Wall Street Breakfast: Race To The Bottom For Central Banks

Futures steady following big tech rebound

U.S. equity index futures are pausing for breath, with the Nasdaq nominally higher and the Dow and S&P 500 inching lower, after Wall Street snapped its tech losing streak on Wednesday. Tesla (NASDAQ:TSLA) shares rebounded nearly 11% after suffering their biggest one-day percentage drop in history, while Apple (NASDAQ:AAPL) gained 4% to bring its market cap back to $2T. On the economic calendar today is the release of U.S. weekly jobless claims as Congress remains deadlocked over a fresh coronavirus stimulus package. While Senate Republicans have united around a “skinny” bill, Democrats oppose the measure, and it isn’t expected to clear its first procedural hurdle in the Senate today.

Brexit is getting messy again

The EU and the U.K. are holding emergency talks after the latter published its Internal Market Bill, which would undercut parts of the Withdrawal Agreement agreed to in January. The news could also damage trade talks as both sides work to secure a new deal. Without an agreement, nearly $1T in trade could be thrown into chaos at the beginning of the year, but some say the “game of Brexit chicken” may be part of the negotiating strategy. Adding to the turmoil, U.S. House Speaker Nancy Pelosi said any potential U.S.-U.K. trade deal would not pass Congress if Britain undermines the Good Friday peace agreement.

Avoiding a full TikTok sale

TikTok owner ByteDance (BDNCE) and the U.S. government are in discussions over possible ways allowing for something less than a full sale of TikTok’s U.S. operations, WSJ reports. The talks follow acts by China’s government that throw some roadblocks at such a sale (like new restrictions on the export of AI technology) and with a nearing deadline for TikTok to agree to a sale or be shut down. ByteDance has been considering options that include a sale to a team of Microsoft (NASDAQ:MSFT) and Walmart (NYSE:WMT), or to a group including Oracle (NYSE:ORCL).

Hot year for listings in Hong Kong

The number of U.S.-listed Chinese companies securing secondary listings in Hong Kong is growing, as Yum China (NYSE:YUMC) joined the group after raising the equivalent of $2.2B by selling new stock. Nasdaq-listed hotelier Huazhu Group (NASDAQ:HTHT) has also started taking orders for a $970M stock sale ahead of its planned secondary listing in Hong Kong on Sept. 22. Why the alternative listings? The U.S. Senate passed a bill in June that could ban many Chinese companies from listing on American exchanges amid escalating tensions between the world’s two largest economies. A Hong Kong listing also means a company’s stock can be traded during Asian hours, broadening its investor base, while shares can be added to the Hong Kong Stock Connect, giving access to mainland investors
Go Deeper: Alibaba, JD.com and NetEase have also completed listings in Hong Kong.

BP takes first step into offshore wind

BP (NYSE:BP) is continuing its seismic strategy shift in abandoning the oil major business model, making its first venture into offshore wind power with a $1.1B purchase of U.S. assets from Norway’s Equinor (NYSE:EQNR). The British firm will receive a 50% stake in the Empire Wind and Beacon Wind developments off New York and Massachusetts, respectively, while Equinor will retain 50% in both, and continue to act as the operator. Just six months after taking the helm, BP CEO Bernard Looney said in August he’d shrink oil and gas output by 40% over the next decade and spend as much as $5B a year building one of the world’s largest renewable power businesses.

Walmart takes another page from the Amazon playbook

Partnering with end-to-end delivery firm Flytrex, Walmart (WMT) launched a pilot program this week to test using drones to deliver groceries and household essentials in Fayetteville, North Carolina. Even though it is expected to be a long time before drones are widely used for deliveries, the company hopes to gain insight by using the technology. Besides mirroring Amazon’s (NASDAQ:AMZN) Prime Air program, Walmart also announced its Walmart+ membership program last week that will take on Amazon Prime.

Rental market blues

There were more than 15,000 empty rental apartments in Manhattan in August, up from 5,600 a year ago, as more New Yorkers fled the city amid the coronavirus crisis, according to a report from Douglas Elliman and Miller Samuel. The inventory of empty units is the largest ever recorded since data started being collected 14 years ago, dashing hopes for a rebound in the fall or the end of 2020. While REITs and real estate companies have more access to capital, smaller landlords may have trouble paying their mortgages and property taxes, which could impact banks and lenders.

How many planes are needed to deliver a coronavirus vaccine?

Dubbing it the “largest single transport challenge ever,” the International Air Transport Association called on governments to start “careful planning with industry stakeholders” for the large-scale delivery of a coronavirus vaccine. “Just providing a single dose to 7.8B people would fill 8,000 (Boeing) 747 cargo aircraft,” according to the air transport body. The IATA also cautioned that “while there are still many unknowns (number of doses, temperature sensitivities, manufacturing locations, etc.), it is clear that the scale of activity will be vast, that cold chain facilities will be required and that delivery to every corner of the planet will be needed.”
Go Deeper: The end of COVID-19 airport screenings for international travelers?

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His fund is up 60% this year after he called the March bottom — now, he sees potential for a ‘severe collapse’

Michael Gayed says he’s not trying to scare anyone, but you wouldn’t know it from his latest take.

Back in May, the fund manager warned of the possibility of two crashes: first bonds, then stocks. With his ATAC Rotation Fund

continuing to deliver the goods — it’s up almost 60% so far this year to rank among the best in its category — he’s still waving the yellow flag.

“It is a wild time in the markets,” said Gayed, who also runs the Lead-Lag Report. “Despite a crippling global pandemic, where the U.S. is failing miserably at a response with daily record after daily record cases being broken, and a U.S. economy that seems to be teetering on the edge of yet another Fed Monetary Policy response, stock markets have not seemed to blink when recovering.”

Yes, 2020 is certainly unique, considering, as he pointed out, that stocks crashed by more than 30% at one point, only to rally almost 50% from there. All that in less than eight months.

After having been bullish near the March bottom, Gayed now says that leading market indicators could very well be signalling a “severe collapse” in stocks.

The yield on the 10-year Treasury

, for instance, is looking at around 0.5%, while the yield on the 30-year

is under 1.5%., which he says is setting up for a potential reversion to the mean.

“It’s often said that bond-market investors are the smart money and tend to lead the stock market in anticipating economic activity,” Gayed explained. “The fact that yields have not risen meaningfully (quite the opposite) in the very short term is quite troubling as historically such short-term movement has tended to precede major periods of equity stress.”

Add to that, action in the utilities sector, which is seen as a recession-proof, safe-haven investment, could spell trouble for the broader market, he said, pointing to this chart showing how the defensive investments have managed to outperform the S&P 500 in the past month:

“That should raise some red flags as an equity investor, and frankly this alone gives me pause,” he said. “A similar movement occurred right before the COVID crash this year.”

Lastly, complacency could become a serious issue, with Gayed pointing to several factors, including the wild recent trading antics of Robinhood traders.

“The S&P 500 is now positive in a year that is expecting economic catastrophe. The Nasdaq is flying. And no one seems to think the market can ever go down,” he wrote in a recent note. “It sure feels like everyone forgot that investing in stocks carries risk — and the conditions are changing so rapidly right now, it looks like risk might come back into full force.”

No big crash Monday, with the Dow Jones Industrial Average

, S&P 500

and Nasdaq Composite

all starting off the week in the green.

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Natural Gas – A Messy Bottom

Welcome to the messy bottom edition of Natural Gas Daily!

Hotter weather over the weekend combined with no increase in Lower 48 production propelled natural gas prices up by ~10%. Last week, we noted that following the closing of the August LNG export trading cycle, September should see very little cancellation due to much better economics. This is true for LNG exports all the way up to ~$2.30/MMBtu or 31% higher than today’s price. This means US natural gas prices will be dominated by US-related gas fundamentals, which means if the weather turns hot, prices will rise.

But the title of this article is a messy bottom because, like any bottoming market pattern, they are usually messy. Short-sellers get wiped out on days like today following a ridiculous surge in price, while sideline bulls get tempted to chase the rally.

It’s times like this that one needs to be particularly cautious of the landscape for natural gas. Has anything really changed since last Friday? Are the storage concerns for the US completely eliminated?

The answer to both questions is no, so the bottom is still taking its shape and form and readers should be aware to call this an absolute bottom just yet.

Now looking at the fundamentals, things are going to be getting better.

Storage build concerns should be somewhat alleviated starting next week once the fundamental balances start to reflect lower storage builds in the coming weeks. But building at or just below the 5-year average is not enough for this market. Remember that our article on Friday noted that if US gas storage builds exactly at the 5-year average, we would, in fact, hit operational tank top. This is a scenario the market does not even want to imagine as it could send gas prices deeply in the negative in some regions.

So to avoid all this altogether, the market is going to keep prices suppressed until it’s sure that we won’t hit tank top. This will likely require a few more weather reports confirming a much hotter than normal July.

Traders we survey believe that if the concerns do alleviate, we should see August contracts trade up to $1.90/MMBtu.

The other thing that has the market feeling a bit more relieved is the fact that with associated gas production returning, we are still at the bottom of the production range. Note that we said we need to see sub ~88 Bcf/d to start getting excited and with a new nomination cycle just 2-days away, the July production reading will be very important for where prices go.

For July, we don’t even need to see a decrease to be bullish. If production is still at ~88 Bcf/d, traders will start getting bullish because that’s with associated gas production returning online.

As a result, the key ingredients for higher prices are still hotter weather and lower production, so if these two variables continue to trend in the same direction, expect us to turn into bulls.

Last thing, due to illiquidity concerns on BOIL/KOLD, we will be using 3x leverage on trading UNG. This will require the use of margin, so please be careful if you do follow us into these trades and be sure to use stop-losses.

For readers interested in following natural gas fundamentals, HFI Research Natural Gas premium provides:

  • Daily natural gas fundamental updates.
  • Weather updates.
  • Energy ideas.
  • Real-time natural gas trades.

For more info, please see here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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The economy can only start to recover from its coronavirus meltdown once it hits rock bottom. Are we there yet?

Investors will largely get a break this coming week from all the awful U.S. economic news before the Memorial Day holiday weekend, but not because things are getting better. They’re not.

Last week brought news of a record 16.4% plunge in retail sales, another 2.6 million layoffs, and a huge drop in inflation. Lower inflation is usually a good thing, but not in the current environment when businesses have to slash prices to stay alive and keep workers on the job.

Read:Jobless claims climb by another 2.6 million amid coronavirus shutdowns

Economic data due for publication in the upcoming week is sparse. On tap: A few million additional jobless claims or layoffs — unthinkable just a few months ago — and more evidence the housing market has taken a hit like every other major part of the U.S. economy.

See:MarketWatch Economic Calendar

The best that can be hoped for is the economy has finally hit rock bottom. A few scattered reports suggest it might be the case.

Surveys of small businesses and consumers, for example, appeared to stabilize in May. A flood of government aid to the tune of $3 trillion has had a lot to do with it. Washington is trying to keep businesses afloat and help tens of millions of suddenly unemployed workers weather the toughest time of their lives.

Most U.S. states, meanwhile, have started to reopen their economies and relax stay-at-home rules and business lockdowns.

These are tentative steps really, and not enough to truly move the needle. It’s going to take a lot more work to get the economy to resemble anything remotely close to normal.

Read:39 million Americans have applied for jobless benefits, but it appears just two-thirds are getting them

A new employment tracker by the workforce-management company Kronos helps to illustrate the depths of the decline.

As it happens, Kronos also makes digital time-clocks that workers use to check in and out of work at some 30,000 companies across the U.S. in fields such as manufacturing, retail and health care.

Since most American workers are still paid on an hourly basis, companies have to keep track. But they aren’t using those old fashioned paper punchers. In many cases workers are using mobile apps or the internet to record when they arrive and leave.

The newly compiled data from Kronos shows that basically an entire shift of work in a three-shift workday got wiped out during the first month of the pandemic. Time-punches sank a whopping 36%.

In a normal week, time punches rarely rise or fall more than 1% to 2%. See more Kronos data here

“This suggests people are starting to return to work as states open up, but they are not returning real quickly,” said Dave Gilbertson, vice president of HCM strategy and operations at Kronos.

Not every industry and not every region of the country has suffered the same.

Las Vegas was particularly hard hit as more than 90% of hourly employees tracked by Kronos were put out of work initially. Most work in casinos that thrive on millions of people visiting the state — millions who have vanished during the shutdowns.

Read:Bottoming out? Consumer sentiment improves in May due to massive federal aid

The health-care industry has been another surprise loser. All the focus on thwarting COVID-19 caused people to stop going to their doctors, dentists or hospitals for elective and even critical procedures. So many medical professionals have been laid off.

It comes as no surprise that the big cities in the East and West bore the brunt of the pandemic’s devastation. Concentrated populations that rely heavily on public transport have suffered the worst.

The South, where states are reopening more aggressively, has largely skirted the worst of the damage. Kronos found that shifts among retailer workers in Florida are almost back to normal — assuming the data is capturing the state as a whole.

“The South didn’t have the same kind of shutdown as the coasts,” Gilbertson said.

If there’s any good news, employees are returning back to work. But slowly. Time punches are still down 28% as of mid-April.

“The pace of recovery is going to be quite a bit slower than we hoped,” Gilbertson said.

Read: Why the U.S. economy’s recovery from the coronavirus is likely to be long and painful

Most economists think it will take years before the U.S. fully recovers. But the sooner the recovery begins the quicker the damage can begin to be reversed. Recent surveys of businesses and consumers, rising stock prices

and reports like the one produced by Kronos suggest the U.S. might just very well be ready to start its long journey back.

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Sinking U.S. economy hasn’t hit bottom yet

The coronavirus capsized what had been the longest expansion in U.S. history. Now the wait is on to see how far the economy sinks before it finds bottom.

A few dimly hopeful signs emerged last week as a pair of reports showed consumer confidence stabilizing toward the end of the April, largely on the flickering hope that the economy will start to rebound during the summer. Another poll found that Americans think four of five jobs lost due the coronavirus will return.

Even just a month ago, many economists might have agreed, but now they see a longer slog ahead. The era of social distancing spawned by the COVID-19 pandemic will reshape economies, they say, and leave many industries that rely on large crowds gasping for economic breath. They include retailers, restaurants, hotels, airlines, resorts, casinos and sports venues.

“I think there is going to be a longer adjustment process during the summer,” said Dave Donabedian, chief investment officer of CIBC Private Wealth Management. “The bigger question is, when those businesses reopen do their customers show up. And do workers want to come back.”

Read: Why the U.S. economy’s recovery from the coronavirus is likely to be long and painful

But that’s in the future. The immediate present still shows the economy descending to depths it hasn’t experienced at least since the 1930s Great Depression.

Read: 26 million Americans and counting have lost their jobs to the coronavirus

The initial look at first-quarter gross domestic product, for example, is expected to show a 3.3% decline in economic growth, according to a MarketWatch survey. Such a drop would be the deepest since 2009 during the Great Recession, but it pales in comparison to a predicted plunge of 25% or more in the second quarter.

See:MarketWatch Economic Calendar

Next week will bring the most up-to-date readings on the U.S. economy’s performance in the second quarter.

Auto sales, manufacturing activity and consumer confidence are all expected to sink in April and another several million people likely applied for unemployment benefits, bringing job losses during the pandemic to almost 30 million.

Read:26 million Americans and counting have lost their jobs to the coronavirus

Also:Millions of workers who’ve applied for jobless benefits still not getting money

The Federal Reserve is also slated to hold one of its regular policy meetings and Chairman Jerome Powell will brief the public afterward. The central bank has already unleashed a blizzard of strategies to keep the economy afloat, putting potentially trillions of dollars at work.

Read:Durable-goods orders plunge 14% in March as the coronavirus starts to bite

Powell is unlikely to pull out any other weapons from the Fed’s growing arsenal on Wednesday, but Wall Street

is eager to hear what he has to say about a potential recovery later in the year. So far he’s adopted a cautiously optimistic tone, but it’s no longer a widely shared view.

See: Here’s a breakdown of the Fed’s rescue programs to keep credit flowing during the coronavirus pandemic

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