Submitted by Michael Every of Rabobank
So much for the Monday on “pause” that I flagged might just happen. Instead, we got amazing action in the energy market. If the initial Saudi flood of oil into a demand collapse deserved the headline “Oil Vey” then yesterday’s development deserves the full “Oil Gevalt” and the question “WTI just happened?” Specifically, WTI for May delivery collapsed to MINUS USD37.63 a barrel. Yes, if you have been on holiday for a few months and just got back, not USD37.63 but MINUS USD37.63. Somebody was PAID USD37.63 to take away a barrel of oil.
On one level this is an indication of fat fingers and of fat heads. It’s also as clear as sign as one will get that in the near term (as the June contract is USD20.43 – for now) there is simply too much oil and nowhere to put it. I don’t know if you have ever seen the classic Laurel and Hardy film “Bogus Bandits” (released in Europe as “The Devil’s Brother”), but it has one scene at the end where Ollie has to pass down endless jugs of wine for Stan to pour into a larger vat that they are to carry upstairs for a party. When the vat is full, Ollie keeps passing the wine down…and Stan has no idea what to do with the stuff except drink it because it has nowhere else to go. Of course, he gets smashed (or “spiffed”, as Olly calls it) leading to a hilarious drunken laughter scene. And that’s just what happened to the oil market yesterday - except it’s no laughing matter when Stan and Ollie are our best analogy for a global commodity market of vast strategic importance.
If you don’t like that view, there are others. Some of the best commentary I have seen on this includes: “If things continue like this, US oil firms are going to have to lay off some members of Congress” and “Perhaps we can store all the oil in WeWork offices.”
While we had too much stuff glooping around in oil, we also had signs that the flood of fiscal liquidity in the US is doing pretty much the same thing – except in this case we know that ‘Stan’ has a bottomless stomach. Congress and the White House are apparently close to agreeing another USD500bn top up for small business lending and virus testing after USD349bn was swallowed in days. That’s what was half of a record annual fiscal deficit in the blink of an eye and not even a leading headline. We also had Trump promising that Phase Four discussions will start soon: will this be USD1 trillion or USD2 trillion? Does it even matter? Just keep drinking!
One can say the same given that markets wobbled this morning on Asia on reports that North Korea’s leader Kim Jong Un, who hasn’t been seen for days, was apparently critical after heart surgery (and he always looks so healthy…); is the absence of Kim bad for capitalist markets? Sorry wrong question – we don’t have capitalist markets: is the absence of Kim bad for “markets”? Anyway, it is for KRW. Luckily, sentiment turned around when South Korean media reported Kim was fine. What a relief!
Yet even that wasn’t it for a drunken Monday. US President Trump has just used an executive order to temporarily suspend all immigration – how long for is still unclear. This will serve several purposes. First, media unfriendly to Trump will stop talking about the virus and will report on the immigration step instead. Second, it will fire up his base. According to his tweet, this action is “in light of the attack from the Invisible Enemy, as well as the need to protect the jobs of our GREAT American citizens.” This implies it will help reduce virus spread, even as lockdowns are being removed, egged on by Trump, and will also boost job creation, even as 22 million positions have been suspended in the last four weeks. If this is a harbinger of what the run-up to 2020 is going to look like then markets should be taking a stiff drink when thinking about Q3 and Q4.
Meanwhile, there was bad news for the real economy. South Korea’s first 20-day trade data, a key Asian leading indicator, showed exports -26.9% y/y and imports -18.6% despite China claiming to be back to normal. Elsewhere, Virgin Australia went into voluntary administration, showing how a credit crunch will emerge unless everyone gets a central-bank backstop - deserving or not. Either ‘Ollie’ keeps the wine flowing or there will be an almighty hangover. (of course, who gets “spiffed” is not always immediately clear: Virgin Australia’s main owners are China’s HNA Group, China’s Nanshan Group, Singapore Airlines, and Etihad Airlines. Sir Richard only has 10%). Virgin Atlantic is meanwhile asking for a GBP500m loan and The Guardian reports Mr Branson is willing to mortgage his private Caribbean island to achieve it given his existing British tax-free fortune of GBP4.7bn is apparently not sufficient. Perhaps if he offered to store oil on the island this might help?
Understandably RBA Governor Lowe has stressed that the government can’t spend too much money right now; the RBA’s latest minutes show concern GDP will be flat through to September; and the Governor is reportedly concerned that SMEs in particular and business investment in general are both likely to still suffer even when we eventually get out of lockdown. AUD was down from nearly 0.64 to 0.63 on the day. NZD also fell from 0.6080 to 0.5980 after RBNZ Governor Orr said he will consider further stimulus in May too just as Kiwi lockdowns start to be lifted from next week.
“What about the priced-in V-shaped recovery when lockdowns are gone?”
“Shut up and drink!”
And cheer yourself up with Ollie and Stan after too much wine: after all, we could use a good laugh.