Markets outlook: All eyes on OPEC+ conference to set market tone

OPEC+ will hold crucial video conference on Thursday

This event is not the only key for oil prices but a harmonious outcome could act as an important stabilizer for the global markets, so the world of business and commerce will be singularly focused on the outcome of the meeting.

The consensus among the street is that whatever deal is done within the proposed context (10-15 million barrel per day cut) will be insufficient to offset an oversupply of 20-30mb/d in Q2. I don't think there’s any disputing that.  

Therefore, we should expect oil to react well to news flow about progress on a deal in the coming days, but then to sell off as the market comes to terms with the magnitude of the imbalance.

 

FACTBOX

Besides the economic devastation, Russian storage issues (very close to capacity) contributed to a greater willingness to participate in new global coordinated production cuts.

OPEC+ will aim for a 10mb/d reduction while the US will be expected to take the lead on an incremental 5mb/d of cuts. But can both parties eke out another 5 mb/d? It’s unlikely, but crazier things have happened; Who would have thought just two weeks ago we would have six million folks in the US lining up at the unemployment window?

The base case for US participation is that the Strategic Petroleum Reserve capacity will be leased to US producers, but OPEC+ will want more.

Saudi Arabia’s part in the price war was in part due to early efforts to dump crude in storage and lease capacity, giving them more of a buffer than Russia.

The game has changed for US shale; the growth trajectory for the industry has changed and many investors will be unwilling to return to the sector, even when oil prices recover.

 

US Week Ahead

With numerous essential data releases still lagging the onset of COVID-19 and the global containment measures, higher frequency data such as Thursday's initial jobless claims (4.5mn forecast vs. 6.6mn previously) are the most important data to watch.

But, even then, the market seems to be relatively desensitized to much weaker data, especially around the employment sectors realizing things are just bad out here and are expected to get worse. Notwithstanding the likelihood that the data is likely to run out because no one is around to build the releases.

Still, this "sudden stop" in economic activity will be devastating. While the stimulus measures implemented thus far have been unprecedented and the rollout speed astounding, it will become abundantly clear over the next few weeks whether they’re having any measurable success in containing the economic fallout or if governments around the world will need to float a bigger boat.

 

UK Week Ahead

It's not really about the extent of the current drop in economic activity but rather the duration of the lockdown that’s at the top of every investor worry list. So, the focus will shift to two fronts, 1) the mortality curves, and 2) the government's lockdown exit strategy

A hasty exit from lockdown could result in a second peak and a second round of lockdown measures, which would create an even bigger health and economic catastrophe. As such, the UK government and governments around the world must get this trade-off right. Therefore it's likely that lockdown measures will extend beyond this month, further dent economic activity and generally things turn bleaker.

 

Asia Week Ahead

As the world descends into its worst recession in Q2 with exporter centers not consuming due to lockdown, exports are likely to contract sharply. Even as the region emerges from COVID-19, a massive drop in exports will act as a significant headwind for the region's economic recovery as the global economic activity suddenly shifts from globalization to internalization. 

The proxies are ones to watch this week as the data in Asia still counts since it’s providing western markets with a blueprint for post-recovery economic acceleration.

South Korea is likely to report its weakest growth in Q1 since the GFC, likely contracting 3% QoQ, with its annual growth expected to fall to -1% (if not more), without further macro policy measures to support growth.

Taiwan is likely to report a 3.5% drop in its exports in March vs. +24.5% in February, as the holiday effect fades, and the COVID-19 impact begins to surface. Meanwhile, the Philippines is likely to record a slower pace of export expansion at 7.6% in February vs. 9.7% in January.

 

Things I don't understand, through my lens: SPX near 2500, the strong USD and The New World Order

“Here are some excerpts from a #COVID19 UBS Bank medical expert call I attended”. I never ever, ever thought I would write that. I miss the Trade War, BREXIT and NAFTA. I miss the Champions League. But today, with the explosion in the lethality headcount stateside, I'm coming to terms and readying to cancel my trip to Dublin, Ireland in August to watch my beloved Notre Dame Fighting Irish College Football Team play the Navy Midshipman. Oh, yea, I miss baseball too.

Commonly I focus on what I do understand, but this week I'm going to focus on things I don't understand, and the trades I'm in that quite frankly aren't working.

 

I don't understand why stocks are still up here

I get it that there’s a lot of stimulus in the system, but that stimulus is merely trying to offset the most considerable economic contraction in modern history. I'm now moving off my current narrative of when the virus will pass and now transitioning to what the economy will look like when it comes back. Undoubtedly it will resemble nothing as it did at the end of February 2020.

The job losses we see are not temporary. Some small and medium-sized businesses are permanently laying off 60% to 80% of their workers. Surveys show many small businesses are four weeks or less from bankruptcy. The friction on getting all these firms and employees back is going to be an arduous task.

I will try to keep an open mind but, for now, I'm sticking to my guns that this gigantically overleveraged house of cards (the US economy) will suffer the most profound economic shock in our lifetime, right as stocks are richly valued and sentiment unequivocally borderline pipe dreamish, meaning that 3300 to 2500 is just the start of what should be a domino effect lower for the S&P 500.  

 

I have no idea why the dollar is strong

The Fed has aimed its water cannon at the USD wildfire, yet the blaze continues to rage; now the market wonders when the G7 or G20 will step in and sell the dollar. The problem is that there just too many fires for the Fed to worry about, suggesting that it would take another massive move higher in the USD before they even think about verbal intervention, let alone actual physical intervention. I'm betting against the dollar, but this has become the market's Problem Child #3.

 

Problem Child(ren) 

Problem Child # 1: Oil markets 

To a degree, the oil issue will be stabilized next week. Russian storage issues (very close to capacity) are contributing to a greater willingness to participate in new global coordinated production cuts and Saudi Arabia’s part in the price war was, in part, due to early efforts to dump crude in storage and lease capacity; all went out the door when Covid19 demand devastation hit. 

When Putin and MBS started this feud, Russia's objective was to hurt US shale. Well, that's all fine and dandy when CoOVID-19 was thought to be a brief health scare, but now the virus's economic hit is morphing into the most significant financial hit since the "Great Depression" there's going to be a change of heart. Even mortal enemies have been known to put differences aside. 

Problem Child #2: Unemployment 

Jobs both reflect and drive the US economy. Nothing can fix this, but social safety nets need to bolster the downfall until the COVID-19 passes, which could be 12-18 months for all we know. After all, The Plague of 1918 lasted until 1920 and only passed when "herd immunity" set in.

 

The New World Order 

Things will eventually recover, but possibly not in our parent's lifetime. The world was already questioning globalization before the virus, so many projects that were previously considered domestically unviable will now be reconsidered. But it will take years to install the necessary multi-product robotics that can manufacture multiple product types, energy production and storage, high-speed data transfer and nanotechnology.

Export-led economies in Asia that previously had a labor market cost advantage will find they become net importers of improved technology from abroad. A short term role reversal will occur, but it will be necessary for local government to spend more on high technology education to ensure they can improve and build on technologies. 

The oil war and the COVID-19 economic fallout suggests that rich countries that competed over commodities and shipping lines will now fight for control of cobalt, lithium, rare metals and cloud computing and data processing. 

China, South Korea and Japan are on the cusp of transition, making their capital market high ports of entry. And as the supply chains geographically concentrate, it’s the more populated markets in Asia where the too big to fail trades continue to resonate. Admittedly I 'm way too early on this trade, but, in my view, proximity becomes the next competitive advantage.