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Capital 19 Catch-Up

Does Anybody Have an Empty Swimming Pool? How The Oil Market is Influencing Wall St and our Portfolios

Does anybody remember how this all kicked off? I know its only April but the middle of February seems like years ago. However, if you think back you might just recall that even though the coronavirus had been in or around our collective consciousness for a good month or so by then the market didn’t really start coming down hard until the Russians and the Saudis had a barney over oil production.

Even though the world economy was coming to a standstill investors didn’t really start fearing the worst until the oil price tumbled. And so it was again this week as this “spurious” comeback rally was halted by further drama with the oil price. This time around it was something that we have never seen before – that is the price of oil going negative.

Yes, you heard that right. By Monday evening the price of the May contract of crude oil had fallen to -$37.63  a barrel. You literally had to pay people to take it off your hands. Now for all of the sensational headlines, the negative price was a little bit of a furphy. There was only one day until expiry and the result was centred around the actual trading instrument rather than the physical cost of a barrel. But it was still a shock. The June and July contracts were both still trading around the $20 mark suggesting the May price fall was just a financial anomaly. And by the next day, when it was to expire it had travelled back into the black.

However, even the June contract had fallen by 43% on Tuesday and was trading around the $11 mark. Is there something the oil traders know that the market doesn’t? We know that demand has plummeted globally. And it won’t kick off again until towns, cities, and countries start to reopen. Exactly when that will be is up in the air at the moment but we have a few things happening that might give us an idea this week.

In the US, the state of Georgia has begun to reopen non-essential businesses as they prepare to lift the stay at home order for all citizens by April 30. The moves have come against all known medical advice, and even President Trump, who’s as keen as anyone to get things going again, has suggested they are moving too early. It’s going to be a crucial test case.

If, as is expected, the number of cases start growing quickly and they are forced back into lockdowns it will be a big setback for the plans of other states who also want to reopen. It’s going to be a fascinating experiment, and you never know, maybe they will pull off a miracle. But I’m glad I don’t live there myself.

What we really need to rescue this market in the short term is a vaccine or treatment. You can see this by how the market reacts to every little rumour about any new drug. Markets were flying late last week as Gilead Sciences (GILD) drug Remdesivir was supposedly helping COVID patients recover in New York. However, things turned negative again when a study out of China showed the drug did nothing to help patients in a trial there, despite Gilead rejecting the report. Finding a treatment is crucial and will mean the economy can start picking back up again. Expect to see big market moves whenever any such rumours hit the headlines. But be careful trading on them.

You may also have missed that the earnings season is in full swing. Not that anyone has been paying that much attention. Results from the first quarter weren’t terribly impacted by the pandemic. Businesses were only impacted for two out of the thirteen weeks so the real damage won’t be seen until the second quarter – the one we are in now.

Therefore guidance for the next quarter is crucial, however, companies are unsurprisingly reluctant to give any. Only those industries that haven’t suffered losses have been able to offer numbers, and there aren’t too many of those. Streaming services, video conference services, food deliverers, and online retail companies will be mostly licking their lips, but for the rest nominating numbers for this quarter will be a guessing game.

Nevertheless, there were some highlights to come out of earnings this week. Chipotle Mexican Grill (CMG) benefitted from its plans to increase its mobile app and delivery options with digital sales jumping 81% during the quarter, and doubling in March. It helped make up for a 16% drop from in-store sales and saw profits beat on expectations. The share price jumped 12% on the news.

Social media platform Snap (SNAP) made an even bigger move after releasing their second-quarter earnings. They jumped 36.7% after beating on both profit and revenue. Importantly daily active users jumped by 20% year on year to 224.5 million, with the company suggesting “Snapchat is helping people stay close to their friends and family while they are separated physically”. It will be interesting to see if they can match these results in the current quarter and whether a downturn in digital advertising will have an impact.

Earnings this week will all be focussed on the big tech names. Amazon (AMZN), Apple (AAPL), Alphabet (GOOGL, GOOG), Facebook (FB), and Microsoft (MSFT) will all be reporting. Some of my other favourites also announcing their numbers include eBay (EBAY), Yum Brands (YUM), Mastercard (MA), Tesla (TSLA), McDonald’s (MCD), Visa (V), and Twitter (TWTR). As suggested earlier all eyes will be on any guidance if it is given. Any holdbacks will be seen as negative.

The commerce department will release its initial Q1 GDP number on Wednesday with expectations of a 3.3% fall. In reality, this number could be anything so strap yourselves in. April car sales will also be reported with reports numbers could be down by 50% year on year. The Fed Reserve will also be meeting later in the week with Chairperson Jerome Powell speaking at the conclusion of the meeting on Wednesday.

It’s going to be another crazy week ahead. The number of new covid19 cases and the number of deaths will be closely watched again. The experiment in Georgia will also be a heavy focus, however, that may take a little bit of time to play out. There’s so much going on.

Stay safe!

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