A change in market sentiment?
- Russia reports more than 250,000 Covid-19 cases, now second in the world for total coronavirus cases. The U.S, is first with more than 1.4 million. The WHO is in discussions with Russian authorities as they say that 2,305 people have died so far from Coronavirus. That is a 0.9% mortality rate, far below the global average. Meanwhile, South Korea tries to stop the club cases: one infected person went to three different clubs to spread the virus, having exposure to more than 3,000 people. Total confirmed cases worldwide reach 4.4 million.
- Cushing, the main oil storage in the U.S, sees first draw down in oil inventories (-2.2mm) in 10 weeks exceeding expectations that were at -1mm, according to the latest API data. Nevertheless, Crude inventories increased by 7.6mm (+4.3mm expected), being the 16th weekly crude build in a row. Despite that, demand recovery expectations (sharp recover in Chinese Industrial Output) and OPEC+ and G20 oil producers commitment in cutting production (already cut 6 million out of 10 promised), sets oil for a 3rd weekly gain in a row.
- Goldman Sachs updates its US unemployment rate estimate to 25% from 15% after the latest non-farm payrolls update reporting more than 20 million jobs lost in April in the U.S. On Thursday, the latest U.S Weekly Jobless Claims data came at 2.98 million, higher than expected, but continuing its slow decreasing trend.
- Top hedge fund managers sound alarm about stocks. One of them, David Tepper, commented the stock market is most overvalued since 1999, during the dot-com bubble. These comments are a change from late March, when he said he was buying into companies focused in technology or healthcare. Stanley Druckenmiller, former chairman of Duquesne Capital, told the Economic Club of New York that liquidity that drove markets higher will shrink as Treasury higher borrowing will crowd out private investors.
- Federal Reserve Chair Jerome Powell warned of uncertain outlook ahead with significant downside risks. Powell denied that the Committee was considering negative interest rates as an additional monetary policy tool. Lack of further action was viewed by equity investors as a disappointment and the S&P500 dipped down for the second time in the week after the large Tuesday night sell off. The DXY (Dollar Index) strengthened.
US-China Trade War
After the phase 1 trade deal agreed on January, it seems this pandemic has restarted a trade war that never finished.
On Wednesday, the U.S delayed the federal savings plan that involved moving federal funds into an index containing Chinese stocks. In addition, Trump extended an executive order protecting the U.S supply chain against Huawei and CTE, two telecom Chinese companies. Later overnight, Beijing announced countermeasures for all those seeking Coronavirus damages from China. Australia will be affected by this latest decision from China if they do continue with the independent investigation on Chinese government action during the start of the outbreak.
Anyone trading the AUD (Australian Dollar) should monitor the US-China trade war as Australia highly depends on China as a trading partner. Special attention should be placed in mineral products as they represent a big chunk of the Australian exports to China. We have to be aware that a trade war has ramifications to other linked countries and should consider these in our investment decision-making process.
The Phase 1 trade deal was contingent on China purchasing an additional $200 billion of U.S goods over a two-year period. A great part of those purchases are agricultural goods, mainly soyabeans. However, China has imported a monthly record-high Brazil soyabeans impeding US trade target according to the FT.
Price. A 25% difference between U.S and Brazilian soyabeans, mainly due to Chinese tariffs, a tax on Chinese imports from the U.S.
U.S Electoral Campaign
Unfortunately, the Covid-19 pandemic has coincided with a U.S presidential elections year.
Having 6 months left to the election, the two candidates Trump and Biden are already strategically deploying their assets to get an edge in the polls.
On the one hand, Trump faces a challenge in toss-up states, i.e states that can swing either for the Republicans or Democrats in an election, as many of them have been among the hardest hit by Coronavirus pandemic in term of unemployment. Areas like Pennsylvania, Florida, Michigan, Texas or Ohio. Trump already visited Pennsylvania on Thursday.
It can be expected that Trump will ask for additional funding for main industries in these key areas, as he did for the Texan oil industry when oil prices decreased following the worldwide lockdown in March and start blaming China, Jerome Powell or the states governors for the pandemic. Trump has already put much pressure on Powell to go ahead with negative interest rates, what will leave some room for Trump to increase trade tensions with China without big sell-offs in the stock market.
On the other hand, the House Democrats are trying to pass a $3tn additional stimulus package without Republican input to aid state and local governments through the crisis. New York and California, key Democrat states, warned essential services could be at threat without aid, which could damage Democratic governors reputation and put at risk the Democratic victory in those states. Republicans have suggested hardest-hit states have been mismanaged by Democratic governors and should not receive federal help.
As usual, I leave here the S&P500 1-week performance heat map and a link to a useful FT interactive Coronavirus chart.
Have a good weekend!