Key points to remember:
- Crude plunge overflows on the stock market as futures fall overnight
- 10-year yields slide to new historic lows below 0.4% at the start
- Inventories on the verge of new lows for recent slowdown
Overnight, it went from a history of coronavirus to a raw history as the market continued its rapid descent.
Hit by a 30% bloodshed in crude oil, the S&P 500 futures have sometimes dropped 5%, reaching their overnight limit for the first time since the night Donald Trump was elected.
The limits of futures trading are probably a good thing. It allows colder heads to prevail, especially in the night sessions. It’s a rule where we haven’t seen it for a long time, but it has proven to be effective over time.
Investors faced with this type of wild trading should also try to keep their cool. We said last week that volatility will continue until at least next week’s Fed meeting. There is no change to that, and it is not too surprising considering what we have experienced. Anyone planning to trade today or this week should consider not going “all or nothing” and keeping transaction sizes smaller than usual.
With the main daily session in progress, a 7% drop in the S&P 500 (SPX) index would trigger a 15-minute trading break.
There is no pause in the collapse of Treasury yields that started two weeks ago. The 10-year yield fell below 0.4% early Monday. Investors continue to set prices for a further Fed rate cut ahead of next week’s Fed meeting.
While all of this was happening, the Fed announced on Monday that it would step up its liquidity actions to guard against market pressure, media reports said. More details could come, but the basic idea seems to be that the Fed’s regional banks will increase the amount they offer to banks for short-term needs, which started last fall when short-term funds have tightened.
US crude futures fell to four-year lows below $ 30 a barrel sometimes early Monday, putting further pressure on a stock market already double-digit down thanks to the coronavirus. Over the weekend, Saudi Arabia announced a drop in the price of crude oil it sells to foreign buyers and now appears poised to start increasing production well above current levels, market observers said. tanker. This came after OPEC and Russia were unable to agree on further production cuts last week.
It seems that Saudi Arabia may be trying to increase Russia’s pain now that Russia has refused to further cut production. The Saudis can make a profit on crude oil at prices much lower than those of Russia. In this scenario, therefore, it is possible that Russia will suffer the most. American drillers are also likely to feel the heat, which could cause more pain for this industry.
Gross correlation with back-to-play actions
The question is whether the crude oil can contain psychological support at just over $ 30 a barrel. If not, the long-term low of $ 26 in February 2016 could be threatened. Crude oil was almost $ 32 when the opening bell approached.
When you think back to the lukewarm stock market of early 2016, one of the big trends then was the close correlation of crude prices with stock prices. The same could happen again here, analysts said, with stocks struggling to get an offer as the crude market sends signals of weak business and consumer demand and risks of major problems for the market. energy sector. All of this could hurt the economy and jobs in the United States, particularly in states where oil is a big business.
The energy sector sometimes fell Friday to levels never seen since the bottom of the stock market in 2009. The SPX has more than quadrupled from its low of March 2009 (today is the 11th anniversary of that ), but the energy sector has gone nowhere since then, with all the gains from that point on.
If there is a silver lining, the drop in crude prices could give consumers a break and stimulate the economy. Pump prices fell below $ 1.50 a gallon in parts of Texas over the weekend and even fell below $ 2 in the far north of Illinois, a generally known state. for its cheap gas.
Falling oil costs could also give the spray transportation sector a new spark, as airlines, trucking companies and railroads can now buy their energy supplies at extremely low prices. It would not be surprising to see some companies – particularly airlines – using this as a major coverage opportunity. This would match what many of them did in 2016 and 2009 in previous oil market crashes, and in the end, it could provide a nice tailwind for their earnings over the next few quarters, assuming that economy exceeds this current distribution.
However, it is unclear how quickly airlines could step in to cover crude costs in an environment where many travelers are canceling trips due to the virus and as the Boeing 737 MAX problem continues. All of this means that the crude may not get an immediate increase in demand as it has sometimes done recently in the crater.
As crude falls from the proverbial cliff, natural gas futures have the opportunity to do what could be a kind of trough generation. They held about $ 1.66 / MMBtu (million British thermal units) Sunday evening. The 2016 low was $ 1,611. Below, you have to go back to the end of 1998 to find a lower price for the first month’s contract at $ 1.61, and the last time it was traded below $ 1.61 was in 1995.
Detail response
Retail investors seem to be caught off guard by the severity of the downturn in the US stock market and may not be using it as a great opportunity to “buy the low” as we may have seen in the past.
Those who buy seem to focus on names like Apple (AAPL) and Microsoft (MSFT) that people trust in the longer term or in the Costcos (COST), Cloroxes (CLX) of the world who could benefit from this type of environment. .
It is technically disappointing that the market sold each day after two historic rallies last week when the SPX gained 4.6% and 4.2%, respectively. This is not necessarily a positive sign, and reinforces ideas that rallies could continue to be sold as long as Treasury yields remain in the landfills.
From an industry perspective, utilities and health care led the charge last week, while energy and financial services finished last in the ranking.
Take a ride in transport
Transportation – often seen as an economic barometer – probably deserves to be watched this week as we learn more about the plight of cruise lines and airlines. The Dow Jones Transportation Average ($ DJT) fell 4.6% last week and is in bearish territory (down more than 20% from the highs). Small-cap stocks were also outperformed by their larger cousins in the past week, dropping 1.8% as the SPX and the Dow Jones Industrial Average ($ DJI) gained small gains.
Transportation and small cap companies may depend more than some other industries on how consumers respond to fear of the virus. For the moment, anecdotal evidence shows that restaurants remain crowded. A White House economic adviser went on television Friday to encourage people to keep working and not let the virus change their lifestyle. Over the course of the month, we’ll see if people follow this advice from Washington (see below).
Data for this week include consumer and producer prices for February, Wednesday and Thursday, respectively. Michigan sentiment for early March Friday may stand out more than usual as investors try to find out if the virus is starting to impact consumers. There is no really important data today.
Looking forward to: Friday’s liquidation following a solid job report shouldn’t have come as much of a surprise if you get a sense of how the market works, especially in volatile times like these. Employment data, by their very nature, are retrospective and the stock and bond markets look to the future. So far, the data has not yet caught up to expectations of an economic slowdown, but stocks and bonds are telling you what investors are waiting for. At this point, they rebill the assets to protect themselves from the impact of the virus on the economy. This is why viewing more up-to-date statistics, such as weekly job applications and inventories and crude oil production, could be a better way to monitor things more in real time. The other thing to remember is that once the stock and bond markets have recovered – and there has never been a past correction when they haven’t finished – it will likely happen before that the data is starting to improve a lot.
Did the Fed Help Friday’s Return? Why have stocks rebounded so much since the lows of the last half hour on Friday? Short coverage seemed to be a factor in the past few minutes, but some market participants said comments by a Fed speaker at the end of the day could also have helped. Boston Fed Chairman Eric Rosengren said in a speech on Friday that if the Fed cut rates to near zero, “we should allow the central bank to buy a wider range of securities or assets “reported the New York Times. “Such a policy,” he noted, “would require an amendment to the Federal Reserve Act.”
Other countries’ central banks can buy stocks and corporate bonds, but the Fed is legally limited to government-guaranteed debts, such as mortgage-backed securities and treasury bills. Purchasing other asset classes would require opening legislation that empowers the Fed, the New York Times reported. It seems pretty far-fetched to consider the Fed intervening to buy stocks, but perhaps the idea that the Fed would take some sort of drastic action sparked optimism in the market on Friday evening. For now, this is just speculation, and no one should consider trading.
One more turn around the jobs report: By taking a new look at Friday’s impressive jobs report, let’s break down where the gains and losses have occurred. The main categories included health care and social assistance, food services and drinking places, government and construction. All of these have seen very healthy gains, with 42,000 new construction jobs. A warm winter could have led to many construction jobs in January and February. With that in mind, remember that the March and April reports may not get the usual construction lift, as some of this has already happened. Government jobs could also be a mistake this year due to the one-time demand for people to conduct the census.
With the virus in mind, consider keeping a close eye on the healthcare and food service sectors when next month’s report is released. The February report probably did not detect much of the impact of the virus on any of these, but it would not be surprising to see food and beverage establishments lose ground and health positions gain ground if the virus is starting to make a real impact on people.
TD Ameritrade® Commentary for educational purposes only. SIPC member.