New York Open: Too much uncertainly in the world

Market Analysis /
Stephen Innes / 21 Apr 2020

The trouble with the V-shape assumption of the recovery or any shape for that matter is that it requires life to return to some semblance of normalcy. In no small degree, we can assume that's not going to happen anytime soon, even as governments around the world are giving the nod to reopening's. 

 

It seems unlikely that people will be keen to return to normal, least of all if everyone that had a job before will have one after. Not to mention the lack of footfall out of the gates as people won't be too eager to visit crowded places. Look at M&M in China whose said sales were down a fifth on last year, despite restrictions having been lifted I can't see how this play's better across Europe of the US especially around major cosmopolitan centers that were hit hardest by the outbreak 

I'm not even sure what the new normal is, let alone what it's going to look like after reopening. I'm digging in for "unlock downs" to be a series of relaxation and imposition of some type tacet lockdown Countries with mass testing, and tracking capabilities will emerge the fastest. But even then, it may be outdoor work that's allowed, while bars and nightclubs are last to reopen. 

Office workers may rotate in terms between home and office, the two groups not meeting.

 It's the technology that's the most significant change and challenge as Big Brother becomes more intrusive than ever in your personal life. Individuals registered as immune, as having had Covid once, of not having had it yet, or being in a vulnerable category. Movements tracked and traced and recorded. Life, as we knew, will never be the same. 

It's only Tuesday, and it feels like not only have oil storage tanks reached the saturation point, but so have traders.

The easing of lockdowns has been raising fears of a second round of infections suggesting governments will err on the side of caution. n. That same caution has also extended to financial markets

Oil markets

There is too much uncertainty in the world at the moment for anyone to have any conviction. Markets are doing some pretty odd twists, with oil being the latest example. It would be easy to write off what happened into expiry, but that might be the problem in itself.

WTI futures are physically delivered to Cushing, Oklahoma. While there is pipeline capacity to ship it out in the near term, this is fixed, giving oil traders minimal options in terms of what to do with their crude.

The oil price reflects the economic value of oil minus less than the cost of storing oil. As WTI requires physical delivery and storage is very expensive to access, the cost of storage in May exceeded the economic value of oil in May. So, unless there is some intervention, June could become worthless also

It's somewhat different for Brent, which is a seaborne product that allows traders more flexibility in storage and transport. But is the May WTI delivery fiasco going to be troubling signs of things to come in the entire Oil complex

One of the key metrics to watch is the shape of the curve. The 12m contango in Brent has widened to nearly $15/bbl this morning; as it veers to March highs, then I suspect things turn ugly again.

The consensus view

The consensus 'view' is that the S&P 500 will have another leg lower - perhaps not as far as to put a new lower-low in, but yes, an unwind of around 15% and back to approximately 2500-2600. So, if the break of 2800 sticks, we could see the Vix call skews rise as investors look for protection. And if the Vix goes up, stocks go down, and the US dollar bid returns A lousy situation all around unless your hoping pinning for mom and dad's pension funds to blow up.

Korea mixed messaging 

Mixed messaging on North Korean leader Kim has confused the market landscape a bit. USDKRW opened bid with disappointing 20-day trade data and news of North Korea's Kim being in critical condition after his surgery. The pair gained more than 1% before gapping back lower on reports that this was not true. Price action has been very choppy, but USDKRW remains supported in a 1220.5-1240.9 range. Equity outflows continue. If Kim is indeed critical, South Korea could be in considerable geopolitical risk with no apparent successor in North Korea.

Crude or rude intentions for currency markets 

Oil is selling off despite the best efforts of the alliance between Saudi Arabia, Russia, and Donald Trump. That said, it was strictly a front-end affair as there is no marginal buyer and plenty of selling given huge inventories, lack of storage, and ~0 demand. 

Oil companies can't even give Gasoline away, with prices below $1.00/gallon at some US gas stations.

So logically, why are petrol related currencies and oil stocks not getting hit to a more significant degree?? The simple answer is when it comes to FX and equity markets, it's not where it been, but instead where it was going as traders are following the active back end contracts, not the front-end contracts. 

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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