Market Flash 21 April

What happened?

- WTI oil prices collapsed yesterday as concerns over storage for May delivery pushed prices below zero for the first time ever (before stabilising just above USD1 per barrel overnight). Despite production cuts and some optimism on tentative signs of reopening, the ongoing stop to economic activity indicates demand for oil is still minimal, and will remain so for some time. Nonetheless, contracts for delivery later (June, July) remained at ‘normal prices’, and Brent prices fell only a few dollars to USD25 per barrel. The May contract expires today, so we’ll watch how June trades in the coming weeks given ongoing oversupply and little demand and storage.

- US equity markets got dragged down by the unravelling of oil prices in a clear signal that fundamentals are still deteriorating, closing down almost 2%, while European markets closed before the move and managed to gain ~0.5%-0.7%. This morning, Asian stocks are down and both US and European futures are in the red.

- US Treasury yields continued their recent fall with the 10-year at 0.60%, while the German 10-year Bund yield climbed a few basis points to -0.44% (ahead of the oil and market fall). Credit spreads remained flat in Europe (202bp for IG and 665bp for HY) and widened 3bp in US IG and US HY (to 209bp and 720bp) in a relatively calm day for credit. Central bank actions are bearing fruit as credit market stress has been easing, though spreads remain well above this year’s lows (93bp for US IG, 315bp for US HY, 94bp for EU IG, 305bp for EU HY).

- The earnings calendar will be heavier again today, with the likes of Procter & Gamble, Coca Cola, SAP, Danone and Netflix, as markets continue to weigh fundamentals vs stimulus. In recent weeks, the prospects of gradual reopening and waves of stimulus have lifted markets, but these no longer reflect the reality of economic and earnings fundamentals, or how slow and staggered the recovery will be. Even if markets are focused on the future, we do not believe the transition out of this crisis will be as seamless as markets currently imply.

- We therefore remain cautious as downward revisions and lack of guidance are likely continue for earnings, which could lead to higher volatility as they come at the same time as worse-than-expected economic data. As such, we continue to believe that downside risks remain.

 What we are watching

- We are looking at gradual reopening announcements to see how they unfold across different regions, countries and industries, as the recovery cannot just be switched on. We look to see if cases remain contained with softer confinement measures to see if the path can be smooth.

- We keep an eye on how stimulus can be deployed to avoid waves of bankruptcies and defaults, and at how defaults can be ring-fenced if/when they happen. Indeed, it is still too early to tell if these measures will be enough to avoid second-round negative consequences from the outbreak, though the Fed in particular is doing everything in its power – and beyond – to limit these risks.

- We will look closely at earnings estimates as they are revised down. Markets may not be factoring enough adjustment yet, especially as valuations would not look as attractive with a much lower “E”.

- We keep an eye on credit and funding markets to see if massive central bank measures, both in the US and Europe, help ease the recent stress. For now, we believe that central banks will succeed in keeping systemic risks low to prevent a credit crisis.

For more market insights from Natixis Investment Managers visit https://www.im.natixis.com/intl/insights/market-outlook

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