Market Analysis

The Week Ahead 6Apr – 10Apr: The Worse Could Be Behind Us

WTI Crude Oil Chart.

Over the past week, we have seen global crude prices rebounding from their all time lows. The hard rally came about in response to U.S. President Donald Trump saying he expects Saudi Arabia and Russia to announce oil production cuts to put an end to their price war. President Trump had spoken to both Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman to push for an agreement (neither Russia nor Saudi Arabia has yet confirmed a production cut but are indicating a willingness to talk next week). Crude gained further support when China said it would start stockpiling oil for state reserves.

Canadian stock market has moved away from their global counterparts. Stocks in the U.S. and most of Europe gained on the oil news, but still lost ground this week as the COVID-19 situation in both regions continues to deteriorate. Most of the drop occurred mid-week after President Trump extended U.S. social distancing guidelines until April 30.

There is mounting evidence that the worst market volatility is behind us. Global stimulus measures have mostly calmed credit markets, gold prices retreated slightly, and stock volatility as measured by the Chicago Board Options Exchange Volatility Index (VIX) is collapsing from record highs as quickly as it had jumped. However, government bond prices are still under pressure due to slowing economic growth and demand for relatively high yielding assets (the reach for yield even at these record low levels grows as more companies slash or eliminate dividends). Similarly, safe-haven flows continue to boost the U.S. dollar.

Economic reports are increasingly looking dismal – like the record 6.65 million initial jobless claims in the U.S. this week. A big drop in Friday’s payrolls number caused stocks to slump further. But investors are mostly ignoring the releases and focusing on progress toward a medical treatment and clarity around the timeline on a peak in confirmed COVID-19 cases; and thus, on when the economy can “re-open”.

Sector performance in the TSX varied widely. That’s a good sign, as selling and buying is no longer indiscriminate. The energy sector soared more than 12%. Materials and communication services were also quite strong. However, health care (cannabis stocks), consumer discretionary, real estate, and technology were all down. Technology, which has been one of the best-performing sectors this year, dropped sharply after Shopify Inc., which represents more than 40% of the sector weight, withdrew its earnings guidance for 2020. Energy shares also led performance in the S&P 500, where real estate, financials, and utilities posted the biggest drops. Health care rose after Abbott Laboratories unveiled a five-minute coronavirus test and Johnson & Johnson announced a vaccine candidate for the virus.

Markets in Europe and Asia also showed a wide dispersion of results. Stocks in France, Spain, and Japan posted large declines. But others, including Switzerland and Australia made big gains. Australian shares logged their biggest one-day gain ever after the government unveiled a massive jobs-rescue plan.