The Federal Reserve continues with massive QE as we wait on a Congressional emergency aid packages, reports Bill Baruch.
E-mini S&P (ESM)
Last week’s close: Settled at 2288.50, down 100.50 on Friday and 407.50 on the week
Fundamentals: U.S benchmarks finished Friday on a very ugly note, settling below the December 2018 low, and kicked off this week by gapping lower. The S&P 500 traded to the lowest level since the week after President Trump’s 2016 election. Hopes of massive fiscal stimulus are stalling in the Senate. Despite headlines over the weekend touting a $2 trillion injection to the economy, passing such an extensive bill immediately was always overshadowed by some foreseeable deadlock. The Senate is expected to vote by noon today in Washington. The bill, according to White House Chief Economic Advisor Kudlow, would be about 10% of GDP or more than $2 trillion. Some of the key sticking points are aid to Boeing (BA) and General Electric (GE) as well as setting a standard in slicing cash payments to Americans. It would also seem that at least $300 billion will be earmarked for loans to small businesses who would not have to repay if they kept workers. Everyone should brush up on their Modern Monetary Theory (MMT) playbook. All in all, this is by far the largest aid package in U.S history, however, as a percentage of GDP it sits far below that from Germany, the U.K, Denmark and Spain which are upwards to at least 15% of GDP.
On the monetary side, the Federal Reserve has already slashed rates to zero and unleased a $700 billion QE program. According to Bloomberg, since the March 15 announcement the Fed has already purchased $340 billion; $272 billion of government debt and $68 billion of mortgaged-backed securities (MBS). With the Fed expected to pick up another $75 billion in government debt today, and another $100 billion in MBS’s this week, there is a rising belief we see the central bank expand its asset purchases to corporate and municipal bonds. As we are wrapping up our writing, the Fed announced open-ended Treasury and MBS purchases, two facilities for liquidity of corporate bonds, expanded money-market liquidity facility and more.
Today’s economic calendar is bare, but tomorrow we look to March Flash PMIs from Europe and the U.S. Given the NY and Philly Manufacturing reads last week, we expect this data to begin shedding some light on the economic damage and cessation. Estimates for the toll on U.S Q2 GDP are mounting. Goldman Sachs (GS) and Morgan Stanley (MS) are predicting -24% and -30% respectively. Another one to keep an eye on is Initial Weekly Jobless Claims. During the Great Financial Crisis, the largest one-week print did not top one million. Goldman Sachs estimates 2.25 million this week.
Technicals: The S&P 500 closed last week below the December 2018 low of 2316.75 and this inarguably opens the door down to the 2007 high of 1586.75. Of course, there are strong levels of support between here and there. First up is 2191.50-2198.75, this was the high before the 2016 election and Friday’s settlement on election week. Unfortunately, we believe continued price action below 2316.75 to be so bearish that we imagine a high probability of a move to the 50% retracement from the high one month ago to the 2009 low at 2031.50. Below there was the February 2016 low at 1802.50. As we have said for at least a week now 1698.75-1709.25 is certainly in play; this .618 retracement from 2009 to 2020 aligns with a total 50% loss from that high. As for the NQ, it sliced through strong major three-star support at 6812.50 on last night’s open. Below here, support has been created against limit down but ultimately, the near-term path of least resistance while below Friday’s settlement at 6969 and below the round 7000 is to 6422.25. Remember, the NQ is still 1000 points or 15% from the December 2018 low of 5820.50. The other budding negative factor is the Death Cross. For the Dow, the 50-day moving average crossed below the 200-dma on Friday. This should take place in the S&P through the week and would ignite waves of selling. Arguably, weakness into Friday’s close was due to this technical trigger in the Dow.
Bias: Neutral/Bearish
Resistance: 2262-2288.50***, 2316.75***, 2361**, 2386.50-2394**, 2442.50***, 2499**, 2536.75-2555.50***
Support: 2191.50-2198.75***, 2031.50***, 1802.50***, 1698.75-1709.25***
NQ (June)
Resistance: 6874-6906**, 6969***, 7040**, 7273.50-7288.25***, 7477-7500**, 7629***
Pivot: 6812.50***
Support: 6628.75**, 6422.25***, 6030***, 5820.50***
Crude Oil (CLK)
Last week’s close: Settled at $22.63, down $3.28 on Friday and $9.10 on the week
Fundamentals: The bleak economic expectations are mounting and certainly not doing the energy sector any favors. For crude oil, it is more than monetary and fiscal stimulus. This is arguably true for the stock market too. Saudi Arabia began a price war two weeks ago and despite the damage, their effort was to stimulate demand while of course looking out for themselves first and foremost. The casualty will be U.S Shale that needs crude oil above $30 to profit. There are calls for President Trump to step in; everything from an embargo or tariffs on Saudi and Russia to using his deal-making prowess. The energy sector is experiencing its own Black Swan, its own Great Financial Crisis. Companies in the space will go out of business. They are now in survival mode; spending and rig activity have been quickly cut. There may be some hedges that allows some companies to keep business operating near usual for a short period of time. Even those though are already implementing contingency plans. Staff will be cut, and loans will be defaulted. Entire regions will see economic activity drastically halted for well after the Coronavirus lockdowns end. Regional banks will see pressure and a domino effect will take place, home values, retailers, etc. Crime will likely increase too.
Some of the big names will come out less scathed. Chevron (CVX) then Exxon (XOM) and ConocoPhillips (COP). We were a bear on energy last year calling to sell rallies in the underlying as well these stocks. I think you now need to begin paying attention to some of the longer-term value in the larger names. They could prove to be winners two years out. EOG Resources Inc. (EOG), Pioneer Natural Resources (PXD) Occidental (OXY) all got slashed by roughly 60-75% and need crude oil back above $30 to produce a cash flow.
Estimates are calling for a demand hit of 8-11 million barrels per day due to the virus outbreak and resulting lockdowns. This is a shock level low. However, if this lasts, if inventories continue to build and the virus lingers for months upon months, it is theoretically possible to see regional prices of crude oil go below zero because of the cost of storage, logistics and carry. We are certainly not calling for this but providing a shock value of our own here. This is a very grim view, but as a trader we must plan for the worst and be patient for opportunity. There will be opportunity between $22 this morning and wherever this bottoming process begins.
Technicals: Price action was slammed into settlement Friday and despite a dead-cat bounce back, remains weak. Our momentum indicator comes in this morning at $23.64 and the bears have a clear edge to start the week while below here. Support is budding at the low settlement and low trade at $20.83. Traders should prepare to see a test of $17.12, the 2001 low.
Bias: Neutral
Resistance: 23.64-23.83***, 25.19**, 25.75-26.05**, 28.28-28.49***, 29.00**, 30.25***
Pivot: 22.63
Support: 20.52-20.83***, 20.00**, 17.12****
Gold (GCJ)
Last week’s close: Settled at $1,484.6, up $5.30 on Friday and down $32.10 on the week
Fundamentals: Gold is trading in a tighter range as this week gets under but contained by technical support and resistance. As we are wrapping up our writing, news is breaking that the Federal Reserve announced open-ended Treasury and MBS purchases, two facilities for liquidity of Corporate Bonds, expanded money-market liquidity facility and more. Gold quickly responded by regaining $1500 as this is almost certain to cause inflation once the economic lockdown ends. Furthermore, it assures liquidity in financial markets for the foreseeable future and reduces the volatility we’ve become accustom to, one that Gold has become a casualty of.
Technicals: Gold settled Friday right at our first layer of support, one that it was able to build some construction from before the added liquidity by the Fed this morning. Still a crucial level on a closing basis and a sticky area of trade is $1,516.7; we must see gold have continued closes above here in order to invite buyers. All in all, the metal has so far held our rare major four-star support beautifully and this helps build a platform to repair the damage. We must see a close above 1574.8-1580 in order to begin neutralizing the damage or Gold remains vulnerable.
Bias: Neutral/Bullish
Resistance: 1516.7***, 1542.8**, 1574.8-1580***, 1597.9-1604***
Pivot: 1497
Support: 1481-1488**, 1446.2-1452.6****, 1400**, 1377.5-1384***, 1266**, 1225****
Bill Baruch provides technical levels on all markets throughout the week at BlueLineFutures.com. Sign up for a complimentary two-week trial of 1 or all 6 of our daily Blue Line Express commodity reports!Please sign up at Blue Line Futures to have our research emailed to you each morning.
Please sign up to have 1 or all 6 of our daily Blue Line Express commodity reports emailed directly!
