- Weekly global market focus
- Fed reduces Treasury and MBS purchases in a positive sign
- Washington’s next virus relief package is coming together
- OPEC+ meeting is delayed as producers try to craft a production cut for the markets
Weekly global market focus — The U.S. markets this week will focus on (1) the pandemic’s growth rate and the continued assessment of the massive global economic damage, (2) any signs of new systemic cracks in the global financial system, (3) oil prices as OPEC+ is on the hot seat to produce a production cut this week, (4) the market reception for the Treasury’s increased auction sizes for this week’s sale of 3, 10 and 30-year securities, and (5) this week’s U.S. economic calendar, which will be dominated by Thursday’s unemployment claims report.
In Europe, the markets are watching how the Eurozone plans to help hard-hit countries such as Italy and Spain to avoid a financial crisis. Germany is refusing to be on the hook for the mutualization of debt through Eurozone coronabonds and is instead pushing for needy countries to borrow from the ESM bailout facility. Meanwhile, the markets are waiting to see if strict lockdown rules will be successful in causing infection rates to start falling in Italy and Spain, the worst-hit countries.
Fed reduces Treasury and MBS purchases in a positive sign — The Fed announced last Friday that it will reduce its daily purchases of Treasury securities this week to $50 billion from $60 billion in the past two weeks, and $75 billion in the prior weeks. The Fed also said it will reduce its daily purchases of mortgage-backed securities this week to $25 billion from $30 billion last week. The Fed has boosted its balance sheet by $1.5 trillion in just the past three weeks, which nearly equals its entire QE3 program of $1.7 trillion that took about two years to complete.
The fact that the Fed feels comfortable in reducing its Treasury purchases is a sign that the Fed believes that the Treasury market is functioning more normally with increased liquidity and narrower bid-offer spreads.
The Fed this week can also reduce its Treasury purchases because the Fed today is expected to open its Treasury repo facility for foreign central banks. That facility should reduce the pressure on foreign central banks to sell their Treasury securities to get cash since they can instead borrow cash from the Fed and put their Treasury securities up as collateral in the repo facility. This facility could be very useful for the smaller to mid-sized central banks that did not qualify for the Fed’s expanded dollar swap lines.
The markets remain nervous about systemic cracks in the financial system, particularly in the mortgage-backed market, corporate bond market, muni market, and asset-backed security market where default threats are high. In addition, the commercial paper market remains troubled since the Fed is not expected to have its commercial paper loan facility operational for another 1-2 weeks.
Washington’s next virus relief package is coming together — Congress is moving towards a fourth stimulus bill that focuses on health care and extending more help to individuals and small businesses. Speaker Pelosi last Friday indicated that she wants to move ahead with a targeted package that looks similar to the last package, leaving her infrastructure ideas to a fifth package.
Senate Republicans are pushing back on any big infrastructure bill, so progress can be accelerated on a fourth bill if infrastructure is left aside for the time being. Congress is currently scheduled to remain on recess until April 20 but Congress could be called back to Washington on short notice if there is a bill to pass.
OPEC+ meeting is delayed as producers try to craft a production cut for the markets — The virtual OPEC+ meeting has been delayed from today until the tentative date of Thursday (Apr 9). The parties apparently have more negotiations to complete before they have a credible production cut agreement to pitch to the markets. Also, a G-20 energy ministers meeting is being planned for Friday where major oil producers such as the U.S. will be prevailed upon to join a global production cut. President Trump on Saturday instead said he was considering tariffs on imported oil, which he thinks might protect U.S. oil producers.
Oil prices rallied sharply last week on news that OPEC+ was moving towards a new production cut agreement. However, no one expects a production cut to be large enough to fully absorb the massive hit to demand that could be on the order of 35 million bpd, or about 35% of global oil demand.
Even the 10 million bpd cut that is being pitched by President Trump and some OPEC+ sources would only go about a third of the way to offsetting the plunge in demand. That means that oil production will still be far too high in the coming weeks and that global oil storage facilities will be full within a matter of weeks.
It remains to be seen how OPEC+ and cooperating countries will be able to claim a 10 mln bpd production cut. Russia over the weekend suggested that it might be willing to cut production by 1 mln bpd, and there is speculation that its cut could go as high as 1.5 mln bpd. Meanwhile, Saudi Arabia could claim a cut of as much as 3.5 mln bpd if it were to roll back its April production hike of 2 mln bpd and then make a 1.5 mln bpd cut from its March production level of 10.0 mln bpd to 8.5 mln bpd. That would still leave another 5 mln bpd of cuts for everyone else in the world, which is a tall order.
The fact is that oil producers around the world are being forced to slash their production by market conditions, not by choice. Producers are facing dwindling customers and storage facilities, and some of them are now pumping at a loss. Indeed, IHS Markit is forecasting that as much as 10 million bpd of world oil production will be shut down in any case from April through June as storage facilities fill up.
