the last crisis we reassured ourselves there was a firm hand on the tiller, that the great ship of the global economy was being steered away from the rocks and the lee shore on which it so nearly beached itself.  Experts from the central banks, governments, finance and regulators pulled together with common purpose and steered us through – not without significant consequences, which we still suffer from today in terms of market distortions.

So…. does an emergency 50 bp rate cut by the Bank of England to “support business and consumer confidence” fill you with confidence all is well with the World and we are going to miss the sharp pointy rocks? Are you going to put your buying boots on because the BoE has made stocks look relatively better return value than Gilts… or are you going to critically consider the risks, shake your head and sell? 

I shall watch today’s UK budget with interest…

Surprisingly, I’m still getting emails and being sent “news” articles explaining why the Coronavirus is not a threat, how it’s been hyped and vastly over-exaggerated, and is only mildly dangerous to a very few elderly patients with pre-existing conditions. Its, apparently, Fake News. 

Your call. 

You’d have to be completely blind to the very real economic effects now making themselves increasingly apparent across the global economy. The Italians are not only struggling with a massive medical crisis, but are juggling their options on how to put their economy on hold for however long the crisis lasts by declaring some kind of moratorium on all domestic mortgage and debt repayments.  

That’s pretty fundamental in terms of how money works, circulates and flows within an economy. But what else can they do to avoid a massive escalating financial implosion cascading through the economy except pull out the control rods to stop circulation? 

Problem is Italy is not a sovereign borrower and can’t just print money to pay for it. It uses someone else’s currency – and even worse, the Euro is a committee currency. Anyone buying Italian bonds is taking a big gamble on the ECB and Europe agreeing to step up with an essentially unlimited ticket for an Italy bailout. Based on our previous experience why would you think that’s going to happen? 

There might not be any choice but to bail them out – that’s the bet!

And its not just Italy in trouble. This is where globalisation and the complexity of modern financial markets comes back to bite us with a vengeance… 

Suddenly, the virus has coalesced into crisis. Now we find ourselves at the epicentre of a massive and expanding economic conflaguration. Any firm or individual relying on income to service debt is unquestionably going to face crisis as cashflow dries up. We are likely to see cascading consequences as one missed payment becomes many, and one defaults sets the dominos tumbling. 

As cash deteriorates on the balance sheet, you are nailed-on to see dozens if not hundreds of firms downgraded to junk triggering a massive enforced corporate sell-off.  If you are still long corporate debt.. good luck with that one. I was emailing with an ETF dealer y’day on Fixed Income EFTs and he neatly turned round the liquidity promise.. “It’s unfair to say its Junk and Crossover ETF’s that are illiquid.. their liquidity is simply a function of underlying liquidity”.. which is why you can’t get a meaningful bid on any position. Try explaining that one to your investment committee. 

If that’s not a problem.. then go buy the market. 

And, that would be a mistake – because I’m pretty sure the market is not as cheap as its going to get… 

Even as money stops, we’re going to see sentiment and hope driven lower as economic expectations on future earnings, default rates, and particularly the efficacy of support mechanisms come under increasing downwards pressure. Yesterday’s rally – such as it was – will stumble even more as it becomes clear… THERE JUST ISN’T A PLAN. 

We all know that cutting interest rates is unlikely to persuade anyone to get on a plane, or help a corporate struggling to make this month’s payroll and rent. Yet the market buys the expectation central banks and the authorities are going to sort this, and will do whatever it takes. 

What if there isn’t much that can be done? 

At some point in the future, someone is going to pull all the data together. They will closely examine the hospital logs, analyse the transmission number and the infection rate, and do a cost-benefit analysis of the efforts to contain the virus. They may well conclude Governments over-reacted and the damage to the global economy exceeded the economic costs in terms of the virus mortality. That’s a nasty, inhumane calculation to make – but it’s one that is repeatedly made in emergency triage and wartime. 

It’s not a calculation any politician in a democracy is going to admit making. The virus controls the headlines and the political options.  Politicians have to be seen to be reacting. 

There are lots of articles out there comparing this crash to previous crashes. The general perception – nicely encapsulated by Mo-the-Tash in How this market crash is different from 2008, and the same – is its different but similar. Yep.. we’ve been here before. 

But this time it is different. 

We naturally assume our Governments know what they are doing, and our financial leadership is fully informed. They are advised by the brightest, smartest and most informed scientists, technocrats, economists and industrial leaders. They will have analysed the way in which the virus is spreading, understood the transmission rate, the likelihood of mass infection, plotted where health resources are likely to be most efficiently targeted, figured out the areas of likely economic weakness, examined the policy options and concluded the right way to address crisis with well-timed fiscal policies, supported by accommodation across the market. 

BUT… 

It’s as clear as a bell that Trump had no plan to address the Coronavirus before he was finally forced to say something Monday. Until then it was a “fake-news” distraction. He made a political gamble: that the virus would recede before it became a crisis, making him look smart and a market genius for calling it.

As the market went into freefall he was forced to play to it off-the-cuff. He spouted out what he thought the market wanted to hear in terms of measures, not because of concern about the virus, infection and mortality, but because a tumbling stock market will crucify him at the polls.

He promised us a full package – which he singularly failed to expand upon at his no-show press conference last night. On Monday he was flolloping around, throwing out crazy ideas like a payroll tax cut (effectively helicopter money) to trigger a demand side economic boost, talked about direct support for shale oil producers and airlines, and further threats about the Fed playing its part. He caught the market and his staff – such as they are, his trusted family members and carefully chosen anodyne yes-men unlikely to trigger a twitter storm – by surprise.

The market took it at face value.  It heard what it wanted to hear. The most powerful man on the planet has a plan. Yippee!  Marvellous! It’s bound to be a good one, because he is the US president. Yep, but he is also Donald Trump. There isn’t a plan. There are tweets.  

In the past Donald has proved lucky. Napoleon said he didn’t care about how good a general was, only that he was lucky. Donald was lucky in his roll of the dice against Iran, and despite the dangers, his ham-fisted approach to trade, tax and the economy, his gambles haven’t resulted in complete disaster. I suppose that’s his “art of the deal”: gamble big and bluff it out. 

But now it’s increasingly clear there is no real plan for the consequences of the virus on America. He’s barely speaking to the Fed and the other economic and financial advisors. Still he’s got economic geniuses like Mike Pence, Larry Kudlow, Steve Mnunchin and Jared Kushner telling him how brilliant his “not-a-plan” is. 

We are so Rubber Ducked. 

Without a deliverable plan, without clear and deliverable policies to support America through the crisis, the market is going to fade. Fact.

When the US economy weakens, then this crisis becomes full blown Global Depression and a Global Market Reset. At that point we’ll know who to blame…  

The global coronavirus outbreak has hit a new milestone: It surpassed 120,000 cases overnight. For anybody who’s still bothering to keep track, that’s 15x the number of cases from the SARS outbreak, which continued for nearly a year before it finally petered out.

In the US, the coronavirus outbreak has reached a grim new milestone. Thanks to the administration’s scramble to bring dozens of private and public labs on-line for testing across the country, the CDC has managed to confirm more than 1,000 cases of the virus. In the Westchester County town of New Rochelle, the epicenter of the outbreak in New York State, and the largest on the east coast, woke up to a 1-mile exclusion zone and national guard soldiers in the streets.

The town now looks like a “ghost town” according to several reports.

As the number of cases topped 1,000, the number of deaths has also climbed: Officially, there are 31 deaths and 1,039 confirmed cases, according to the Washington Post, which is significantly more than the number confirmed by Dr. Anthony Fauci during last night’s press conference.

Across the US, Washington State’s King County remains the epicenter of America’s worst outbreak, with 273 cases. New York is No. 2 with 176. After hinting about ‘mandatory measures’ last night that set tongues wagging about the possibility of Italy-style travel restrictions, Washington Gov. Jay Inslee is reportedly planning to announce a plan to…ban all events with more than 250 people, according to MyNorthwest.

At a press conference scheduled for Wednesday at 10:15 a.m., it is expected that Gov. Jay Inslee along with regional leaders and city mayors could announce a ban on large gatherings and events of 250 people or more in at least three counties. Any ban would affect upcoming sporting events in the area, including a home game for the XFL’s Seattle Dragons on Sunday.

Inslee has been hinting at this for the past week as a possible preemptive move to curb the spread of coronavirus. Over the weekend, he stated that his office was considering enacting “mandatory measures” in the days ahead.

Monday night on MSBNC, the Washington governor spoke to Rachel Maddow, admitting that soon, the state was “going to have to make some hard decisions.”

He further elaborated on that point during a Tuesday press conference, when he cited the need to “look forward ahead of the curve in Washington state.”

“We need to look at what is coming, not just what is here today,” he detailed, estimating that given limits on testing capacity, experts have told him there could be at least 1,000 untested coronavirus cases across the state.

So much for ‘hard decisions’….

This immense build up, only to announce restrictions that are only ‘slightly’ more comprehensive than the milquetoast event bans embraced by Germany, France, Switzerland and others, brings to mind a tweet we noticed earlier highlighting the sometimes unintended consequences that half-measures can create.

When 90% of Americans get the coronavirus, we’ll look back & say, “Man, that was pretty dumb making all college classes ‘remote’ while airfare and hotels are super cheap. Who would’ve thought 20 yr olds don’t give a fuck and just ended up traveling everywhere spreading disease.”

— Fat Tail Capital (@FatTailCapital) March 11, 2020

On the east coast, the State of New York is asking businesses to voluntarily consider having employees work two shifts as well as allowing telework, Gov. Andrew Cuomo said in an interview with CNN, the network that employs his brother, where he has been making near-daily appearances in addition to his daily press conferences.

“This is about reducing the density,” Cuomo said. “The spread is not going to stop on its own.”

He also announced 20 new cases of virus, bringing total in state to about 193, with most of the new cases diagnosed in New Rochelle, where the virus has clearly been circulating for weeks.

Elsewhere, China reported a rise in coronavirus infections imported from abroad, while noting 24 additional cases of coronavirus and 22 additional deaths on March 10, compared with 19 additional cases and 17 additional deaths on March 9, bringing the total number of cases in mainland China to 80,778 and death toll at 3,158. China’s Hubei province said it will mandate a return to work according to different levels of risk in an orderly manner, adding that key areas of the Wuhan economy will be allowed to return.

South Korea reported 242 additional coronavirus cases, bringing its total to 7,555 and 6 additional deaths, increasing the death toll to 60.

Elsewhere, Japan is reportedly planning to declare a state of emergency due to the coronavirus outbreak after the number of domestic cases rose by the largest daily number yet, with 59 new cases bringing the total to 1,278, while the total death toll has climbed to 19 and there were 427 discharged from hospital on Tuesday.

Italy’s total coronavirus cases rose to 10,149, from 9172, and the death toll increased to 631 yesterday from 463 in its largest daily jump yet.

While the monthly OPEC report is usually best used as a 100-page paperweight, this month – in the aftermath of OPEC’s collapse after Saudi Arabia announced it would unleash a scorched-earth price war on all high cost oil producers (itself included) – investors actually cared what OPEC had to say, beyond just the popular monthly table which shows oil production by OPEC member stated, and which showed that in February Libyan production cratered and Saudi Arabia was just below 9.7mmb/d…

… and instead oil-market watchers were more curious about the demand side, since they already know a supply shock is coming. What they found is that OPEC also expects a concurrent demand shock – the first such double whammy since the Great Depression – as OPEC now sees a whopping 94% drop in 2020 global oil demand growth in response to the economic impact of the coronavirus even as global oil supply is set to explode.

Here are the main points, courtesy of RanSquawk

• 2020 global oil demand growth forecast revised down by 920k BPD from 990k to 60k BPD, reflecting slower global economic growth associated with a wider spread of Covid-19 beyond China, which however was the bulk of the demand collapse

• Preliminary data indicates that global oil supply in February decreased by 290k BPD to average of 99.75mln BPD, up 780k BPD YY.
• In February, OPEC crude production fell by 546k BPD MM to average 27.77mln BPD, according to secondary sources. Crude output increased in Iraq, Nigeria, Angola, Congo and UAE whilst production decreased mainly Saudi in and Libya (-647k BPD MM), Iraq and Kuwait.

Of course, with bank analysts now admitting a recession is now virtually inevitable, we expect the April MOMR will seen an outright drop in demand in 2020, one which will only get bigger with time.

Here are the other highlights:

OPEC

• Demand for OPEC crude in 2020 was revised down by 1.1 BPD compared to the prior report and stands at 28.2mln BPD, around 1.7mln BPD lower than the 2019 level
• The share of OPEC crude oil in total global production decreased by 0.5 ppt to 27.8% in February compared with the previous month

NON-OPEC

• For 2020, the FSU oil supply forecast revised up by 10k BPD to and is expected to grow 70k BPD to 14.44mln BPD OECD
• OECD oil demand was revised down by 60k BPD, with most of the downward revisions appearing in 1H20.
• Considering the latest developments, downward risks currently outweigh any positive indicators and suggest further likely downward revisions in oil demand growth, should the current status persist.
• OECD total product inventories rose by 38.6mln barrels MM in January to stand at 1.508bln barrels. This was 59.2mln barrels above the same time a year ago, but 8.8mln barrels lower than the latest five-year average.

CORONAVIRUS

• Based on preliminary and partly estimated data, China’s oil demand started the year at modest growth levels. Oil demand growth in January 2020 posted an increase of 0.16mln BPD compared to January 2019, though this was far below the average monthly growth level in 2019 of 0.36mln BPD

WORLD ECONOMY

• Following a considerably weaker economic growth for 2H19 in Japan, Euro-zone and in India, the Covid-19 related developments necessitated a further downward revision of the 2020 GDP growth forecast to 2.4% from 3.0% forecast in the previous month. This compares to a 2019 GDP growth estimate of 2.9%.

* * *

What about the supply shock? We didn’t need the OPEC MOMR for that: the following headline is sufficient to see may Brent will soon plunge into the teens as Deutsche Bank warned earlier this week.

BREAKING NEWS #OOTT pic.twitter.com/prGCU3aklZ

— Amena Bakr (@Amena__Bakr) March 11, 2020

Authored by Irina Slav via OilPrice.com,

A mild winter in the northern hemisphere, the COVID-19 outbreak, and now the price war that Saudi Arabia declared last weekend have combined to produce an all-new oil price crisis just four years after the last one. And things might get worse before they get better.

After last week data from hedge funds showed a slowdown in the selloff of oil and fuel contracts, as reported by Reuters’ John Kemp, this week’s data, for the first week of March, indicated a serious acceleration of sales. During that week, Kemp reported in his weekly column, fund sold the equivalent of 133 million barrels of oil across the six most traded oil and fuel contracts. This compares with sales of just 11 million barrels of oil equivalent across the six contracts just a week earlier.

The overall long position of hedge funds on oil and fuels was down to 392 million barrels by March 3, Kemp also noted, which compares with 970 million barrels at the start of 2020. That’s a decline of as much as 60 percent, and that’s not all. The ratio of bullish to bearish positions, Kemp says, has fallen to 2:1 from 7:1 in January and is one of the lowest ratios in the past few years.

Meanwhile, the COVID-19 epidemic is marching across the world, fueling panic and dampening oil demand as people self-quarantine, flights get grounded, Italy extends its lockdown to the whole country, and a growing number of states in America declare a state of emergency.

While this was happening, Saudi Arabia fired the first shot in what many are seeing as an all-out price war. After Russia refused to take part in deeper production cuts to prop up prices, with energy minister Alexander Novak saying that from April the country’s oil producers will be pumping oil as usual, without compliance to any OPEC+ quotas, Riyadh said it was cutting the prices for its oil and planning a production increase, utilizing its full production capacity, which is about 12 million bpd.

The bad news: hedge funds were extremely bearish on oil and fuels even before OPEC+ broke down.

This suggests they might get even more bearish on oil after the latest developments there. And this, in turn, means prices could fall further despite a temporary improvement yesterday, in which Brent recouped some of its losses to trade, at the time of writing, at close to $37 a barrel.

“This has turned into a scorched Earth approach by Saudi Arabia, in particular, to deal with the problem of chronic overproduction,” John Kilduff from Again Capital told CNBC.

“The Saudis are the lowest cost producer by far. There is a reckoning ahead for all other producers, especially those companies operating in the U.S shale patch.”

“The prognosis for the oil market is even more dire than in November 2014, when such a price war last started, as it comes to a head with the significant collapse in oil demand due to the coronavirus,” Goldman Sachs’ Jeffrey Currie said. The investment bank cut its oil price forecast for the second and third quarter to $30 a barrel for Brent, noting that the benchmark could dip even lower, into the $20s.

The situation in oil looks like a three-person staring contest. With low-cost producer but ambitious spender Saudi Arabia on one side, pumping at will, Russia on the other, braced for lower prices and its previous experience with price crashes, and US oil producing companies on the third side, grappling with insufficient cash for dividends and, for many shale producers, a heavy debt burden. For now, the analyst consensus seems to be that U.S. shale independents will be the ones to blink first.

Yesterday we reported that the perpetual sellside optimists at JPMorgan, led by Croatian tag-team of Lakos-Bujas and Kolanovic, admitted that their chronic optimism may have been catastrophically misplaced, and while repeating the bank’s year end 3,400 price target (not for long) they also said that in case they are wrong (they are) and the Covid pandemic accelerates globally, they now expect a “pessimistic scenario”, where “the equity multiple may not find a bottom until it hits 14-15x and EPS growth turns negative—implying a recession case of ~2,300 level for S&P500.”

In short, JPMorgan came this close to admitting a recession is on deck.

Now it’s Goldman’s turn.

In a note published early on Tuesday morning, Goldman’s chief equity strategist David Kostin writes that “after 11 years, 13% annualized earnings growth and 16% annualized trough-to-peak appreciation, we believe the S&P 500 bull market will soon end.”

As a reminder, it was just two weeks ago on February 27th, when Goldman first cut its 2020 S&P 500 EPS estimate to $165, stating that it now expects no earnings growth in 2020 (technically, that would be the second year in a row without earnings growth), however, the bank kept a cheerful perspective by anticipating a big jump in 2021 earnings.

That optimism is now gone and as Kostin writes this morning, “we are now reducing our profit forecast again. Our revised 2020 EPS estimate equals $157, representing a decline of 5% vs. 2019.”

On a quarterly basis, Goldman now expects EPS to literally “collapse” by roughly 15% in 2Q (consensus expects +3%) and 12% in 3Q (consensus expects +8%) before once again predicting a surge of 12% in 4Q and 11% in 2021 – we expect that in the next downward revision to Goldman’s base case, this 2021 V-shaped rebound will quietly disappear.

Drivers of Goldman’s reduced EPS estimate include:

1. lower crude oil prices that reduce Energy company profits;
2. lower interest rates that squeeze net interest margin (NIM) for Financials; and
3. lower volume of business activity and reduced consumer spending that curbs revenues for companies across many industries. This is underscored by reduced or withdrawn sales and earnings guidance from a number of Information Technology firms, a sector that contributes nearly 20% of aggregate S&P 500 EPS.

Alongside plunging earnings, Goldman now also expects a sharp drop in the S&P, and now sees the broadest US equity index will tumble into a bear market by mid-year and despite low bond yields, Goldman now has a mid-year S&P 500 target of 2450 (15% below the current level and 28% below the market peak).

Translation: After 11 years, the longest bull market in history is coming to an end.

Some more observations here from Kostin:

Ten-year US Treasury yields plunged from 1.9% at the start of 2020 to an intra-day low of 0.3% this week before rising to 0.8% today. Despite this valuation support, we expect falling growth expectations and consumer confidence as well as elevated policy uncertainty will widen the yield gap to 665 bp, corresponding with a forward P/E multiple of 14x and a mid-year S&P 500 level of 2450.

Of course, just like JPMorgan, Goldman can’t leave it on a doomish note, and as such the bank sees a silver lining in late 2020 when it expects that the impact of the coronavirus will likely wane, and as a result “a recovery in earnings and sentiment will reduce the yield gap to 450 bp and lift the S&P 500 to 3200 by year-end (+31% from the trough). The sharp rebound would be modestly higher than the median 6-month return following previous event-driven bear markets.”

Bottom line: Goldman told a part of the truth, but is terrified to tell the full truth, and is why in 3-4 weeks when Goldman downgrades its earnings forecast for the 3rd consecutive time, we expect that any hint of a V-shaped recovery will be gone for good, replace with the far more appropriate “L-shaped” recovery.

After printing hotter than expected in January, headline consumer price inflation was expected to slow in February (and it did) but actually printed higher than expectations.

• Headline CPI rose 2.3% YoY (slower than the +2.5% in Januray but higher than the 2.2% expectation)

• Core CPI rose 2.4% YoY (higher than January’s +2.3%)

Source: Bloomberg

This is near the highest Core CPI since Sept 2008..

Source: Bloomberg

Under the hood, Services inflation continues to accelerate to its highest since August 2016 as goods inflation languishes…

Source: Bloomberg

The Details:

The shelter index rose 3.3 percent over the 12-month span, and the medical care index rose 4.6 percent.

The apparel index rose 0.4 percent in February following a 0.7-percent increase the prior month. The personal care index also increased 0.4 percent over the month. The index for used cars and trucks rose 0.4 percent in February after falling 1.2 percent in January. The education index increased 0.3 percent in February, and the motor vehicle insurance index rose 0.5 percent. The indexes for household furnishings and operations, for new vehicles, for tobacco, and for alcoholic beverages also increased over the month.

The medical care index rose 0.1 percent in February with its major component indexes mixed. The index for physicians’ services rose 0.2 percent, while the index for prescription drugs fell 0.8 percent and the index for hospital services declined 0.1 percent. The recreation index was one of the few to decline over the month, falling 0.3 percent after increasing in each of the previous 4 months. The index for airline fares also fell in February, decreasing 0.3 percent after rising in January. The  communication index was unchanged over the month.    

Of course all of this is before the coronavirus really starte to take effect – which will have very ‘odd’ effects in terms of both inflation (some goods) and deflation (services)