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Volume remains significantly down on what was seen in the downtick, understandably, and the rally thus far continues to be driven in large part by a very narrow subset of stocks across most major indices, with technology notable as a key driver in the U.S.
The massive surge in liquidity provision that major central banks, led by the U.S Federal Reserve, have provided in the past month has taken financial market liquidity provision off the table as a risk for embattled corporates, but the issue remains as to how the transfer mechanism applies in getting this liquidity into the real world.
To that end its been notable that deeply cyclical parts of the market remain very much on the outer, indicating that as yet investors seem unwilling to ascribe much value to the idea of imminent cyclical recovery.
The lowest quality corporate debt on issue, such as CCC-rated bonds, have also been the weakest in the rally.
Where liquidity was a major issue 4 weeks ago, solvency has now become the predominant concern for investors.
This morning WTI oil prices have collapsed -15% to $15/barrel and their lowest level since 1999.
The demand destruction inflicted on oil markets by global airline travel bans and social-distancing rules has been immense and there is now concern that U.S storage capabilities might breach their limits causing producers to have to deeply discount current production in order to find buyers willing and able to store it.
Oil is a very central risk to wider markets in general given the major impact oil prices have on profitability of major U.S corporate borrowers and on the revenues of emerging market economies such as Russia and Brazil.
U.S high yield debt indices have approximately a 10% exposure to oil leaving investors here vulnerable to a run of bankruptcies and wider selling of non-investment grade debt.
The risk of a knock-on effect to other highly levered borrowers as investors exit the sector is real.
Confirming the ongoing issues of solvency in US credit markets was the announcement by Moody’s that it could cut the investment ratings on some US$22bn in collateralized loan obligations (CLO’s) it rated, or 19% of the total Moody’s covered.
A CLO is simply a portfolio of corporate loans packaged up to be sold to investors that aims to offer greater security to investors by way of diversification.
Once again this looks to be a highly questionable strategy and has the potential to cause significant investor selling across corporate credit as solvency issues loom with an economy stuck in lock down.
The issues in credit have not been solved by the Fed’s bold liquidity support of a few weeks ago, and only a re-opening of the world economy in quick step is likely to guard against rising insolvencies and the knock on effect to investors exposed.
This remains a considerable factor in our ongoing cautious outlook.
On a positive, and this is only a personal view, but I think locally here we might have reason to feel like the tide is turning in Australia on our battle to contain the rate of infection.
Everybody knows we have flattened the curve well, and with the prospect of contact tracing technology being rolled out in a fortnight, I would hazard a guess to say that small freedoms will be granted in as soon as 4 weeks.
Let’s keep an eye on how the Danes and Austrians do in the coming few weeks on their ‘opening up’, but with a little bit of luck, Australians are likely to see slightly less restrictions by mid-May and that, in my mind, is likely to include the resumption of school for junior and middle school students and perhaps even senior school students.
Just a personal view.
Hope all remain well.
Bullet-points
US Consumer Confidence beginning to unwind
As with the previous weeks, the key focus will be on the weekly jobless claims and consumer confidence figures in the United States as this data is the most current.
The April purchasing manager data to be released worldwide on Thursday will also be closely watched to see the extent of the fall-off in April activity.
US corporate reporting season continues this week with many industrial companies such as Halliburton (HAL), PACCAR (PAC), Dover (DOV), Freeport (FCX), Illinois Toolworks (ITW) and 3M (MMM) reporting, alongside tech companies such as Netflix (NFLX), IBM (IBM) and Intel (INTC).
We will get some sense of economic reality from many of these companies, but market direction is still likely to be dictated by the major tech giants next week.
Amazon (AMZN), Tesla (TSLA), Google (GOOG), Microsoft (MSFT), Apple (AAPL) and Facebook (FB) all report next week and will be a major focus for investors given these stocks have contributed so much of the market’s rebound from its March lows.
There is risk of disappointment here clearly.
The first of the three major Australian banks reporting, being (ANZ) reports next Thursday.
Index | Change | % | |
All Ordinaries | 5544 | +105 | +1.9% |
S&P / ASX 200 | 5487 | +100 | +1.9% |
Property Trust Index | 1173 | +7 | +0.7% |
Utilities Index | 7730 | +126 | +1.6% |
Financials Index | 4302 | +9 | +0.2% |
Materials Index | 11780 | +238 | +2.1% |
Index | Change | % | |
U.S. S&P 500 | 2874 | +113 | +4% |
London’s FTSE | 5787 | -55 | -0.9% |
Japan’s Nikkei | 19897 | +855 | +4.2% |
Hang Seng | 24380 | +80 | +0.3% |
China’s Shanghai | 2839 | +43 | +1.4% |
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