The 3rd Shoe Drops

Happy Friday,

Credit imploded, stocks too and this week Oil and by extension Commodities joined the party. Guess what that means? No more shoes to drop!

Makes sense for Comm to drop fast & last (note the speed). No CB support for hard assets and Oil has been in a supply surge vs rest of Comm space cutting supply. It’s coming for Oil - watch US rig count #s today: already down 36% in a month; need another 30% to get to 2016 low. 

On the + side, expect China to ramp up Fixed Asset Inv (FAI) as Pres. Xi highlights need for old (Transport, hydro, energy) and new (5G, AI, IoT) infrastructure investment. More in upcoming key Two Sessions meet, likely in late May with side benefit of signaling Covid-19 control. China stimulus estimates to date = roughly 2.5% of GDP vs 19% in the GFC aftermath > don't expect a repeat but stimulus is ramping in China.

Rolling Thunder (link) policy response continues with BOJ discussing open ended bond purchases, ECB joining Fed in buying sub IG debt for collateral, US topping up PPP plan while the EC signs off on immediate $580 B spend and discusses LT $1.5-2T plan tied to upcoming budget. Bit of a can kick but Europeans do love their football - new decision date May 6th.

We have argued that current econ data don't mean much for markets but US jobless claim rollover does reinforce the speed and up front nature of the Covid-19 sudden stop economic shock. This allows investors to look thru & discount it. A key point many struggle with.

Lot of focus on possible Italy downgrade to junk today - much less on how Sov debt issues are flying off the shelf, making YouTube food fight videos look tame. Ex A: this week’s Italian debt issue (yes same Italy) for 16 B Euros. Guess what the demand was: 100B, 6x oversubscribed… demand for yield is real people.

We remain constructive and focused forward. We like the Comm space - it's the only asset class that hasn't bounced big and its day is coming: LC energy with dividends, miners, gold.

We note S&P has been sideways for several weeks - trying to decide whether the next move is up or down. The re openings, in Europe & here in the US, will tell the tale. Next week 7 US states will end their stay at home policy even though the US lacks sufficient testing and tracing capacity. The big risk is that the US reopens, stocks rock to 3,000 and then we have a failed re opening with cases exploding and stocks sinking back toward 24-2500.

Much ink has been spilled on how Covid-19 has changed the world - never be the same etc etc. We aren’t sure but we are focused on whether it leads to new leadership in global equities… that is THE question & one worth musing over this weekend….

TGIF!

TPW Investment Management Team