March 29 Market Update | Technical, Fundamental, News

2020年3月29日

Description:

An analysis for the week ahead.

Points of Interest:

2-day balance; 2700 and 2400 targets.

Technical:

Last Monday, we dropped below a week long balance area. Thereafter, /ES immediately reversed and one time-framed higher until March 25, hitting the 2524 fib level. The market broke through that level and retested Friday. Thursday and Friday’s value areas were left overlapping.

Sunday’s open and Monday trading to determine if there is a break, accepting Friday’s end-of-day liquidation and moving lower back into the prior balance zone. If we continue that trend, immediate target 2400. If break is higher, then the target is 2700, filling a prior gap.

Index Analysis:

SPX: SPX
RUT: RUT
NDX: NDX
DJI: DJI
NYA: NYA
UKX: UKX
NI225: NI225
HSI: HSI

Futures Analysis:

/ES:
/GC:
/CL:
/NG:
/ZB:

Fundamental:

‘The Rising Tide Lifts All The Boats’: Benzinga survey shows “respondents are overwhelmingly positive about the present economic situation, with many feeling undeterred in their ability to repay debts and travel over the next year” (bit.ly/3byOtRm).

‘We Shall Overcome’: Fiscal stimulus has been introduced to “prevent mass homelessness, starvation and a wave of business closures not seen since the height of the Great Depression” (bit.ly/3bzgmJb). This comes on after the Fed compiled savings data showing that “40% of U.S. households would not be able to come up with $400 for an emergency expense" (bit.ly/2JjQ0i3). The stimulus would ideally produce a “V-shaped recovery,” basically putting people back to where they were before #coronacrisis came around.

‘Spend That Sh*t’: CivicScience poll shows respondents “would spend a government stimulus payment on bills, necessities, and treats, rather than saving or investing the money” (bit.ly/33QeLvZ).

‘Money Printer Go Brrrr’: The Fed will buy unlimited amounts of treasury and mortgage-backed securities (wapo.st/2wJGmmm). The tagged article also discusses a countrywide finance crunch (e.g., Rhode Island to run out of money in weeks) and mass layoffs. I spoke with Ally Invest Chief Investment Strategist Lindsey Bell last week; “The second quarter is likely to show negative GDP growth — that is on the investor’s mind. I think what the Fed did was a shot in the arm of the financial system. It’s really about protecting against what can happen down the road, instead of what’s happening now” (bit.ly/3bBE3kb).

‘Ring Of Fire’: The holders “of mortgage backed securities are fielding redemption requests from clients, margin calls from jittery counterparties and drops in their valuations, forcing the funds to solicit offers on billions in assets in emergency sales over the weekend” (bloom.bg/2UoEcBy). “Invesco Mortgage Capital, a real estate investment trust that invests in mortgage-backed securities, also saying it’s no longer able to fund margin calls. If forced sales accelerate, bond prices could fall and put pressure on other investors to mark down or sell ... holdings." "Real estate investor Tom Barrack said Monday that the U.S. commercial-mortgage market is on the brink of collapse and predicted a ‘domino effect’ of consequences if banks and the government don’t take prompt action to keep borrowers from defaulting."

‘Hold Tight’: Unwind of globalization due to tightening supply chains will push up manufacturing costs and prices (yhoo.it/3dDuNO4). Adding money into the system to aid spending will increase inflationary pressures, pushing yields lower. The expected sharp drop in earnings “coupled with increasing costs could trigger a wave of defaults.” Note that anti-inflationary weapons include rate hikes which could trigger defaults in the face of “a heavily indebted environment.”

‘99 Problems’ And Liquidity Is One: Investors observed disruptions in the U.S. Treasury market as shown by wide spreads and difficult transaction completion (bit.ly/3adlQZY). That said, the Federal Reserve announced its intentions to enhance liquidity swap line arrangements alongside 5 other major central banks, helping ease dollar funding stress. Adding, “The swap lines among these central banks are available standing facilities and serve as an important liquidity backstop to ease strains in global funding markets.” "Dollars have been in huge demand ... outside U.S. borders as banks, companies and governments scramble to secure them to service the dollar-denominated debts many have accumulated. That has sent dollar-funding costs spiraling." Read More Here: reut.rs/2xfoMXn.

‘The Walls Is Gray, The Clothes Is Orange’: According to Moody’s Analytics, the recent bill to address the virus shutdown and mitigate the economic impact adds to deficit and tilts outlook down, worsened by a lack in “mandated paid sick leave and universal healthcare, which may necessitate” further fiscal stimulus (t.co/oFGQRXqN1f?amp=1). Adding, if fiscal stimulus is successful, higher GDP growth would alleviate an intense “upward trajectory of the federal debt burden.” Debt would remain affordable in the face of low rates, “a key pillar of … fiscal strength.” Moody’s base case for the virus concentrates the economic disruption through Q2 2020, alongside lower realized GDP growth. Additionally, Moody’s stated that liquidity and functioning credit markets -- alone -- are insufficient in stopping bank asset declines; also, bank credit cost increases will ding profits, but equity, funding cushions are strong.

‘I’m Back’: After two months of viral insanity, China and other economic centers in the region are returning to work. That said, data shows “the recovery might be slower than expected as people still avoid activities that risk social contact and infection. For example, data show coal consumption for power generation remains 30% below normal levels, road congestion is still 40% below normal levels. Other more “risky” activities that require physical proximity, like riding the subway remains down even more, around 66% below normal while attendance at movies has virtually stopped. Other data shows that passenger arrivals in Hong Kong and Thailand airports are around 10% of normal levels, and that in turn affects oil demand, restaurants, hotels and tourism even in unaffected locations. Supply chains are also disrupted. Chinese ports have triple the normal number of containers waiting to be offloaded” (bit.ly/2J2arAd).

Talk Of Credit Crisis: The fear that a coronavirus slowdown may cause a credit crisis was ignited after financial conditions tightened despite the Federal Reserve’s emergency rate cut (bloom.bg/2TydohN). Adding, Bloomberg suggests that signs of stress in the credit market are apparent through multiple channels; credit card and loan delinquencies are appearing on the consumer lending front, while across the world, “Non-bank companies have drastically upped their leverage since the last crisis, as treasurers have taken advantage of historically low interest rates” (bloom.bg/2TydohN). The same article alleges that this increase in debt and leverage is a problem, even in a low rate environment, due to the “profitability drought that is making it harder for companies to service debts.” Highly leveraged banks include JPM (22x leverage), Citi (35x leverage), Goldman (232x leverage), and BoA (12x leverage). See Post Here: bit.ly/39q3UtN.

‘Hello, goodbye’: Oil at lows due to tensions between Saudi Arabia and Russia. The intent of a heavy supply increase is to get the Russian’s talking. Read more about this chicken fight at reut.rs/2INzgQc. What happens to the United States? Well, according to Reuters, "'U.S. production is likely less well hedged than the market realizes,' said Michael Tran, managing director of energy strategy at RBC Capital Markets in New York” (reut.rs/2TNGCJQ). Basically, producers bought protective put spreads and collars which only hedged from normal (expected) declines. What happened wasn’t quite expected, and so, some firms, like APA and CLR are facing severe trouble. Here are break-even prices for oil producing countries (tmsnrt.rs/2QbTAyI). Adding to this information, if there was a supply-war truce, two things would happen; first, prices would not return to pre-OPEC levels as demand has deteriorated; second, higher prices would help backstop energy and financial markets, allowing efforts to be diverted to fighting a global financial crisis (reut.rs/2xRjOjE).

Supply Risks: Joe Brusuelas of RSM expects supply shocks to roll from Asia, to Europe and then North America, "with the worst impact for businesses to come in April and May” (bit.ly/3cV15nD). Additionally, an ISM survey indicates that the virus caused supply disruptions for 75% of U.S. companies, leading to a hit in revenues (bit.ly/2IOsp9b).

Cash Is Not Trash: The world is fleeing to dollars, pushing up its value relative to other currencies. “This could help the U.S. consumer by making imports cheaper, if imports weren’t disrupted by supply chain constrictions. But with a stronger dollar, U.S. manufacturing will become uncompetitive, and foreign holders of dollar-denominated debt could get pushed into default. Other countries’ import and debt service costs will skyrocket, weakening their currencies and pushing up the dollar even further. The ballooning demand for dollars could lead to a currency liquidity crunch – the swap lines extended to foreign central banks in last Sunday’s Fed intervention were expanded even further on Thursday, a worrying sign that the initial measure wasn’t enough to relieve the strain on the FX markets” (yhoo.it/3dDuNO4).

Delinquency rates move higher (bit.ly/2QhAGq6) I detailed subprime auto-loan issues in a Benzinga.com article I wrote late last year (bit.ly/2vXjFec).

Sentiment: 32.9% Bullish, 15.0% Neutral, 52.1% Bearish as of 3/28/2020 (bit.ly/330VhEp).

GEX Gamma Exposure: -289,385,495 as of 3/27/2020 (bit.ly/2UpgtRE).

In The News:

XAUUSD - GC1! Spread: The massive spread this week occured due to worries over shipments of bullion. The spread is “to remain in place until either refineries reopen and transport resumes or Comex changes its rules to allow 400 ounce bars to be used to settle contracts” (bit.ly/2UnmPRI).

One of the largest U.S. mortgage lenders catering to risky borrowers slashed 70% of its workforce. Read more here: bloom.bg/39pvfMA.

Rebalancing: “850 billion of pending rebalancing flows is done over the next few weeks that should also help reduce vol and to lift equity prices higher from here” (bit.ly/2WStTXZ).

Money Market Funds: “A total of $286 billion was pushed into money market funds in the week ending March 25 — a 7.3% increase over the previous week's total and the largest inflow ever in terms of amount and percentage gain” (bit.ly/3atrQh9).

What Small Businesses, Restaurants Can Expect: “It's inevitable that we don't come out of this in the same way we came into it,” Sasson said (bit.ly/39jSQhO). “In the end, it comes down to liquidity in people's pockets. Do they have the money to spend in restaurants?

Oil Price Collapse Reverberates With Job, Capital Expenditure Cuts: bit.ly/2QS3aXI

Information I'm Carrying Forward:

Narrative Economics: “Narratives have the power to amplify and accelerate the transmission of recessionary or expansionary forces through the economy because they can become self-fulfilling” (reut.rs/33zmyOC).

‘V-Shaped’ Recovery: Despite the rapid increase in coronavirus cases (bit.ly/2VWCvN6) across the rest of the world, China seems to be recovering. According to Bloomberg, “Reservations for domestic flights and hotels in China are recovering from a coronavirus-induced slump as people return to work across the nation” (bloom.bg/38CeEES). Additionally, Chinese cargo flows at ports are recovering, according to Freight Waves (bit.ly/3cHVgK0).

‘Help! I’ve Fallen, And I Can’t Get Up!’: According to ARK Investment Management, prior to COVID-19 entering the U.S., consumer confidence, spending and business were improving. "The US Purchasing Managers Index had plummeted to a four year low. Consumers have been responding to record low unemployment rates and accelerating wage gains while businesses have been unsettled ... by various #trade conflicts and flattening to inverted yield curves." Ark suggests that inverted yield curves (which usually precede recessions) were a commonplace during periods of disruptive innovation, leading up to the 1920s. That said, what does all this information mean for a subsequent recovery? Well, Ark suggests that lags in inventory and capital spending are worrisome; "While real GDP could be hit through mid-year by cancelled flights and conferences and other business disruptions causing another round of inventory and capital spending cuts, the rubber band associated with a global rebound has been stretching for more than a year now." In other words, Ark thinks we may experience a V-shaped recovery (bit.ly/3d1vpg2).

Energy Slump: “While many drillers in Texas and other shale regions look vulnerable, as they’re overly indebted and already battered by rock-bottom natural gas prices, significant declines in U.S. production may take time. The largest American oil companies, Exxon Mobil Corp. and Chevron Corp., now control many shale wells and have the balance sheets to withstand lower prices. Some smaller drillers may go out of business, but many will have bought financial hedges against the drop in crude.In the short run, Russia is in a good position to withstand an oil price slump. The budget breaks even at a price of $42 a barrel and the finance ministry has squirreled away billions in a rainy-day fund. Nonetheless, the coronavirus’s impact on the global economy is still unclear and with millions more barrels poised to flood the market, Wall Street analysts are warning oil could test recent lows of $26 a barrel” (yhoo.it/39BlzPY).

“Bruno Braizinha at Bank of America had this perspective, earlier this week: When we abstract from the near-term noise and volatility and refocus on year-end scenarios we find two limiting cases: (1) a U.S. recession scenario with the pricing of the Fed to the Zero Lower Bound, which implies 20 basis points for two-year Treasuries and 50-80 basis points for 10-year Treasuries; or (2) an upswing back to trend growth as the coronavirus outbreak dissipates, which likely implies a Fed on hold after a 50 basis-point cut (two-year Treasuries around 1.1%) and 10-year Treasuries in the 1.5-1.7% range. A 50/50 weighting of these scenarios implies a 1-1.25% range for 10-year Treasuries at year-end. With forwards currently around 1.1%, the market seems to be assigning a marginally higher probability to the bullish rates scenario (bearish risky assets) for end-2020” (bloom.bg/2TT0JF4).

‘Hot Hot Hot’: Home sales surged to a high. This came alongside a rise in homebuilding, single-family completions and inventory of homes under construction. The National Association of Realtors expects recent social distancing policies to hurt the selling season, but sees hope in Fed Stimulus (reut.rs/2J5yNJh). Note: “Mortgage agreements effectively constrain ... selling properties at a loss, sellers must delay any planned sale until the economy recovers,” according to Moody's Analytics. “This all translates into a steep decline in existing home sales during recessions.” "Last month, houses for sale typically stayed on the market for 36 days, down from 43 days in January, and 44 days a year ago. 47% of homes sold in February were on the market for less than a month. First time buyers accounted for 32% of sales last month, matching January."

Creditworthiness Took A Hit: “The share of bond issuers with the lowest investment grade rating — BBB- for S&P and Fitch or Baa3 for Moody’s — has risen to around 45% in Europe from around 14% in 2000, and to 36% in the United States from 29%, BIS analysis shows” (reut.rs/2vIKClC). A drop in ratings could lead to a mass sale in bonds.

‘Push It’: For fiscal stimulus to work, almost $4 trillion would need to be injected into the economy. The “U.S. gross domestic product is $20 trillion in round numbers, of which 70%, again in round numbers, comes from consumption. That means that consumers contribute a bit less than $1.2 trillion each month. So if the nation comes to a complete halt and stays that way for three months, the implication is that it will take a bite approaching $4 trillion out of GDP. So a fiscal package of $4 trillion might be in order” (bloom.bg/2Qx68ko).

"The healthy reserves of many states and cities are why we think municipalities are well positioned to weather some economic dislocation,” according to Cumberland Advisors (bit.ly/3cLaXQO).

Exploration and production “firms hold the majority of the $86 billion of debt coming due in 2020-24, implying a higher default risk for the industry” (bit.ly/3aW3egR).

“Oil prices expected to remain anchored around $65 per barrel through 2024.” (tmsnrt.rs/38Nl3Nx) Visit (tmsnrt.rs/38Nl3Nx) to view strategic choices for Saudi Arabia and Russia to protect prices and/or defend market share; one option includes forcing U.S. shale to slowdown.

“Unlike the financial crisis, investment-grade borrowers now benefit from ample liquidity” (bit.ly/33RyD1L). Adding, “More businesses are increasing investment spending than are not, but a plurality of firms reported no change in capital expenditures.” “Since the crisis should be temporary and short in duration, we don’t expect structural disruptions to the job market.”

“As the coronavirus crisis hammers the U.S. economy, some headline numbers may rival those seen in the 1929 to 1933 Great Depression. But comparisons between the two eras can be misleading. Indeed programs built in response to the problems of the last century, such as unemployment insurance, make a similarly long and deep downturn less likely” (tmsnrt.rs/3amPhIW).

‘Big Things Poppin’: According to a Bloomberg Opinion article, “forward PE’s look attractive for a period with such low interest rates, but they aren’t even close to the levels seen during the 2008 Credit Crisis or even the Sovereign Debt Crisis, where negative earnings and corporate solvency was a problem” (bit.ly/2J2arAd).

"Despite historically low interest rates, U.S. companies are being unusually frugal, holding back on issuing new debt and pumping up their balance sheets with cash … Historically, when interest rates are low and the economy is strong, companies have levered up to increase capital expenditures and buy assets in order to expand. The opposite is happening now." (bit.ly/3cJ7phV) Adding, firm’s have reduced spending (bit.ly/2TTo5fj) which may weaken the economy; The BLS released a report which turned negative for the first time in a while (bit.ly/33jCKDB).

"A survey of small- and medium-sized Chinese companies conducted this month showed that a third of respondents only had enough cash to cover fixed expenses for a month, with another third running out within two months … While China’s government has cut interest rates, ordered banks to boost lending and loosened criteria for companies to restart operations, many of the nation’s private businesses say they’ve been unable to access the funding they need to meet upcoming deadlines for debt and salary payments. Without more financial support or a sudden rebound in China’s economy, some may have to shut for good” (bloom.bg/39DjNxK).

Last year, airlines were expecting their worst year with the auto industry laying off more people than it did in the past decade (bit.ly/39mGXYx). This came alongside a trade-war induced slowing in factory activity across the U.S., Europe, and Asia (reut.rs/2JjCknm). Nevertheless, freight and passenger shipments were slowing in 2019 with orders for consumer good hauling trucks dropping 52% year over year and air shipments solidly negative with April 2019 being the first month in which “every region on Earth, without exception, showed lower outgoing and incoming changes in weight, year over year, according to cargo market database WorldACD” (bit.ly/39mGXYx). Still, in the summer of 2019, the probability of a downturn was “at least 40% due to a falloff in auto sales, an increase in unsold inventory and weakness in government spending, Noel Perry, principal and economist for Transport Futures, told a transportation industry conference in April” (bit.ly/39mGXYx).

‘Work Hard Play Hard’: “Goldman Sachs predicts more than 2 million Americans will file for unemployment claims by next week, pointing to ‘an unprecedented surge’” (bit.ly/2wvkcUC). "If Goldman's economic forecasters are right, the number of Americans filing initial claims for unemployment benefits next week will more than triple the all-time high of 695,000 set in October 1982, and nearly four times the number seen at the peak of the Great Recession." This came alongside a jump in initial claims for the week ending March 14 (bit.ly/33DNvjW). "Thursday's jobless claims report is likely 'only the tip of the iceberg: These numbers do not account for the surge of new claims from overwhelmed’” unemployment websites from coast to coast. Adding, the hardest hit sectors include sports, entertainment, hotels, restaurants, transportation and retail. In the same article, Bank of America strategists said that a total of approximately 3.5 million jobs will be lost.

Disclaimer:

This is a page where I look to share knowledge and keep track of trades. If questions, concerns, or suggestions, feel free to comment. I think everyone can improve, especially me.

In no way should this post be construed as investment advice.