Monday Musings: April 20, 2020

Apr 20, 2020

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Public Trust Credit Team
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Senate eyes new deal to replenish small business aid this week

On Sunday, the Trump Administration and Senate Democrats stated that they were getting close to a new agreement for a fresh stimulus deal to the tune of nearly $500 billion in additional rescue funds. The announcement comes as the original $349 billion in funding for the Paycheck Protection Program was fully tapped-out in just two weeks’ time. U.S. Secretary of the Treasury, Steven Mnuchin, expressed optimism that the Senate could reach an agreement as early as Monday with the House ideally taking up the bill for a formal vote by Tuesday. The agreement is expected to include $310 billion in additional funds for the small business relief program, another $60 billion for a separate Economic Injury Disaster Loan program, $75 billion for hospital aid, and $25 billion to expand nationwide virus testing.

The collapse in demand for oil as a result of COVID-19 drives down oil prices to the lowest level since 1986

West Texas Intermediate (WTI) neared $10 a barrel on Monday, as the precipitous collapse in demand from lock downs across the globe continue to increase inventories driven by a lack of demand spurred by COVID-19. As reported by Bloomberg, the S&P 500 Energy Index has lost approximately 45% since the beginning of 2020 as producers and refiners face the devastating aftermath of world markets shutting down. Even with OPEC+ agreeing to a roughly 10% cut in production, the market will continue to see heightened volatility in the near-term, as the sharpest cuts are not slated until May and June. Market estimates place the fall in demand to at least 20% from the start of the COVID-19 pandemic. While the OPEC+ agreement will help with supply, the fall in consumption is much larger and will continue to stress the oil market until the virus clears and global economies break from their lock downs or there is an agreement for additional production cuts.

Corporate earning kick-off in earnest and it looks rocky

Roughly one-fifth of the companies in the S&P 500 are scheduled to report earnings this week providing investors with the first in-depth look at the effects of the COVID-19 pandemic. Earnings for Q1 are expected to show less pain than Q2 because of the strong start to the year before the shutdowns. However, earnings releases should indicate how the shutdowns are affecting profit, and more importantly, allow companies to adjust or outright reissue full-year guidance. As of the end of March, Factset reported a consensus earnings decline of 5.2%, the largest year-over-year decline since Q2 2016, but this likely understates the depth of how much earnings will decline.

Highlights from U.S. bank earnings

A number of U.S. banks have already reported Q1 2020 earnings since last week. Reported profits have taken a severe hit this quarter, mainly due to an accounting change that took effect on January 1 of this year. Many U.S. banks are now expected to calculate expected credit losses over the life of the loans, a material change from the previous incurred loss model. As a result, banks have increased loan loss reserves substantially during the quarter. Still, the actual level of loan losses remains very low at this time as they haven’t yet had the time to materialize for the most part, outside of the oil and gas industry which is currently under intense pressure. Banks have already allowed significant deferrals and forbearance for their clients, and they are heavily involved with many of the government programs, such as the Paycheck Protection Programs for small businesses. Revolver draws appear to have peaked in the third week of March and have been slowing since. Payment activity remains particularly weak as individuals and businesses have cut discretionary spending significantly. The bright spot was trading revenues for investment banks, thanks to high market volatility and increased client activity. Positively, all the large U.S. banks benefit from solid capital and liquidity levels that should help them weather the COVID-19 storm fairly well.
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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