Monday Musings: May 18, 2020

May 18, 2020

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Public Trust Credit Team
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Moderna vaccine trial news sends equity markets ripping

Study results from a human trial of the Moderna COVID-19 vaccine were released today showing promising results. Data from the results suggest a “high probability to provide protection from COVID-19 disease in humans.” The USDA gave Moderna permission to begin the second stage of testing with an emergency use vaccine potentially being ready for use by the fall. Moderna is now looking to expand the human trials, enrolling over 100 patients for the next test that will include trials on patients over 55 years of age and will more directly assess the vaccine’s ability to actually protect people from the disease. Moderna’s vaccine trial is among the furthest in the development cycle, but vaccine development is a slow process and will not be available until fall at the earliest for emergency use.

A monetary and fiscal effort

In an interview on “60 Minutes,” Fed chair Jerome Powell said he believes the road to recovery from the COVID-19 shock will likely be slow. He reiterated his view that both the Fed and Congress may need to do more to support the economic recovery. He also acknowledged that the unemployment rate could peak to 20 or 25% and that the economy could “easily” contract by 20% or 30% annualized in the second quarter. He believes the economy could recover steadily assuming there is no second wave of infection, but that total recovery will not be possible until people are fully confident they are safe, likely until a vaccine is finalized with widespread distribution. He suggested that government efforts may need to span over a few more months to avoid long-term economic damage by helping individuals pay their bills and limit business insolvencies. On Friday, the House passed a $3 trillion pandemic relief package, but certain aspects of the package are unlikely to pass the Republican-controlled Senate. Still, Mr. Powell added that the central bank was not “out of ammunition by a long shot.”

Oil markets see positive signs as reports reveal consumption in China rebounds to near pre-pandemic levels

As reported by Bloomberg, Chinese oil consumption is currently at approximately 13 million barrels a day, slightly under levels from a year ago. As the world’s second-largest consumer of oil behind the U.S., China’s consumption is currently seen as an indicator of how other large, oil-consuming countries may see an uptick in demand once lockdown restrictions begin to ease. West Texas Intermediate (WTI) and Brent Crude both had strong showings today, with Brent Crude hitting an intraday high of $35 per barrel, its highest level since April 9, 2020. WTI, the benchmark for the U.S. oil market, reached an intraday price of $33 per barrel, marking a significant divergence from trading in the negatives in late April. A strong rebound in consumption from China in conjunction with agreed OPEC+ cuts of 9.7 million barrels per day (approximately 10% of global supply) should help to shore up the dramatic collapse in demand from the COVID-19 pandemic. On Monday, Russia reiterated the country’s pledge to maintain compliance with agreed OPEC+ production cuts, further alleviating concerns of OPEC+ agreements derailing.

Japan’s economic expansion officially comes to an end

Japan, the world’s third largest economy, shrank by an annualized 3.4% from the previous quarter in the January-March period, officially falling into the technical definition of recession (two consecutive quarters of negative real GDP growth). The COVID-19 pandemic has severely curtailed domestic demand, with private consumption, residential investment, and capital expenditures down sharply from 2017 highs. The pandemic has also weighed heavily on overseas demand, a particular challenge for an economy that relies greatly on exports to drive growth. The IMF now projects real GDP growth of -5.2% in 2020 before rebounding to slightly positive growth in 2021. Last week, the three Japanese mega-banks reported their fiscal year 2019 earnings with management teams guiding for a 30%-40% decline in net profit in 2021. Unsurprisingly, bottom lines were hammered by loan loss provisions, and large balances of unrealized gains associated with equity holdings fell substantially. Positively, robust diversification by both business line and geography helped sustain revenues, and global market operations performed extremely well as banks were able to realize large gains while re-balancing their sizable bond portfolios.
 
Japanese auto manufacturers have already started to report their fiscal year-end numbers and, as anticipated, saw material declines near the end of the quarter due to a dramatic drop in demand, most notably from China (the world’s largest auto market). However, Japanese autos are seeing an uptick in demand in China as the country continues to gain traction post-lockdown. In related news, May is expected to be the worst month for sales in North America, with a gradual improvement each quarter and pre-pandemic demand levels possibly returning by early 2021.
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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