1. Moving the markets

Optimists got a slap in the face, as reports of the greatly hyped experimental coronavirus drug Remdesivir, by Gilead, delivered disappointing results in clinical trials. That was enough of a downer for the markets to buckle, and the early gains were slowly wiped out, despite attempts to revive the bullish theme.

Looking at the chart above, this must have been one of the slowest days in recent weeks, with the major indexes ending the day just about unchanged.

Not helping the mood were reports from Europe, as their much-anticipated summit turned out to be a total flop with no agreement on a recovery package reached, as four “frugal” EU countries opposed any grants.

Then we learned that the housing market is not doing well, although that comes as no surprise, as New Home Sales crashed by 15.4% MoM, the biggest drop since July 2013, as ZeroHedge noted. This was also the biggest decline for March—ever!

Another 4.427 million Americans filed for first time unemployment in the last week bringing the four-week claims total to 26.5 million jobs lost. If you look at the “initial” and “continuing” claims, as per Bloomberg, it shows the highest level of continuing claims ever.

That means, we have now exceeded the jobs created in the past 10 years by the number job losses in the last 5 weeks. Stunning! Yet, current market levels in no way reflect those facts but, at least for today, equities did not rally into the close.

Summing up the day using the Good, Bad and Ugly analogy was Zero Hedge:

1. The Good – Stocks are up (all it took was a few trillion dollars)? Oil is up (all it took was threats of war)?
2. The Bad – COVID cases are up, COVID deaths are up (and Gilead’s drug is a dud)…
3. The Ugly – Over 26 million Americans have now filed for unemployment benefits in the last 5 weeks.

A three-way-standoff between ugly real economic data, ongoing global lockdowns, and the Fed’s “whatever it takes” asset lift-a-thon…

What’s next? Will more bad news be good news again?

Snapping A 2-Day Slide

1. Moving the markets

After a 2-day slide, the markets found some footing via temporary stabilization of the oil market, some better-than-expected earnings reports, and anticipation that Congress will produce another stimulus package, maybe this time without much bickering.

Getting things started, and preventing oil from slipping further, were announcements by the administration to shoot at Iranian gunboats should they interfere again with U.S. Navy operations in open waters.

A little saber rattling like this had the desired effect and put oil prices back on a northerly path, at least for the time being. However, troubles in that sector are sure to continue next month at the expiration of June futures.

In terms of market direction, plenty of opposing views exist with 2 big boys now engaged in a tug-of-war. On one side, we have JPM’s math whiz Marko Kolanovic, who is favoring new market highs by 2021, and that in the face of plunging earnings expectations of 30% or more. On the other side, we have billionaire investor Paul Singer, who noted that “our gut tells us that a 50% or deeper decline from the February top might be the ultimate path of global stock markets.”

I tend to lean more towards Paul’s assessment with the recent rebound off the lows being reviewed by Citi’s Robert Buckland like this:

“All bear markets include false rallies, often associated with supportive monetary policy. But markets only find a sustainable base when there are signs that cheap money is feeding through into the real economy, rather than temporarily supporting asset prices.”

Most economic numbers are so bad that I don’t need to regurgitate them, but I found it interesting, yet not surprising, that the US Consumer Comfort signaled an environment that clearly demonstrates an obvious divergence from Wall Street to Main Street.

After yesterday’s historic crash in oil prices, which pulled down equities as well, the pain did not stop today, as the major indexes got clobbered again with the S&P 500 surrendering over 3%.

Apparently, even the headline scanning computer algos were confused as oil prices recovered some, but remain crushed, while earnings reports and additional congressional aid for businesses were not offering any clear path to a recovery.

At the same time, worries about further fallout from the energy sector via defaults and layoffs has created an environment undermining risk sentiment, the true extent of which will be unknown for a while. As a result, the more volatile tech sector fared the worst with the Nasdaq sinking almost -3.5%.

Back to the oil saga. With May’s contract expired, the focus was on June, which also got hammered and marked its lowest finish in 21 years by settling at $11.57/barrel. Again, the issue is one of demand destruction and oversupply, which means in about 6 weeks all storage facilities will have been filled up, unless the economy starts roaring back—and does so quickly.

While this is possible, it is not very likely due to the State restrictions and various phase-in procedures to reopen the country, so I think we will see many more tumultuous events from the energy sector. That may even accelerate, once it becomes clear which entities have collapsed and are no longer viable businesses.

In bond land, the 5-year hit a new record low intraday, according to ZeroHedge, which highlights the decoupling between the bond market and the stock market’s rebound, as Bloomberg shows in this chart. If, as is usually the case, bonds are correct that would mean that the S&P 500 would have to retract to a level around the 2,100, which would represent a drop of some -23%.

Should that materialize, we will have taken out the March lows (2,191), and a clear resumption of the bear market would be a foregone conclusion.

1. Moving the markets

I had to look at the chart several times before realizing that May crude oil had crashed over 300%, as of this writing, into negative territory, and a barrel of WTI settled at a price of MINUS $37. In other words, a seller was willing to pay a buyer that very $37—just to take a barrel of oil off their hands!

That would be the equivalent of you buying $200 worth of groceries and at checkout, they are paying you $37 to take the groceries with you. Huh? These are some of the idiotic financial distortions we are seeing, and I am sure there is much more to come.

Of course, the reason for the oil crash is the spreading demand destruction due to the coronavirus, as the country has shut down, while land and ocean storage facilities are filled up close to their capacities.

There will be deep financial repercussions way beyond the energy sector, as banks involved in loans and derivatives are being threatened, the magnitude of which is not known at this time. However, I see it as a warning sign as to how substantial the economic fallout will be, while current stock prices are in no way reflecting these uncertainties.

The major equity indexes had opened to the downside, but were in the process of crawling back, when the oil debacle accelerated and put an end to the mid-day rally by pushing them to new lows for the session.

Continued hope and optimism about the potential easing of the global lockdowns took a backseat to the oil crisis, but traders were on edge anyway with second wave virus infections having made a comeback.

Right now, the question in my mind is “will equities be able to resist these unprecedented events and march higher, or will we see a reversal with a re-visit of the March lows on deck?”

We will find out soon enough.