Morning Markets Brief 4-21-2020

Summary and Price Action Rundown

Global risk assets remain under pressure this morning as disorderly downside continues for oil prices, while mixed corporate earnings and heightened policy and geopolitical uncertainty also weigh on market sentiment. S&P 500 futures indicate a 1.5% lower open, which would extend yesterday’s 1.8% decline that put year-to-date downside at 12.6% and the decline from February’s record high at 16.6%. Global equities had extended their rebound from mid-March lows last week as investors focused on the potential for economic recovery amid improving coronavirus containment data and hopes for an effective treatment, alongside massive fiscal and monetary stimulus. But other asset classes, such as crude oil, failed to validate equities’ apparent optimism and this week’s stunning crude price declines have contributed to a renewed sense of risk aversion. Oil remains under severe pressure after the expiring May contract for US benchmark WTI crashed into unprecedented negative territory yesterday. EU stocks are down more than 2% this morning and Asian equities were uniformly lower overnight. Longer duration Treasury yields continued to edge down toward historic lows, with the 10-year yield at 0.58%, while a broad dollar index is extending yesterday’s rebound.


Crashing Oil Prices Exert Pressure on Global Markets

Accelerating downside in crude futures has reverberated across asset classes this week, highlighting the grim outlook for demand. International benchmark Brent crude and US benchmark WTI prices posted dramatic losses yesterday, with the changeover from the WTI contract from May to June exaggerating the slide and sending prices negative for the first time for the expiring WTI contract. Crude prices remain under pressure this morning. Currencies of oil dependent countries, like Russia and Mexico, have depreciated sharply versus the dollar and pressure has intensified on US energy sector credit spreads. For context, oil prices had rebounded from nearly 20-year lows in early April as OPEC, Russia, and other major producers (collectively known as OPEC+) ended the price war and agreed to reduce supply by 10 million barrels per day over the next two months. Still, traders clearly believe that even these significant production cuts cannot balance the dramatically oversupplied oil market, which has seen demand collapse amid the coronavirus pandemic. Meanwhile, Texas regulators continue to debate output curbs. The White House is exploring options for supporting the industry (paying producers not to pump oil, investing in additional storage solutions, filling the Strategic Petroleum Reserve) but Congress would have to approve the bulk of these appropriations.

Corporate Earnings Provide Little Optimism on the Outlook

This second week of first quarter (Q1) corporate earnings season features a more diverse group of companies than last week, offering insight on the divergent impact of the pandemic. United Airlines expects to report a $2.1 billion pretax Q1 loss, showing the impact that the pandemic had on airlines in March. United has applied to the Treasury Department to borrow as much as $4.5 billion, and if so, would issue warrants for the Treasury to buy 14.2 million shares at $31.50 per share, about 5.7% of shares outstanding. The loan would be in addition to the roughly $5 billion in grants and loans that United expects to receive under the Payroll Protection Program (PPP) to pay salaries and benefits this summer. Under that arrangement, United will issue warrants for the Treasury to buy up to 4.6 million shares. United shares fell 4.4% yesterday and are down 68.5% year-to-date. Meanwhile, oilfield services giant Halliburton reported a $1 billion Q1 loss and warned that bleak conditions in the shale patch would depress its results for the rest of the year. Shares of Halliburton posted a moderate gain but remain 68.8% lower this year. Lastly, subprime auto lender ALLY Financial reported a downside earnings surprise, driven by a major loan loss provision build related to a weakened customer credit outlook. Shares ended the day 2.2% lower. With 54 of the S&P 500 companies having reported, 70% have surprised to the upside on sales and 68% have topped earnings estimates.

Additional Themes

US Policy Action in Focus – The Senate is poised for a vote today, and the House may follow on tomorrow, on a bill for roughly $500 billion that will provide an additional $250 billion for the Small Business Administration’s pandemic relief loan facility, the PPP, as well as funding for hospitals and states. For context, the PPP hit its $349 billion limit last week and is now out of money. Meanwhile, analysts are pondering President Trump’s tweet last evening announcing an Executive Order to temporarily suspend all immigration to the US. This comes amid reports that the White House is preparing to slash federal regulation of business activities.

North Korea Headlines Noted – The South Korean won lagged regional peers overnight, but declines were still modest at 0.7% versus the dollar, amid reports claiming that North Korean leader Kim Jong Un is critically ill and incapacitated. If the reports prove true, the question of succession in the repressive regime greatly increases regional geostrategic uncertainty.