Weekly View - It takes two to contango
Last week oil traded in negative territory for the first time ever, as storage facilities near full capacity struggled to accommodate arriving shipments. We remain cautious on oil. At the same time, uranium, which is used in nuclear reactors around the world, spiked significantly higher as shutdowns put pressure on supply. With coronavirus now taking a bigger toll on emerging markets (EM), there is no corner of the market left untouched by it. Commodity exporters will suffer doubly while in some EMs, such as Brazil, political instability could bring still more volatility ahead. We remain underweight EM overall, but prefer Asian commodity importers within the asset class.
April purchasing manager indices (PMI) touched all-time lows in the euro area and continued to plunge in Japan, with the services sector particularly hard hit. Euro-area consumer confidence has also collapsed, and we can expect spending to follow the same trajectory. The European response so far has been insufficient, with the solution presented by the heads of state lacking, notably with an absence of grants to ailing economies. We hope that a European Recovery fund encompassing loans and grants can be pulled together. For now, they have merely kicked the can down the road by passing the buck to the Commission. The market did not take the news too badly last week and S&P did not downgrade Italian bonds. As long as there is no concrete solution, we prefer corporate over sovereign bonds in Europe.
The first quarter reporting season is starting to show that some sectors, like pharmaceuticals and consumer durables, are able to reaffirm guidance, whereas elsewhere, companies are abandoning guidance, cancelling buybacks and cutting dividends. We remain underweight equities, especially in regulated sectors where cheque-writing governments may want to share the bill. Unsurprisingly, markets remain dislocated, with 30 days of realised volatility above 70% in the US. We will trade volatility as an asset class in clients’ interests.