The economic calendar:
MONDAY
3 and 6 Month Bill Auction
TUESDAY
NFIB Business Optimism Index, Redbook Index (YoY), Redbook Index (MoM), USDA WASDE Report, 3-Year Note Auction, API Weekly Crude Oil Stock
WEDNESDAY
MBA Mortgage Applications, U.S. Consumer Price Index, Consumer Price Index ex Food & Energy, Consumer Price Index Core, Consumer Price Index (MoM), EIA Crude Oil Stocks Change, 10-Year Note Auction, Monthly Budget Statement
THURSDAY
ECB Interest Rate Decision, Producer Price Index, Producer Price Index ex Food & Energy, Initial Jobless Claims, Initial Jobless Claims 4-week average, Continuing Jobless Claims, EIA Natural Gas Storage Change, 4-Week Bill Auction, 30-Year Bond Auction, CFTC NC Net Positions
FRIDAY
Import Price Index (MoM), Import Price Index (YoY), Export Price Index (MoM), Export Price Index (YoY), Michigan Consumer Sentiment Index, Baker Hughes US Oil Rig Count
Source: Johns Hopkins CSSE
WHAT TO WATCH THIS WEEK
- S&P 500 futures touched price limit down at 2819 down -148 points (-5%) Sunday evening as of this writing. The markets are spooked by corporate earnings slowing from coronavirus and the new oil trade war clash between prominent OPEC members Russia and Saudi Arabia.
- Oil futures prices crashed over -25% to their lowest levels since 2016 after Saudi Arabi said it plans to cut oil prices. The price cut was in response to OPEC members from Russia and Saudi Arabia not agreeing on oil production cuts. The threat is more supply on an oil market that has abundant supply and slowing demand.
- How do central banks respond? The market is pricing significant interest rate cuts to improve sentiment about the drag on the economy from coronavirus. The Fed Funds futures market is pricing a 45% chance of a 100 basis point rate cut by September. Zero rates here we come.
- Updates and reports on the spreading coronavirus. Total confirmed cases rise above 109965 vs. 87470 last week, with 3824 vs. 2990 deaths, as reported last week. We continue to monitor the coronavirus situation closely. The number of reported virus cases outside mainland China spooked markets last week, and risk-off continues in Sunday evening trade.
Equities - A crazy week of rollercoaster action last week continues in Sunday evening trading. The S&P 500 futures are halted at overnight price limit down 2819 (-5%).
The markets are in a state of extreme volatility, given the rapidly progressing coronavirus epidemic, and now the Saudi and Russian oil trade war. Because no one has an information edge, traders are mainly trading on the latest headlines—and taking a "sell now" and "access later" mentality.
Many of the defensive sectors have been the bright spot - Utilities, Consumer Staples, Healthcare. See the below table.
Why is the market falling? Well, the coronavirus disruption puts pressure on corporate earnings that were priced for perfection. Remember, stock returns were stellar in 2019, and traders were looking for earnings growth in 2020.
And now, we can add the Oil Trade War to our list of negative market factors. Many U.S. based oil and gas companies will default on debt payments with oil prices this low.
SUNDAY EVENING EXTREME RISK OFF MARKETS
Source: TradingView
Energy - We Now Have An Oil Trade War. WTI Oil fell sharply to lowest levels since 2016 when futures trading opened Sunday evening with U.S. crude futures sliding 24% to $31.10 a barrel. This is one of the most significant one-day swings ever in crude oil trading.
The declines came after Saudi Arabia said it was cutting oil prices. It slashed its popular medium crude by $7 a barrel to the U.S. The price cut is directed at taking market share from Russia, but will also have a direct impact on U.S. shale producing companies.
The price cut was in response to OPEC members from Russia and Saudi Arabia not agreeing on oil production cuts. The price cut is directed at taking market share from Russia.
U.S. oil and gas companies are feeling the pain from increased supply and lower prices. The lower prices and new soft oil demand caused by coronavirus delivers another blow to oil and gas companies.
Analysts say "possible dips in prices and oil business operational stress could see oil trading around $20". At a $20 level, we will see significant financial stress and declining production from U.S. shale companies. From a historical perspective, Brent oil traded at an all-time low of $9.55 a barrel in 1998. (Read More)
Source: TradingView
Interest Rates - In a surprising mid-meeting move last week, the U.S. central bank cut interest rates by 0.50% to a Fed Funds Target range of 1.0% to 1.25%. This is the first time the central bank had an emergency mid-meeting move since the 2008 financial crisis.
And, the market reaction - "We Want More Cowbell." The markets have wiped out any optimism from the rate cut and are pricing in another 0.75% - 1.0% cut in the next six months.
Many analysts recognize monetary policy cannot shelter markets from coronavirus and global supply chains, but it can shift sentiment. Many traders feel a rate cut will only be a temporary boost to markets. The science and data of coronavirus will be the ultimate driver of the market in the near term.
U.S.Treasuries Yields current to last week:
30-year yield 1.29% vs. 1.679%
10-year yield 0.495% vs. 1.156%
5-year yield 0.39% vs. 0.94%
2-year yield 0.302% vs. 0.927%
2-10 yield spread 0.187% vs. 0.229%
March Fed Meeting Rate Cut Probabilities:
The Fed Funds futures market is pricing an 83% chance of a 75 basis point cut, and 17% of rates going tp 0% at the next Fed meeting on March 18.
September Fed Meeting Rate Cut Probabilities:
The Fed Funds futures market is pricing a 45% chance of a 75 basis point cut, at the next Fed meeting on September 16, and a 54% chance of rates going to 0%.
The current Fed Fund Target Rate is 1.0 - 1.25%.
Source: CME Group Fed Watch Tool
Agriculture Markets - Focus will be on outside markets this week. Renewed fears of a slowdown in global trade due to coronavirus pressuring markets. The stock market sell-off and oil price collapse are factors pressuring grain and oilseed markets. Grain prices are fragile in Sunday evening trade( see below).
Source CME Group
An important headline a few weeks ago that did not get much attention is the White House administration renewed its jawboning that China must honor its 'phase 1' trade obligations. Some analysts are worried that the trade deal terms will not be fulfilled or renegotiated because of China's virus issues. Read More
Volatility Index - CBOE Volatility Index or VIX closed at 41.94 Friday. Most of this reflects the scale and speed of the sell-off. Expect a push above 50 as the S&P 500 futures are locked limit down in Sunday night trade.
We are flat tail volatility trades at the moment but will be stalking for trade opportunities.
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