Another remarkable week for the economy and financial markets ended on a characteristically surreal note, as surging US equities competed for chyron space with highlights from the worst jobs report in American history.
By the time the closing bell sounded, stocks were higher by 3.5% on the week. Oil logged a second consecutive weekly advance, the first two-week winning streak since February and only the second of 2020.
Sporting a 28-handle, the VIX is now a mirror image of its March 16 self. It was 82 then.
Taken at face value (and that’s not generally an advisable way to view things), this suggests market participants are indeed willing to “write off” the second quarter and look ahead to a brighter future.
And yet, the dichotomy between, on one hand, the worst economy since the Depression, and, on the other, buoyant stocks and falling equity volatility, is also apparent in the juxtaposition between rising equities and futures pricing for negative rates (bottom pane).
It’s obviously true that monetary accommodation is bullish for risk assets, but only to a point. One would would be inclined to think that if things really are so bad that the Fed will soon brave the NIRP taboo, it wouldn’t be conducive to a risk-on trade.
Jerome Powell will give a speech about the economy on May 13. When news of the Fed chair’s upcoming remarks crossed on Friday afternoon, fed funds futures backed off. A variety of theories have been floated to explain the market’s pricing in of NIRP in America. Explanations run the gamut from generalized macro angst (centered on deflation risk) to stop-outs to Jeff Gundlach’s silly “fatal” tweet, which I refused to dignify in these pages, but which was amplified by Bloomberg and other outlets.
In crude, a variety of catalysts were at play this week, from the Saudis raising prices to signs of hope in the EIA data (the bullish bits were brushed aside initially, but likely fed into the generally positive vibe) to the latest update from Baker Hughes, which showed domestic oil and gas exploration falling to a record low.
That’s bad news for a lot of folks, but taken in conjunction with the OPEC+ cuts and the tentative restart of economic activity, it’s bullish for prices. The market is “naturally” rebalancing, as painful a process as that is.
“The price action of the past week implies that oil prices have bottomed out”, PVM said, in a Thursday note, adding that “the expected jump in global oil demand and fall in OPEC and non-OPEC supply will drain oil inventories all over the world in the second half of the year [and] this growing consensus is presently supporting prices”.
In equities, it’s the same story: You’re fully justified in expressing reservations about buying stocks at a time when corporate profits are in free fall, but as discussed in “Freight Trains“, taking an outright bearish view is tantamount to putting your finite supply of money up against a guy (Powell) who prints it.
“This is why I continue to advocate a ‘long Momentum’ position into the summer versus avoidance of an outright ‘bearish stocks’ trade expression”, Nomura’s Charlie McElligott said Friday.
“The performance of this market-neutral strategy is predominately a function of the inability to envision a scenario of sustained selloff in US rates and USTs [given] an extended period of economic distress”, he went on to remark.
As far as central banks’ reaction function, McElligott didn’t mince words.
“If you don’t [think] the Fed is buying equities ETFs on the next market shock, you are wrong”, he wrote, before suggesting that we’re likely to see “more widespread deployment of NIRP” before it’s all over.