2020/05/04 Commentary: Downside Volatility Indeed… Now What?
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COMMENTARY: Monday, May 4, 2020
Courtesy CNBC © 2020 All Rights Reserved.
The US EQUITIES have seen a selloff from very near anticipated key resistance. And the volatility seems to confirm overall bearish trend tendencies. Yet the rapid selloff raises questions over why the reversal of the sustained recovery rally was so sharp, and why it might have happened on improved news?
We now temporarily digress into data and market considerations. Data (especially today’s Friday Early May holiday-delayed Euro-zone Manufacturing PMIs) is more or less as expected. Yet that still means very bad. And in its own right along with being a psychological bellwether for other asset classes, the JUNE S&P 500 FUTURE fell back from the resistance we had anticipated to below 2,850 support, with 2,750 the next level. That said, if it holds there, another rally could occur if stressors abate.
For more on the reasons for the US EQUITIES spill, see Thursday’s ‘Friendly Fed Indeed and COVID Cure?’ research note. In this case ‘Friendly Fed’ meant not just the Fed but also overall from all of the central banks last week, including BoJ last Monday and ECB on Thursday.
The one disappointment we noted on Friday was lack of a formal ‘Eurobond’ (pan-European funded government bond) from the ECB. That was blamed for some of Thursday’s later losses, but there is quite a bit more below.
Central Banks Still Not the 'Cure'
Yet as we noted during the initial phase of the COVID-19 sharp bear selloff back on March 3-4, the major FOMC rate cut was not going to in any way address the problems created by the novel coronavirus. Hence a sharp MARCH S&P 500 FUTURE recovery rally from below 3,000 only carried very temporarily (for a couple of hours on the rate cut morning) above 3,100 prior to failing again.
Further confirmation of our view on the morning of March 3rd doesn’t even require any reading of previous research notes. As luck would have it, I had ventured down to the Chicago Mercantile Exchange that morning to be interviewed by Price Futures Group’s energy specialist Phil Flynn.
When apprised of the Fed’s 0.50% cut (of which I had not been aware due to being in transit), my visceral response was, “It’s meaningless.” While I communicated that in less aggressive terms in the actual interview (https://bit.ly/2L0UUkS), there was also clear MARCH S&P 500 FUTURE bear trend reversal skepticism (03:20-04:00) that noted the specific technically significant price levels to watch despite that morning’s very sharp rally.
A further fall was also only temporarily stanched into Wednesday by Joe Biden’s Super Tuesday primary election victories. Yet that failed again by that Thursday. The combined inference on those was that the broad central bank commitment to provide further support isn’t going to be a primary factor in reversing the bear trend.
The Real Partial 'Cure' NOT a Panacea
There was also the key factor on the temporary COVID-19 ‘cure’ factor euphoria last week. While Gilead Sciences’ remdesivir is great for treating those seriously ill with COVID-19, it is indeed only useful once someone is very sick. It is not a ‘preventative’ like a vaccine.
As such, it is neither going to provide anyone more confidence they can resume ‘life as usual’ from prior to the COVID-19 pandemic, nor assist the global economy in providing income for businesses or work. For more on those issues please see last Wednesday’s ‘Short-Term’ versus the ‘Long Arc’ Rohr-Blog post.
The bottom line for public-engaged businesses is that social distancing-based restrictions on their traffic and income will still be in place through this Summer into the Fall. And even achieving any improvement back to those diminished performances is based on a public appetite for getting back to their previous socializing and spending habits. Is this realistic?
A 'Long Road Back' Indeed
As for socializing, there is a case for some improvement. Yet it is only back above the very low bar of the current broad-based quarantine. And we have previously noted at length (see the Rohr-Blog post) the limitations from a business model standpoint, as well as the consumer attitude (once again see a recent CBS News poll https://bit.ly/351adDz.) And it gets worse on overall consumer spending…
... as it appears it will be the ‘long road back’ we have suggested rather than the very strong rebound (‘V’ shaped recovery) the Trump administration is touting. That CBS News poll is reinforced by more recent indications on business and consumer activity, justifying all around skepticism. CNBC’s Steve Liesman had a very good analysis (https://cnb.cx/3c5kBgb) based on insights into the progress of the US reopening, even allowing it is still very early days.
Yet rather than reversing, the store closings are still up 14%. Liesman points out this may be due to some stores that held on for a while, yet now realize they will not be economically viable (as we had suggested might occur.)
Medically, new infections are still running at the same 30,000 cases where it has been. And even averaging cities in 10 now newly partially reopened states, according to the widely respected TomTom surveys, store traffic is still only 22% of normal.
Liesman seems to agree with our views in noting there may be a secondary wave of stores closing due to economics. And he once again highlights the issue of whether consumers will return to old habits. Playing on the words of the classic 1989 movie Field of Dreams “If you build it, he will come”, he ends his key points with the consumer proclivities question, “If you open it, will they come?”
Chinese Consumerism RIP?
There is a good chance at least for the intermediate-term the avid consumerism of recent decades may be seeing a major reset. Of special note is the attitude of younger Chinese consumers who had previously abandoned the frugal habits of their elders to join a debt-fueled Chinese government mandated shift to a more consumer based economy. Might there be a permanent shift back to frugality?
