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Msg  67078 of 68665  at  3/31/2020 1:39:12 PM  by

carswell


The Launch Pad


Daily market commentary
The Launch Pad
March 31, 2020
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Today

The rebound continued to gain steam yesterday, led by Health Care and Tech, gaining 4.67% and 4.23% respectively. Next on the list of sector gainers were Consumer Staples and Utilities. While capital is being put to work, it continues pile into the more defensive sectors. Technology while not typically “defensive” has outperformed on a relative basis to the overall market.

Today is the last day of Q1. It’s amazing how fast time passes when you are having fun. 90 days ago, the world looked very different, we remember reading dozens of Year and Decade ahead pieces and not one mentioned this as a possible risk, including ours. Black swan events are always the biggest risks for investors. They come as a surprise and with major consequences. While the U.S. election and trade war took up the majority of the focus for the ‘year ahead’ both seem to be of little significance at this juncture. QTD, the S&P 500 is down 18.7% and the TSX is down -23.59%. This would be the worst quarter since 2008. When you factor in the big fall for the loonie, U.S. returns are significantly better, ‘only’ falling -10.83%. Looking back at the quarterly returns was also a stark reminder that bear markets can drag on for prolonged periods of times. Back in 2008 we saw six consecutive quarters in the red.

Needless to say, this quarter was characterized by the unprecedented, on all sides. The first half of the quarter saw new all time highs. The second half of the quarter witnessed the end of one of the longest bull markets in history, replacing it with the fastest bear market. Society has purposefully pushed the economy into a sudden recession to fight a global health issue. More stimulus than believed possible, an oil war, the list goes on. Glad that quarter is over.

While green for most of the early morning, stock futures have slipped as we near the open. No real news to cause for concern, except the consistent drip of negative news concerning the spread of the coronoavirus. It seems some days the markets care, and others it doesn’t. New York reporting a 16% increase of deaths in six hours and talks of extending lockdowns in Italy certainly don’t help.

Ford and General Electric pair up to produce ventilators in the US. The auto giant is collaborating with GE’s healthcare division to produce 50,000 over the next 100 days. One is already being used in New York. While it’s admirable that the company is stepping up in a time of need, it’s unfortunate that they have delayed North American production indefinitely. They just cancelled plans to restart factories in Mexico and the U.S. over the next two weeks.

With ad budgets way way down (and advertisers themselves shutting down), the Coronavirus is a media extinction event. A cruel irony of the pandemic, is that while journalists may be performing an essential business, the business of journalism is facing an extinction-level threat.

Donald Trump is considering expanding the travel ban. The US president said yesterday that travelers from China, Europe, and Iran remain blocked from entering the US, “and we may add a few more.” Canada and Mexico have already agreed to reduce border crossings to the US.


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Company news

Carnival is turning to the bond market to raise $3bb of bonds. They are trying to raise money in both Euros and Dollars. The bonds will have first claims on their ships and mature in three years. Startup Nurx Inc. has created a covid-19 test that can be used at home and sells for $189. On March 20th they launched the product which requires patients to swab their throat and FedEx the sample to their lab. However the FDA did not support the test and the company pulled it. Ford has canceled plans to reopen their manufacturing facilities in Mexico and the U.S. in two weeks. The United Auto Workers announced two deaths of Fort plant workers on March 28th. They still plan to start making ventilators in Michigan during the week of April 20th. TC Energy has said they will proceed with Keystone XL pipeline construction. The government of Alberta will invest $1.1bb in equity, which will substantially cover 2020 construction costs.

Commodities

Crude futures surged overnight as sings of an economic recovery in China emerged; at the time of writing, WTI Crude futures were up +7.3% to US$21.55/bbl while Brent Crude futures were up +3.7% to US$23.61/bbl. Yet, physical market structures remained in freefall. Western Canadian Select spot prices still trade less than C$5.00/bbl, at one point dropping as low as C$3.82/bbl. Realized prices for Alberta's bitumen-blend crude likely crossed into negative territory after deducting the cost of the lighter oil blend required to allow the sticky grade to flow in a pipeline. As Michael Dunn of Stifel FirstEnergy notes, non-upgraded crude production in Alberta requires high-US$20s per barrel WTI to cover variable costs, and an additional US$2-US$5 for sustaining capital requirements. If these levels persist, production curtails in the province are likely imminent.

Meanwhile, Saudi’s Arab Light Crude grade will begin selling a US$7.73/bbl, -US$3.63 lower than where it was last month. Saudi Arabia is also redirecting the flow of its crude to to a terminal in the south end of the Suez Canal in Egypt, where it will then be pumped to a storage and export facility on the Mediterranean Sea. The flow is the largest observed in 3 years and is likely part of the kingdom’s plan to flood Europe with their barrels. Back in America, the call for regulators to coordinate a slash in production grows louder. Two of the largest drillers in Texas, Pioneer Natural Resources and Parsley Energy, asked of the Texas Railroad commission an emergency meeting no later than April 13. The proposed output cuts may slash as much as -30% of some companies’ overall production.

Elsewhere, gold prices are headed for its sixth consecutive quarterly gain, the longest stretch observed since 2011; at the time of writing, the spot price for the yellow metal edged lower -1.19% to US$1,603.30/oz. It’s been a volatile month for the commodity, as investors seemingly sold gold to raise cash while its futures market was put into a squeeze. In a new twist, Russia’s central bank announced yesterday that it would stop purchases of bullion starting tomorrow. While the nation’s purchasing has certainly assisted in underpinning demand in recent years, the move will free up Russian gold for export at a time when physical metal is in high demand.


Fixed income and economics

It’s about as stale and irrelevant as you can get with data points, but StatsCan reported that domestic output rose by +0.1% in January (+0.2% forecast). That translated into a GDP clip of +1.8% annualized which was the second highest pace in the past half-year. Positive highlights included strength in manufacturing (+0.8%), construction (+0.2%) and in the finance/insurance (+0.9%) segments, while the Q4 household debt declined 3/10’s per dollar of income to 176.3%. All of this of course omits the damaging effects of the COVID-19 outbreak and markets are rightfully shrugging off the release for the most part. Loonies are softer by a half-penny from their early session highs while Canada’s underperform. Moody’s published an official update regarding our Canadian economy yesterday that saw the agency revise their forecast for GDP to a -2.2% contraction from +1.5% growth prior. “As in many countries, the Canadian government’s containment measures will slow the spread of the virus, but severely affect economic activity and growth. However, the emergency fiscal measures will help to cushion the shock,” analysts noted. Looking ahead to 2021, Moody’s now expects 2.4% growth in Canada, “as economic activity normalizes, supported by the government’s policy response.”

Chart of the day

Markets

Quote of the day

Inside every cynical person, there is a disappointed idealist.

- George Carlin



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