‘Better Odds At The Neighborhood Craps Game’

Oil continued to dominate headlines on Tuesday as S&P Dow Jones said it will pre-roll its WTI contracts to July, the latest evidence that the first-month will be personae non grata as long as everyone remains terrified of delivery in an environment where there’s simply nowhere to store the stuff.

“It’s not particularly unusual for the second month to be more liquid than the first as expiry approaches, but it’s less usual to completely skip a month as happened here”, Bloomberg’s Eddie van der Walt wrote Tuesday.

There’s a kind of self-fulfilling prophecy going on. If everyone expects everyone else to avoid the nearer contracts, they’ll become increasingly less desirable. This could perpetuate the price action, making a re-run of negative prices in the near-term futures more likely. “S&P GSCI now too rolling from June to July”, Nomura’s Charlie McElligott sighed, in a Tuesday note, calling it “a race to the death versus USO and the negative feedback loop thereafter”.

Jitters around an imminent overflow at Cushing will keep this dynamic in play. US producers are now storing barrels in the Strategic Petroleum Reserve after inking leasing deals with the DOE.

“This is a market best left to the experts who can see the flows. People seeking to have fun will get better odds at the neighborhood craps game”, former trader Richard Breslow quipped. Don’t tell that to the folks in USO, though.

Elsewhere, it’s all about reopening plans for major western economies, and for US states. Economically, our fate is sealed in the second quarter, but even ostensibly rational people (i.e., people other than Donald Trump) seem to be clinging to the notion that the third and fourth quarters are salvageable.

That may be some semblance of true, but it depends heavily on the idea that consumers will return to restaurants, retail stores and generally be willing to engage in economic activity with something that at least looks like their pre-COVID vigor. That seems like a potentially dubious assumption – especially considering economic activity wasn’t all that “vigorous” ahead of the pandemic.

Stocks will do what they’re prone to doing in the face of trillions in support from the benefactors with the printing presses – namely rise in the absence of a clear reason not to on a given day. Poor earnings don’t count.

I’ve said it before, and I’ll say it again: If we’ve learned anything post-crisis, it should be that betting against policymakers with printing presses is perilous.

Especially when a pandemic has given them all the cover they need to toss moral hazard considerations out the window.

(BofA)

The VIX is back to March levels and the tails have are being priced out. “Central banks have depressed short term rate volatility and the Fed’s policies are like oil on water for equities, rendering all other drivers less important”, SocGen’s Kit Juckes wrote Tuesday.

“With FOMC and ECB meetings, as well as US and Eurozone GDP data, Chinese PMIs and US ISM before the weekend, I wouldn’t declare this week a write-off yet and it’s worth pointing out that FX volatility is likely to be more resilient”, Juckes went on to say, noting that in FX, at least, “relative economic prospects and policy differences are [still] important [meaning] vol is likely to end up stuck in a higher range than it was in recent months”.

“WTI was trading at $10.89 at the time of writing when it started the year at around $60, and Brent at $18.89 when it began around $64”, Rabobank’s Michael Every remarked. “Such is the real damage still being done by the virus regardless of [anybody] tentatively going back to work”.

I suppose that’s just as good a summary as any.