As expected, Thursday was a sloppy day on Wall Street and just generally an all around mess.
Equities plunged, oil struggled to digest another standoff between the Saudis and Russia in Vienna and bonds surged with gold as investors clamor for safety amid an incessant stream of coronavirus headlines.
OPEC is desperate to put a floor under crude, which is essentially in free fall thanks to demand destruction concerns engendered by the global health scare. Brent settled below $50 for the first time in almost three years.
Long story short, OPEC wants a 1.5 million b/d cut through the end of the year (initially, the recommendation was that the deeper cuts would last just through Q2, but after “informal” talks at the Saudi delegation’s hotel, ministers decided that the drastic cuts should in fact last longer).
If Russia doesn’t agree, OPEC may simply scrap the cuts completely. In other words, the bid to support the market is purportedly contingent on Russia going along with the idea, a massive gamble for the Saudis and the biggest test of the cartel’s alliance with Moscow yet.
We’ll see what happens. For now, crude continues to plunge and energy shares in the US are at the lowest since 2009.
January marked the worst start to a year for oil since 1991, and although Russia risks losing some sway in the Mideast by persisting in recalcitrance over the proposed cuts at a time when the Kremlin is still heavily involved in Syria, Riyadh is chancing an outright collapse in prices if Putin calls the Saudis’ bluff. Further price declines would strain the Kingdom’s budget and make for bad optics if it translates into selling pressure on the tiny sliver of Aramco that trades publicly.
In any event, this drama will likely end in a compromise, so we won’t dwell on it further for now, but the stakes are high. As Bloomberg notes, we’re talking about “1.5 million barrels a day of fresh oil cuts, plus 2.1 million of existing curbs OPEC+ agreed on last year that expire at the end of this month, the equivalent to the consumption of Germany and France combined”.
The bigger picture (i.e., the 30,000-foot macro view) is simply this: The larger the economic impact from the spread of the virus, the more downward pressure on oil prices and the stronger the deflationary impulse.
In equities, Thursday was “just” another 3% +/- session, a state of affairs that serves as a stark reminder of what happens when a left-tail catalyst collides with modern market structure (as discussed at length in “We’re All Momentum Traders Now“).
These swings are quite remarkable and aren’t generally indicative of a “healthy” market, although I suppose that depends on one’s definition of “healthy”.
Transports look to have fallen into a bear market, and generally speaking, the airline industry is facing something akin to a mini-existential crisis – assuming it makes sense to use “mini” with “existential crisis”.
Southwest on Thursday delivered a revenue warning that served to underscore some of the market’s worst fears about the expected impact of the epidemic on travel, both domestic and international.
Down there in the bottom pane is the 14-day RSI for US 2 year yields. As far as I can tell, that is a record low.
Oh, and then there’s the following, which speaks for itself:
So, all in all, just another session during which shell-shocked fundamental/ discretionary investors grappled with myriad dynamics they don’t fully understand, while traders of all stripes (carbon-based and otherwise) attempted to navigate headlines about a biological threat that neither man nor machine can keep pace with.
All the while, central banks feign bravery, not because they want to, but because, in the absence of a fiscal response or a scientific cure for the problem, they have no choice.
“There’s a tree where the doves go to die”…