Weekly Market Framework – Week of April 27, 2020

Critical Market Context for the Week Ahead

An oil shock took the world by storm last week, with May 20 contract of Western Texas Intermediate plummeting well below $0, reaching a stunning negative $38 per barrel.

The reverberations of this market collapse were felt around the world, with over 100 million barrels of oil stranded at sea:

And the collapse in the market forcing producers to shut down their rigs (yellow = shut down, blue = scheduled for decommission).

One would think this logic-defying demand shock forcing “black gold” to go negative – even if it only for technical reasons – would have put risk-assets on notice.

And yet the markets were oddly calm. U.S. equities posted modest gains amid promising news about states re-opening.

Even energy stocks were up, as can be seen via this ETF:

Equities performed against the backdrop of seemingly good news, as case growth decreased, several states planned to reopen their economies, and the U.S. Senate passed a new $484 billion coronavirus relief package for small businesses, $320 billion of which will go to replenish the Payroll Protection Program.

Meanwhile, the dismal economic indicators continued to trickle in through the wire. Over 4.4 million people filed jobless claims the week of April 18, bringing the five-week total up to over 26.4 million, more than all the jobs added since the Great Recession:

Last week was an exercise in ambivalence: one that required investors to square an apocalyptic energy shock and grim economic indicators with the rosy assurances of fiscal and monetary authorities. As states reopen their economies, success will hinge on whether businesses can reemerge from a prolonged economic shutdown.