Mortgage rates almost drop to another record low — here’s why a housing market slowdown won’t push them lower


Mortgage rates remained near another record low for the third straight week. If a new low comes, it may not be because the U.S. housing market is struggling.

The 30-year fixed-rate mortgage averaged 3.31% during the week ending April 16, representing a decline of two basis points from a week ago, Freddie Mac
FMCC,
+10.44%

reported Thursday. A year ago, the 30-year fixed-rate mortgage averaged 4.17%.

The average rate for a 30-year home loan dropped to an all-time low of 3.29% in early March as concerns regarding the coronavirus outbreak began to mount.

The 5-year Treasury-indexed hybrid adjustable rate mortgage fell six basis points over this last week, averaging 3.34%. The 15-year fixed rate mortgage, meanwhile, increased three basis points to an average of 2.8%.

Read more:Are you a homeowner seeking forbearance on your mortgage? Watch out for these red flags

Theoretically, mortgage rates could be even lower if these were normal circumstances, said Danielle Hale, chief economist for Realtor.com. “Under normal circumstances, the high volume of money currently parked in the bond market would have likely led to a drop in interest rates to at least 2%, Hale said. “But instead, rates remained roughly consistent this week.”

(Realtor.com is operated by News Corp
NWSA,
-5.54%

subsidiary Move Inc., and MarketWatch is a unit of Dow Jones, which is also a News Corp division.)

Historically, mortgage rates have roughly tracked the direction of the yield on the 10-year Treasury note
TMUBMUSD10Y,
0.662%

, which dipped below 0.7% in recent days. But investors and lenders have grown concerned about borrowers’ ability to repay loans.

That has limited interest in mortgage-backed securities, which in turn has limited lenders’ ability to lower rates much further than they already have. And with a growing number of Americans losing their jobs or being furloughed as a result of the coronavirus pandemic, lenders are growing stingier in terms of who they will give a mortgage to.

Also see:These U.S. housing markets are most vulnerable to a coronavirus downturn

As a result, lenders may increase loan pricing in some cases to account for the added risk they’re facing right now. Some banks have also imposed more stringent underwriting standards for new home loans, including higher credit scores and down payment requirements.

And borrowers who are looking for loans beyond those that qualify for government backing, such as jumbo mortgages, may face greater difficulty in getting them.

“Limits to forbearance offerings, not to mention high degrees of uncertainty around the credit worthiness of some borrowers, continue to restrict market activity for non-agency and unconventional loans,” said Matthew Speakman, an economist with Zillow
ZG,
-7.66%
.
“The outlook for the coming months remains very uncertain, so the appearance of a calmer market of late could be a mirage as the likelihood of a sharp move in financial markets is still quite high.”

But if mortgage rates do move in the weeks and months ahead, it won’t necessarily be because the housing market is struggling. Recent data has suggested that the housing sector has begun to bear the brunt of the coronavirus pandemic’s impact. Economists have forecast a major decline in home sales, and new-home construction has slowed considerably as a result of stay-at-home orders.

“While new monthly economic data are driving markets lower this week, they are a lagging indicator and should be priced in already,” said Sam Khater, Freddie Mac’s chief economist, in Thursday’s report. “Real time daily economic activity metrics suggest that the economy will likely not decline much further. Going forward, the key question is no longer the depth of the economic contraction, but the duration.”



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Futures surge on early signs of coronavirus slowdown in hot spots By Reuters


© Reuters. Nearly deserted Wall Street and steps of Federal Hall in lower Manhattan during outbreak of coronavirus disease (COVID-19) in New York

By Uday Sampath Kumar

(Reuters) – U.S. stock index futures bounced for a second straight day on Tuesday as risk appetite returned on tentative signs that the coronavirus outbreak was starting to plateau in hard-hit U.S. states.

All three major indexes rallied more than 7% on Monday after the governors of New York and New Jersey said their states, hot spots of the COVID-19 disease, were showing early signs of a “flattening” of the outbreak.

But they warned against complacency as the nationwide death toll approached 11,000 and global infections surged past 1.3 million.

“Even if we have reached the peak, the lockdowns around the globe may be extended for a while more as governments may want to ensure that the virus has indeed been contained,” said Charalambos Pissouros, senior market analyst at JFD Group.

“We believe that the global economy may start recovering well after the peak of the pandemic.”

A Reuters poll of economists said a global recession would be deeper than previously thought, although most clung to hopes for a swift rebound.

Exxon Mobil (N:), Marathon Oil (N:) and Apache Corp (N:) rose between 4% and 10% in premarket trading as oil prices rallied amid hopes the world’s main oil producers including Saudi Arabia and Russia would agree to cut output at a meeting on Thursday.

Despite Monday’s bounce, which marked the biggest daily percentage rise for each index since March 24, the S&P 500 () remains more than 21% below its mid-February record closing high.

Wall Street’s fear gauge () has steadily retreated from 12-year peaks, but volatility is expected to remain high as companies prepare to report first-quarter earnings and outline plans to bolster cash reserves to ride out the economic slump.

Oilfield services firm Halliburton Co (N:) jumped 7.3% after saying it was cutting about 350 jobs in Oklahoma and that its executives would reduce their salaries.

S&P 500 companies are expected to enter an earnings recession in 2020, with profit declines in the first and second quarters, according to IBES data from Refinitiv.

At 06:09 a.m. ET, were up 791 points, or 3.52%, S&P 500 e-minis were up 82.25 points, or 3.11% and were up 217 points, or 2.7%.

SPDR S&P 500 ETFs (P:) were up 3%.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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Oil skids on oversupply fears, stocks jump on virus slowdown By Reuters


© Reuters. FILE PHOTO: A pump jack operates in front of a drilling rig at sunset in an oil field in Texas

By Swati Pandey

SYDNEY (Reuters) – Oil prices skidded on Monday after Saudi-Russian negotiations to cut output were delayed, keeping oversupply concerns alive, while stocks jumped as investors were encouraged by a slowdown in coronavirus-related deaths and new cases.

In currency markets, sterling fell after British Prime Minister was admitted to hospital following persistent coronavirus symptoms as the pandemic rapidly spreads.

Brent crude () fell as much as $3 in early Asian trading after Saudi Arabia and Russia postponed a meeting over a potential pact to cut production to Thursday. [O/R]

Analysts said the news could lead to some sell-off in currency markets too.

Also weighing on the pound were fears other senior government officials who were in the same briefing as Prime Minister Boris Johnson could be affected by the virus, said Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto, Canada.

The pound fell 0.4% in early trade on Monday in a knee-jerk reaction and was last down 0.3% at $1.2222.

“It is stating the obvious to say the viral outbreak and the containment measures to fight it are central to market action,” said Michael McCarthy, chief market strategist at CMC Markets.

Indeed, equity investors looked at the positives with major European nations including France and Italy reporting lower fatality rates.

U.S. stock futures () jumped more than 1.5% in early Asian trading on Monday after U.S. President Donald Trump expressed hope the country was seeing a “levelling off” of the coronavirus crisis.

The gains came despite New York Governor Andrew Cuomo cautioning that it was not yet clear whether the crisis in the state had reached a plateau.

Investors took solace from the fact that COVID-19 cases appeared to be reaching a peak in Europe with Italy seeing the number of patients in intensive care falling for the second consecutive day.

In Asia, Australia’s benchmark index () added 0.5%, Japan’s Nikkei was up 0.2% () while South Korea’s KOSPI index () climbed 1.4%.

That left MSCI’s broadest index of Asian shares outside of Japan () up 0.1%. China markets were closed for a public holiday.

“Focus in markets will now turn to the path out of lockdown and to what extent containment measures can be lifted without risking a second wave of infections,” National Australia Bank analyst Tapas Strickland wrote in a note.

“Key to a strong rebound in China will be the ongoing lifting of containment measures with Wuhan – the epicentre of the outbreak – set to lift containment measures on April 8.”

Strickland, however, noted many in China were still subject to social distancing and isolation restrictions to prevent a resurgence in infections.

The pandemic has claimed more than 64,000 deaths as it further exploded in the United States and the death toll climbed in Spain and Italy, according to a Reuters tally.

Concerns about heavy damage to the global economy have pushed investors into the perceived safety of government bonds where yields are at or near all-time lows. [US/]

Elsewhere in currencies, the dollar was up a touch against the yen at 108.58. . The euro () was barely moved at $1.0803 while the risk sensitive Australian dollar was up 0.2% at $0.6004.

In commodities, Brent crude futures () slipped 6.2%, or $2.13, to $31.98 a barrel while U.S. crude () dived 7.4%, or $2.12, to $26.12. [O/R]

was down 0.2% at $1,612.9 an ounce.





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Helix Energy: Q1 Is A Slowdown, But Growth Prospect Exists In 2020 – Helix Energy Solutions Group, Inc. (NYSE:HLX)


Helix Energy Can Take Some Time Before The Turnaround

At this point, Helix Energy Solutions (HLX), like most of the other oilfield services companies, is vulnerable to the ongoing crude oil price vagaries. Despite the increase in tendering activities, seasonality can affect its top-line adversely in the short term. Also, an oversupply of rigs in the Gulf of Mexico and the North Sea will not allow margin to improve in the short term. The fall in the backlog by the end of the year signals the potential revenue loss in 2020. The depressed energy price and offshore projects’ long cycle can prolong the stock’s recovery.

HLX’s well intervention vessel utilization improved significantly in 2019. It is particularly optimistic about the growth opportunities in Brazil and the Q700’s (a semi-submersible vessel) prospect, particularly in West Africa. Before the current energy price debacle, higher offshore tendering activities were leading to higher average day-rates, as early indications pointed out.

The Current Challenges

Investors need to be aware of challenges from the persistently low crude oil prices following the coronavirus outbreak and higher supply from OPEC, doubts have been cast over the feasibility and the actual turnaround times of various projects across the regions. An oversupply in the offshore service segment has kept rates down. While higher offshore tendering activities are likely to see volume improving, the margin is unlikely to be benefited soon. On top of that, the seasonal activity slowdown, which typically starts in Q4 and lasts until the beginning of Q2, will affect HLX’s Well Intervention and Robotics segment performance in the North Sea.

The Well Intervention Business Dynamics

Despite various obstacles withholding the growth potential, HLX’s Well Intervention vessel utilization was steady at a relatively high level in 2019. Globally, it was 92%, although it was a marginal fall from 97% achieved in Q3 2019. In Brazil, it was notably high at 98%. The North Sea (Europe) market has provided stability to the company’s revenues since 2017, although the utilization was relatively low. In the Gulf of Mexico, investment is coming back. The Q5000 (a well intervention vessel), which performs well intervention jobs for BP, will return to the campaign in April. Q4000, another well intervention vessel, is expected to return to activity in March after the maintenance work is completed. The company expects utilization for both of these vessels to remain high, and therefore, we can expect the top-line to increase in Q2 2020.

Investors may note that the company completed the Droshky asset acquisition early in the year. The Q400 fleet, which also worked on a Droshky well, was deployed to production enhancement operation. There has been a rise in the number of production enhancement jobs by the end of 2019. HLX’s Well Enhancer and Seawell performed production enhancement and abandonment work, although the latter was sent for seasonal warm stacking due to scheduled maintenance work.

Overall, the company has scheduled five of the seven Well Intervention assets for maintenance in Q1. So, it will invariably affect Q1 top-line and profit adversely. However, most of these assets will be back in action in 2020 itself, and thus, the recovery should be sharp by the end of the year. Plus, they are expected to remain operational in 2021, which means revenues from the well interventional should be consistent in 2021. Through a couple of well intervention vessels, it plans to cater to West Africa, Asia-Pacific, and Brazil in 2020. The company will look to use Q7000 as a swing vessel transiting from region-to-region.

Q7000 And Other Prospects

Much of the company’s potential lies with the success of the Q7000 vessel. The Q7000 was fully mobilized with services equipment during Q4 2019. It arrived in Nigeria in early January. It completed the first well campaign during the month. The vessel will remain under contract at least until Q2 2020 and will look to cater to various opportunities in West Africa. Regarding the potential for Q700, the company earlier disclosed that short-term contracts are typically showing increasing trends in the well intervention industry. The company’s management believed that at a 50% utilization level, the vessel could achieve breakeven to $20 million contributions in 2020.

Regarding the possibility of a rate increase in the Gulf of Mexico and the North Sea, the company readjusted to market in the North Sea after a couple of legacy contracts carrying lower rates ended in 2020. The utilization rate has improved in these regions. We may see rate improvement in 2020, although there is still an oversupply of rigs in these regions. The situation, however, can improve markedly in 2021 when several rigs will retire. So, I expect all these factors to enhance the company’s financial performance, but the change will be gradual and may transient to 2021.

Robotics Segment Asset Utilization

In the Robotics charter fleet, the utilization decreased drastically to 73% by the end of 2019 from 96% a quarter ago. Most of the fall in utilization can be attributed to the 43 days reduction in the available chartered vessel days following the termination of the Grand Canyon charter in November 2019. ROV, trencher, and ROVDrill utilization was relatively steady, although the overall utilization was still stuck at a low level (41%). Likely, the Robotics segment performance will not improve in the short term. However, the cost structure of the chartered vessels will improve in 2020. Plus, benefits from hedges can partially offset the negative drivers. Overall, the segment result can remain unchanged or may improve modestly in 2020.

Falling Backlog

As of December 31, 2019, HLX’s backlog was $0.8 billion, which was a 28% decrease compared to a year ago. Lower backlog typically indicates lower visibility into future revenues. Approximately $0.51 billion of the current backlog is estimated to be completed during 2020. A five-year contract with BP (BP) for work in the Gulf of Mexico, two four-year contracts with Petrobras (PBR) for well intervention services offshore Brazil, and a seven-year contract for the HP I account for the 82% of the backlog. The BP contract and the Petrobras contracts expire in 2021.

FY2020 Outlook

In FY2020, the company expects its performance to improve but much of its assumptions are based on Q7000 running with high utilization finding substantial opportunities in West Africa. It also assumes the North Sea Well Intervention market to maintain a consistent level of activity in 2020.

So, assuming steady contract awards for the rest of the year, the company estimates that revenues (at the guidance mid-point) will increase by 14% in FY2020, while EBITDA can increase by 8%.

Analyzing The Well Intervention Segment Drivers

In Q4 2019, HLX’s revenues from the Well Intervention segment increased by 17% compared to Q3, following a 7% increase in the previous quarter. Operating income in this segment declined by 59% during the same period. The deterioration was primarily due to lower rates in the Gulf of Mexico, the seasonal slowdown in the North Sea, and lower rental utilization.

Robotics Segment Drivers In Q4

HLX’s Robotics segment revenues decreased by 32% in Q4 compared to a quarter ago. Lower utilization across its assets, including charter vessel, ROV, trencher, and ROVDrill, and fewer vessel trenching days led to the fall. The segment operating profit turned to a mild loss compared to a decent profit ($15.6 million) a quarter ago.

Cash Flows and Debt Profile

In FY2020, the company has $120 million debt repayment obligations, while between 2020 and 2023, it has to repay ~$223 million of debt. A considerable portion of the company’s debt has equity conversion features. Since its liquidity (cash plus revolving credit facility) is strong ($379 million), it faces no repayment risk in the near term.

However, its free cash flow (or FCF) nearly halved in FY2019 compared to FY2018. Capex increased, while cash flow from operations (CFO) declined in the past year, leading to the FCF fall in FY2019. The company’s management expects capex to dip sharply to $50 million in FY2020. Although I do not think the CFO will improve much in FY2020, a much sharper fall in capex can lead to significant improvement (~320%) in the FCF.

HLX’s debt-to-equity ratio (0.24x) is lower than its peers’ average of 0.3x. Oceaneering International (NYSE:OII) has higher leverage (0.74x), while Dril-Quip, Inc. (DRQ) has not debt. Low leverage compared to peers can be advantageous if the energy environment deteriorates and debt repayment becomes difficult. However, over the medium term, the company, without refinancing, may need to improve cash flows to avoid strain on the balance sheet.

What Does The Relative Valuation Imply?

Helix Energy is, currently, trading at an EV/EBITDA multiple of 4.3x. The forward EV/EBITDA multiple is ~4.0x. Between FY2015 and now, the company’s average EV/EBITDA multiple was 8.6x. So, it is currently trading at a discount to its past average.

HLX’s forward EV-to-EBITDA multiple compression versus its adjusted trailing 12-month EV/EBITDA is lower than peers, which implies a less steep rise in the EBITDA in the next four quarters compared to peers. This would typically result in a lower current EV/EBITDA multiple compared to the peers. HLX’s current EV/EBITDA is lower than the peers’ average (9.6x). I have used estimates provided by Seeking Alpha in this analysis.

Analyst Rating

Source

According to data provided by Seeking Alpha, six sell-side analysts rated HLX a “buy” in March (includes “very bullish”), while two recommended a “hold.” None recommended a “sell.” The consensus target price is $8.81, which at the current price, yields 314% returns.

What’s The Take On HLX?

In 2019, the offshore and deepwater projects were seemingly rebounding from the past three-year trough. Accordingly, Helix Energy’s well intervention vessel utilization improved significantly in 2019. The company is particularly optimistic about Q700’s prospect, particularly in West Africa. It also seeks growth opportunities in Brazil. The average day rates are starting to strengthen, particularly in the harsh-environment segment, according to a Rystad study.

However, the crude oil price crash looks to dash the hopes of a top-line revival in the short term. With many well intervention vessels going through maintenance, the company will lack the volume of project work in Q1. Also, an oversupply of rigs in the Gulf of Mexico and the North Sea will not allow margin to improve in the short term. A significant fall in free cash flow in FY2019 was a concern for HLX. However, in FY2020, a steep fall in capex and a steady cash flow from operations would lead to significant improvement in FCF. In the current energy environment, the company might want to stabilize cash flows to avoid strains on the balance sheet given its debt maturity profile.

I think the slow translation of tendering activity into actual project commencement in the offshore and subsea segment can prolong the stock’s recovery. But there is strong potential for the stock’s rebound in the medium-to-long-term.

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Despite Trump trade deal, many S&P 500 firms are still concerned about tariffs, economic slowdown


Investors who believe the “Phase 1” U.S.-China trade deal put tariff worries to bed for U.S. companies might want to think again.

U.S. stocks have had an impressive run over the first six weeks of the year, shaking off concerns over the impact of the coronavirus outbreak, potential policy uncertainty relating to the 2020 presidential election, and manufacturing sectors in many advanced economies that remained mired in contraction.

The Dow Jones Industrial Average

DJIA, +0.74%

has risen about 2.8% since 2020 began, while the S&P 500 index

SPX, +0.54%

has gained 4.3% and the Nasdaq Composite Index

COMP, +0.71%

is up a lofty 8.1%. The S&P 500 and Nasdaq each posted a record-high finish on Tuesday. All the main indexes were up early Wednesday.

One reason for the market’s resilience is the belief that last month’s U.S.-China trade deal, pitched as the first phase of, presumably, a larger accord, would lessen impact of trade uncertainty on corporate performance, but an analysis of corporate conference calls this earnings season shows that a significant share of companies are still concerned about tariffs and the chances of a global economic slowdown.

Through Friday, at which point about two-thirds of the S&P 500 had reported fourth-quarter earnings, there had been 184 mentions of “trade war,” “tariffs” and other concerns in earnings calls, a decline from peak of 705 in the third quarter of 2019, but a figure that will certainly rise as the final third of companies report this month, said Derek Valles, an equity researcher at Amenity Analytics, which compiled the data for MarketWatch.


Companies are still discussing the topic at a faster pace than in all of 2017 and the first half of 2018, when the U.S.-China trade war was heating up, and those who are mentioning it are taking a decidedly negative tone. Amenity assigns an “amenity score” to management commentary on various topics on a scale of -100 to +100, using the budding science of natural-language processing, which deploys computer programs to assess human language.

So far, it has assigned a score of -60 for the current earnings season on tariff and trade topics, which is well below the -3.9 of the first quarter of 2017 and only slightly better than the nadir of -75 seen in the third quarter of last year.

“What you see towards the middle of middle 2018 was a huge ramp-up and focus in how folks are discussing trade wars, tariffs in so forth and a decline in the overall amenity score, which is indicative of that folks are talking more about and they’re speaking, on balance, negatively about it,” Valles said. “It remains a headwind for many firms.”

In other words, there are fewer companies concerned about tariffs than during the worst of the trade war, but remaining duties are negatively impacting the performance of many firms. Companies that have cited the negative impact of tariffs on their 2020 outlooks include Whirlpool Corp.

WHR, +0.09%

 , O’Reilly Automotive Inc.

ORLY, +0.26%

and Boeing Co.

BA, +1.16%

 .

Jennifer McKeown, head of global economics service at Capital Economics, wrote in a note following the signing of the Phase 1 trade deal that “tariffs remain high and we suspect that tensions will persist in other forms,” such as the Trump administration’s encouraging allies to not deploy hardware manufactured by Chinese firms like Huawei Technologies Co. “Any adverse effects on trade so far will not be fully unwound, since tariffs are far higher than they were,” she added.

The Trump administration has said that Huawei presents a national-security threat and has issued regulations and executive orders that prevent U.S. companies from using its hardware in critical infrastructure. It has mounted an international pressure campaign to convince allies to do the same, but has been unsuccessful in many cases, with the United Kingdom’s recent decision to allow Huawei to supply some high-speed network equipment being a recent example.

Don’t miss: U.S. says China’s Huawei can gain ‘back door’ access to mobile networks around the world

Another potential headwind for stocks, which was potent during the middle of last year, were fears of an oncoming recession. Similarly, mentions of “recession,” “slowdown” and related terms appear to be trending lower, though companies that are discussing these topics are doing so as pessimistically as they have since the start of 2017.


Companies most worried about an economic slowdown include Kellogg Co.

K, +0.27%

 , Caterpillar Inc.

CAT, +2.19%

and Procter & Gamble Co.

PG, -0.68%

 , according to Amenity’s analysis. All three have seen year-to-date declines in their stock prices. A Kellogg representative said that executive remarks in a January call were “normal,” and that “we consistently offer context on all our earnings calls based on challenges or volatility in the macro, geopolitical and competitive landscape.” Procter & Gamble declined to comment, while Caterpillar did not respond to a request.

The most heartening aspect of earnings calls so far has been the outlook for profit margins. With the S&P 500 priced at 19.1 times forward earnings, according to Refinitiv, above the 10-year average of about 15 times, investors appeared to be betting that large-cap earnings growth can recover from near-flat earnings growth in 2019. And management commentary so far appears to give reason for hope, as companies are, on average, talking more optimistically about profit-margin expectations than at any point since 2017.


To be sure, many analysts question whether such optimism is warranted, as S&P 500 profit margins have been steadily rising for years, and the recent imposition of tariffs, along with a tight labor market that has helped instigate faster wage growth, could eat into earnings.



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