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11 March 2020
Video commentary for March 10th 2020
Eoin Treacy's view
A link to today's video commentary is posted in the Subscriber's Area.
Some of the topics discussed include: Massive monetary and fiscal stimulus in the pipeline, stocks begin to unwind short-term oversold conditions, Oil steadies, bonds ease, Dollar surges against Euro and yen, gold eases
Market Makers "Didn't Show Up for Work," Macro Risk CEO Says
This article by Sonali Basak for Bloomberg may be of interest to subscribers. Here is a section:
“It’s literally as if the market makers didn’t show up for work,” Curnutt said in a Bloomberg Television interview, referring to options and junk-bond exchange-traded funds such as the iShares iBoxx High-Yield Corporate Bond ETF, known by its ticker, HYG. “The posted bid-offers on the screens illustrated that there was no one in the market posting for something that is one of the more liquid -- usually -- hedges to use.”
Banks have been constrained by rules created after the 2008 financial crisis. That has pushed some market-making activity to other types of financial institutions including Citadel Securities and Virtu Financial Inc., which was one of a handful of firms that rose in trading Monday as the S&P 500 slipped
7.6%.
“The traditional liquidity provider in times of stress -- the bank -- really isn’t there,” John McClain, portfolio manager at Diamond Hill Capital Management, said in an interview. “Banks themselves have a lot more regulation around what they can be doing.”
Still, for all that, trading was relatively orderly in HYG and other debt ETFs, especially compared with the underlying bonds. The liquidity concerns still didn’t mean there was a “full-blown breakdown in markets,” Curnutt said.
Philipp Hildebrand, vice chairman of BlackRock Inc., agreed. “I was there in 2008, and the difference is the financial system essentially seized up, which is not what happened, at least not so far,” he said. “It’s an important signal that the ETF market functions.”
Eoin Treacy's view
ETFs have been a wonderful innovation which have opened up asset classes which were never previously available to retail investors. They have also allowed the cost of investing to come down and reduced performance deviation from the broad market averages. The challenge is ETFs can often be more liquid than their underlying indices and instruments. That represents a significant challenge in times of stress and particularly during bouts of contagion selling.
Shale's Profitability Problem Just Became Much Worse
This article by Rachel Adams-Heard and Kevin Crowley for Bloomberg may be of interest to subscribers. Here it is in full:
With West Texas Intermediate crude trading just above $30 a barrel, America’s shale producers’
profitability problem just became much worse. Only a handful of companies in two areas of the country have breakeven costs lower than the current oil price. Wells drilled by Exxon Mobil Corp., Occidental Petroleum Corp. Chevron Corp. and Crownquest Operating LLC in the Permian Basin, which stretches across West Texas and southeastern New Mexico, can turn profits at $31 a barrel, data compiled by Rystad Energy show, while Occidental’s wells in the DJ Basin of Colorado are also in the money at that price, which is where oil settled Monday. For everyone else, drilling new wells will almost certainly mean going into the red.
Eoin Treacy's view
The most expensive segments of the oil sector focusing on higher cost production are at risk of being shut in. Even in the best of times a lot of offshore supply has a $40 cost of production but deepwater and Brazil’s pre-salt can stretch to $70. Canada’s tar sands can be among the highest cost production areas but legacy operations have lower costs. Meanwhile the low-price environment is likely to represent an acceleration in the pace of consolidation in the unconventional sector.
Xi Jinping visits Wuhan, in major show of confidence as China turns corner on coronavirus
This article by James Griffiths for CNN may be of interest to subscribers. Here is a section:
He "will visit and express regards to medical workers, military officers and soldiers, community workers, police officers, officials and volunteers who have been fighting the epidemic on the front line, as well as patients and residents during the inspection," Xinhua reported.
That Xi can visit the city suggests the government has supreme confidence in his safety and epidemic controls put in place there. The closest he previously came to the frontlines of the outbreak was visiting virus treatment centers in the capital Beijing, which has far fewer cases than Wuhan.
Senior government officials, including Vice Premier Sun Chunlan and Premier Li Keqiang, have visited Wuhan, but it was assumed until now that the risk to Xi, even if slight, was not worth the potential cost. Since taking office in 2011, Xi has centralized authority massively, becoming China's most powerful leader since Mao Zedong, and were the 66-year-old to fall ill, that could seriously destabilize the political system.
Eoin Treacy's view
Xi’s visit to a heavily sanitised sites in Wuhan is clearly aimed at signaling China is over the worst of the epidemic. What is less reported on is they have simply stopped counting. The majority of regions outside Hubei are only counting serious cases and ignore people with mild symptoms or those who are asymptomatic.
Britain Seen Announcing Biggest Bond Deluge in Nearly a Decade
This article by John Ainger and Greg Ritchie for Bloomberg may be of interest to subscribers. Here is a section:
“Market momentum this powerful will not be reversed by even a very large supply shock,” said John Wraith, a U.K. rates strategist at UBS Group AG in London. “Negative yields are clearly a possibility, especially in safest, shortest issues.” The scope of estimates from primary dealers of U.K. government bonds, known as gilt-edged market makers, was broad ranging.
The most conservative -- Morgan Stanley -- sees a supply of 146.3 billion pounds, while Nomura International Plc estimates an increase to 185 billion pounds. That’s a level not trumped since former leader Gordon Brown oversaw a record 228 billion in 2009-10 to help extricate the country from the financial crisis.
Now that Johnson has delivered on his election promise to “get Brexit done” after years of political turmoil, to retain support he must address the concerns of those in some of the poorest regions of the U.K. That requires funding for infrastructure, health care and job creation. Finance minister Rishi Sunak on Sunday hinted the nation’s fiscal rules could be ditched as he prepares a massive package of measures to tackle the coronavirus crisis.
Eoin Treacy's view
The entire UK yield curve is a couple of interest rate cuts from negative yields so it is an ideal time for the government to borrow more than it needs to ensure ample liquidity to combat the negative effect of the coronavirus, to placate a restive population eager for better standards of living and to ensure a smooth exit from the EU.
Eoin's personal portfolio: commodity long initiated February 18th 2020
Eoin Treacy's view
One of the most commonly asked questions by subscribers is how to find details of my open traders. In an effort to make it easier I will simply repost the latest summary daily until there is a change. I'll change the title to the date of publication of new details so you will know when the information was provided.