Tuesday, April 21, 2020

Evening Note

US equities closed lower again today: SPX -3.1%, Dow -2.7%, Nasdaq -3.48%, Russell 2000 -2.33%. Europe sold off across the board to a similar extent as well.

Oil took another huge hit today, although, after hours, in Asia, the price has jumped by 10%. While, as I noted yesterday, technical factors are indeed in play, it’s really all about fundamentals. The amount of oil currently being produced relative to demand, and the utter lack of storage capacity, reflects the on-the-ground economic reality that, while showing up vividly in the price of oil, has yet to be fully discounted in the equity markets.

RealVision’s Ash Bennington makes perfect commonsense:

“It’s not just a catastrophe for the fossil fuel industry, although it certainly is that, it’s also an index, a proxy, for what else is happening in the real economy; for the absence of demand, for the absence of consumption, for the absence of normal economic functioning."  
"This is cyclical, this flows through the system. The reality is that what we’re seeing in oil presents something much bigger in terms of what we’re seeing throughout the U.S. and in the global economy.”
My base case remains that odds favor equities catching down to what commodities, such as oil and industrial materials (see chart) signal about true general conditions…

Click to enlarge...

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