Step in the right direction
April 2, 2020
Crude math: Trump’s comment about a “ten million barrel and possibly more” Saudi/Russia production cut was more than enough to start today’s short-squeeze in deeply oversold crude prices. A lack of detail creates understandable skepticism in other markets with HY credit spreads only contracting by 11bps to ~724. The most recent numbers have Saudi Arabia pumping ~11.5MM bpd, OPEC ~25MM and Russia ~10.5MM for a total of ~47MM bpd. That implies a production cut of ~21% is you assume ‘10MM barrels’ refers to a daily number and it covers all OPEC+, not just Saudi Arabia and Russia. Crude holds onto early gains on reports that Saudi Arabia is apparently calling for an emergency OPEC+ meeting but there’s no indication yet if Saudi and Russian oil counterparts have held talks. Recall the most recent OPEC+ meeting held 3/5-3/6 resulted in a ‘nothing done’ and enough acrimony to get us here. But higher oil prices would narrow HY spreads, which would further secure the idea for an SPX floor at ~2200 and a potential rally through near-term technical resistance at ~2630.
Curves: Outside of the crude oil/credit spread dynamic, markets are only really following daily case totals and other related Covid-19 metrics. The combined monetary/fiscal policy response is currently meant to support functioning credit markets and enough aggregate demand to shorten an eventual recovery. The Fed should now have sufficient liquidity to ease the stress on credit markets, while finding the right number to keep the pilot light lit will more closely follow case curves. Mortality curves are more reliable than case counts, but equity markets continues to respond favorably when a region’s daily confirmed case growth falls below 10%. It’s below this level when the infection curves begin to decelerate at a more rapid pace. I know the headlines and images on NYC and state continue to look grim, but the daily and weekly moving averages for both look like they could fall below 10% over the course of several days.