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Editor's Note: Hamish Risk | March 16, 2020
In today’s Macro Briefing we highlight some crucial macro touch points, firstly, RenMac look at how investors should be monitoring systemic risk in the US banking sector amid the health crisis and melt down of the energy sector, and then secondly, what do slumping oil prices mean for the economy. Here Ned Davis Research have modelled the mining employment multiplier to extrapolate what that means for job losses in the wider economy. Staying with oil, Cornerstone Macro reckon it could take two years for the oil market to rebalance. On equities, yesterday’s bounce has provided some respite, but the key question is whether there will be another big move lower. Longview Economics have studied 50-years of equity market routs to ascertain the timing and degree of the next big move. Finally, to end of an optimistic note (hopefully), Jefferies highlight their expert call from earlier in the week on the latest trials for a vaccine that inhibits COVID-19, Remdesivir (RDV). This drug is being developed by a company named Gilead Sciences.
Biotech healthcare Jefferies
1. Expert call: Hopeful expectations on Covid-19 vaccineJefferies have released a note following a conference call with a former director of the US Biomedical Advanced Research and Development Authority to discuss remdesivir (RDV) and other drugs that may potentially inhibit Covid-19. The firm says the expert held a conservative view on the chances of hugely positive results for RDV in ongoing China Phase III studies, citing various preclinical and clinical results and no anecdotal positive news yet out of China – but did think it could add modest benefit. For its part, Jefferies thinks RDV could have benefit but mostly for patients early in disease onset and lower viral load. The firm says Phase III test data for RDV might come early April or sooner, and it believes even a marginal benefit of 10-20% would be a “success” given the large global unmet medical need. Jefferies retains a “buy” rating on RDV producer Gilead Sciences.
oil market rebalancing Cornerstone Macro
2. This oil price crash mess will take 2-years to work throughCornerstone Macro’s energy team says that their new base case calls for low $30s Brent in 2020 and high $30s Brent in 2021 (annual averages) and forecast ~2 Mb/d inventory build in 2020 and a modest draw in 2021 based on the assumption that Saudi Arabia and Russia both raise production, while oil demand falls ~1 Mb/d y/y in 2020. That draws them to the conclusion that it will take roughly two years of low prices for shale to decline enough to rebalance the global oil market, that is, unless Saudi Arabia or Russia gives in to low prices. This is unlikely, say Cornerstone. The report says this could be further compounded by the fact that the EM oil demand tailwind fading, and conclude that it’s not hard to add up to 2009 type oil demand declines, despite the comparatively healthier global economy today. Looking further out, assuming low prices sustain through 2021, the middle of the decade is potentially exciting / setting up for a price spike.
bear market US equities Longview Economics
3. Analysing 50-years of market crashes to predict the next move lowerWith volatility in markets remaining high, the latest report from Longview Economics sets out to gauge the potential path of future price action as two, and possibly three, economic shocks play out in the global economy. The firm says given the recent violent moves in indices such as the S&P500 cash index, it is instructive to note the typical price action of markets after sharp 10% or greater sell-offs/crashes. To that end, Longview has analysed all those crashes since the late 1970s, a total of 15 sharp pullbacks, to assess how the stock market typically behaves after one of those initial waves of selling. The firm finds that after the initial wave of selling, the probability of a later retest of those initial lows is high. Longview warns, however, that it is rare that this initial retest significantly breaches the intraday lows of wave one.
Oil US economy US employment US shale Ned Davis Research
4. Sinking oil prices = sinking economy?The negatives of falling oil prices outweigh the positives for the US economy, say Ned Davis Research. That’s because of the damage lower prices will have on the US energy sector. NDR have analysed the impact of this using the the mining employment multiplier. They found estimates of this multiplier that range between 3.9 and 5.9, depending on the source and methodology. That means that each mining job supports as many as six jobs in other industries. NDR then modelled potential job losses for the sector, based on previous oil price shocks, to then come up with an estimate of total jobs lost to the economy overall. The result? Job losses of between 7-10% of the total jobs created in the economy in 2019.
Financials Money markets re-purchase agreements Renaissance Macro Research
5. New systemic risk indicators for 2020US bank stocks have been hit hard recently as the widening of Libor-OIS spreads has raised concern for potential credit and systemic risks in the sector. But as Renaissance Macro Research’s Howard Mason points out in a note published yesterday, the operating regime of the Federal Reserve has evolved meaningfully since the financial crisis, and even since the spike in repo rates last September. So, investors should update the indicators they use to make more informed judgements of systemic risk in the sector. Mason says one of the most important of these relevant indicators today is the SOFR-IOER spread. This spread compares rates in the private market for secured (‘repo’) loans with the rate received by banks for making unsecured loans to the Fed through reserve balances in excess of those required by the minimum reserve requirements of a fractional banking system. What this spread suggests to Mason now is that there’s no problem with the ‘plumbing’ of the financial system: money is moving properly to where it needs to be.