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How long can the bull run?

Now that the bull run has started, Tony Nash CEO and Founder of Complete Intelligence joins BFM 89.9 in another global markets discussion. What’s behind this rally and will it be sustained? They also discuss OPEC, the Brent price and its future, Europe’s fiscal stimulus, the ECB, and the resumption of trade war between the U.S. and China.

 

Listen to the podcast on BFM: The Business Station.

 

BFM Description:

On the back of an emerging bull run in Asia and the U.S., we reach out to Tony Nash, CEO of Complete Intelligence, for his thoughts on whether or not this momentum can be maintained, oil prices, as well as the ECB’s bond purchase programme.

 

Produced by: Michael Gong

 

Presented by: Wong Shou Ning, Lyn Mak

 

 

Show Notes

 

 

BFM: U.S. stocks extended their rally into the eighth straight day as investors clung to optimism for quick recovery from the pandemic. So the Dow Jones closed up 2.1 percent. The S&P 500 closed up 1.8 percent, and NASDAQ was up 0.8 percent. In fact, NASDAQ in the intraday trading did touch an all-time high. It’s as if COVID-19 never happened.

 

Meanwhile, Asia also had a very good run. Nikkei 225 closed at 1.3 percent. Shanghai was barely up, though. It was flat at 0.1 percent. Hang Seng was up 1.4 percent. Singapore was the big surprise here. We talked about it yesterday. The banking stocks were up and this caused the Straits Times Index to go up by 3.4 percent. Meanwhile, on the FBMKLCI, our market was up 2.1 percent. Also on the back of banking stocks, public bank RHP saw almost a pulping double-digit gains.

 

Pandemic? What pandemic? Never happened.

 

So this morning, for more insight into global markets, we have on the line with us Tony Nash, CEO of Complete Intelligence. Thanks very much for joining us this morning, Tony.

 

Now, equities have recently exhibited strong bullish momentum in both Asia and the U.S.. What’s behind this rally? And is it sustainable?

 

TN: I think a lot of it is the monetary policy expectations and the stimulus expectations washing through. It’s a lot of hope around activity in the summer, say, for crude prices, driving and consumption. There’s an expectation that there’s been some pent up consumption because of COVID. Some of this is coming back. It’s key to know that the U.S. markets are still 10 percent below where they were pre-COVID, 10 percent or more. So it’s not completely as if things never happened, but it has come back relatively quickly. The S&P, for example, was at around 2300. So we’ve climbed about 700 points in the S&P 500 since the nadir of COVID.

 

BFM: I always ask our commentators this, and I’m going to ask you also. Why the disconnect between what is happening on Main Street versus what’s happening on Wall Street.

 

TN: There’s an expectation that most publicly traded companies are going to pack as much bad news into Q2 as possible. And so they’re just throwing the kitchen sink into Q2. So that should mean pretty clear sailing for the rest of the year, assuming that it is 2020 and all. So anything can happen. But assuming that there isn’t another major catastrophe, things should be pretty clear for the rest of the year if every- and anything that could go wrong goes into Q2 data.

 

BFM: Brent has also erased some of its recent gains and is back below the $40 a barrel mark with the OPEC meeting now in doubt. What do you think oil prices will be heading?

 

TN: Our view is that things have been pretty range traded. We don’t see things going up to, say, $50 anytime soon. It’s possible. But we’ve expected things to stay pretty range traded until probably August or so.

 

We’re going to see daily rises and we’re going to see falls. But prices have come back a little bit on some drawdowns we’ve seen in storage and expectations around driving. Although, It’s not a perfect substitution for flying. And those volumes will still be down until we start to see people get back on planes. And until we start to see commuters back on their daily drives, we really don’t expect to see things come back above, say, $50 for Brent.

 

BFM: Shifting to Europe. The ECB is expected to expand its bond repurchase program this Thursday. So they’ve got a currency 750 billion euros outlay. Is that enough or do you think they need to increase it?

 

TN: It’s not enough. But I don’t know that Europe really has the financial wherewithal to do much more. They are not a fiscal union. And so they’re really having to contort their mandate to make sure that they can do this. This is really pushing Europe and the ECB and the concept of a quasi-fiscal union under the E.U. is putting real pressure on that.

 

So the limits of the monetary, not fiscal union are really pressed. And when you look at things like the insolvencies we saw in Greece and Italy and other places in southern Europe over the last 10 years, places like Germany are just tired of fiscal stimulus of other countries in the EU.

 

BFM: And if you look at the equity markets in Europe, that’s been also the lag out. Do you think there’s any opportunities there or is it a similar situation whereby the corporates there are going to not perform up to par?

 

TN: No, we don’t think they’ll perform up to par. Until we see countries beyond Germany really lift some of these lockdowns in a big way, it’s going to be really slow going. It’s strange how we’ve seen these protests really go against the lockdown. We may actually see some of these countries rip the Band-Aid off, because if you have tens of thousands or hundreds of thousands of protesters out there, it may be a situation where you can just say, “Well, lockdown’s over,” and you may start to see consumption patterns come back to normal. That would be a good thing for markets. That would be a good thing for companies. But European companies, especially European banks, remain troubled. And I think this crisis has really forced those banks to look in the mirror. And if markets are functioning well, then we’ll start to see some consequences, particularly for European banks.

 

BFM: Thank you very much for speaking with us this morning, Tony. And that was Tony Nash, CEO of Complete Intelligence.

 

He made some comments there about Brent crude, which he doesn’t really expect to come above the fifty dollars per barrel mark until perhaps we see planes start flying again. But the Trump administration has just made an announcement to that effect, saying that they are suspending passenger flights to the U.S. by Chinese airlines effective June 16th.

 

So the U.S. government said in a statement that it was responding to the failure of the Chinese government to allow U.S. carriers to fly to and from China. Now, this hasn’t, of course, been good for the tensions that have already been flaring between the two countries over the handling of COVID-19, as well as the treatment of Hong Kong.

 

China recently paused some agriculture imports after Trump threatened to limit the policy exemptions that allow America to treat Hong Kong differently than the mainland.

 

And that was done. The global economy was cheering and it looks like they’ve started fighting again. I think I’m just curious, what else is there to fight over? Because there’s been soybeans, beef, pork imports, corn, and now airlines.

 

U.S. airlines did see a bit of a share surge amidst the broader market rally and signs that travel demand is starting to rebound. Boeing was up 13 percent at one point after a report from IATA indicated that recovery was underway for global airlines.

 

So looks like we’re going to be watching that space as well, quite closely.

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Podcasts

Message to Fed: More sugar please!

Tony joins BFM for another discussion on the US markets, this time, sending a message to Fed on what needs to be done. What he thinks will Powell do next and why is the Fed buying a lot of ETFs. Plus, a side topic on oil as Saudi called for a larger production cut.

 

Produced by: Michael Gong

 

Presented by: Roshan Kanesan, Noelle Lim, Khoo Hsu Chuang

 

This podcast is originally published by BFM 89.9: The Business Station.

 

 

Podcast Notes

 

BFM: The Fed chair, Jerome Powell, painted a rather negative view of the economy unless fiscal and monetary policymakers rise to the challenge. But what’s left in the toolbox, though?

 

TN: There’s quite a lot left, actually. We’ve seen a few trillion dollars spent. What we need to make sure is that that money actually gets out to businesses. So offering lower rates, nobody is really in a mood to borrow unless it’s forgivable. With the mandatory closing of a lot of small and mid-sized businesses, it’s really putting their revenue models in peril. Actually helping those businesses with cash to substitute for revenue, since this was a government shutdown, is really all they can do. But I think the next path is looking to medium-term spending programs like infrastructure. A number of these things that can go from direct cash payments to earned cash so that we can have a more viable economy again.

 

BFM: Could you elaborate more on some of the fiscal measures that you’re talking about?

 

TN: For small and mid-sized businesses, we’ve had things like the PPP, the Paycheck Protection Program. What that does is it gives about two and a half months’ worth of expenses to companies so that they can retain their staff and pay for their rent during the downtime. But what’s happened is not a lot of companies have been approved. Of those who’ve been approved, not all have gotten their money, a number of them are still waiting.

 

For small companies, they run on cash flow. They don’t have three to six months of cash sitting in the bank normally. So while they wait, they’re going bankrupt. They’re having to fire people. At the same time, we’re starting to see more and more large companies announce layoffs over the past two weeks. And so we’ve seen the devastation of a lot of small and mid-sized companies in the US. We’re starting to see that bleed into large corporate layoffs.

 

Those large companies want to see the expenses associated with those layoffs put into Q2. As we go through Q2, we’re expected to see more and more corporate layoffs, so that all those companies can pack them into their earnings reports for Q2.

 

BFM: The correction of the last couple of days, the American share market has been a bit of a test, up 30% since the March lows. A lot of billionaire investors like Stan Druckenmiller and Appaloosa management’s David Tepper say that stocks have been the most overvalued for a number of decades. What does that do for your thinking by way of your portfolio? Are you taking some money off the table? Are you getting more cautious? What are you going to do?

 

TN: The only thing we can really guarantee right now is volatility. And what is happening is they’re trying to find a new pricing level. Until we’ve found that new pricing level, really anything can happen.

 

What we’re entering right now is a phase where people are realizing that states may stay closed longer than many expected. I actually think you’re going to get a lot of push back from citizens in the U.S. Los Angeles just announced they are going to stay closed for three more months. You’re going to see a lot of unrest there. People are really pushing back because their hopes and dreams of decades of these small and mid-sized businesses are just being devastated as local officials make these decisions. I feel in the next few weeks, we’re going to see more and more people pushing back on those orders because they need to get back to work. They’ve got to run their companies. They’ve got to make some money.

 

BFM: That’s right. But this is an ongoing chasm between what’s happening on Wall Street, which is essentially a rally and Main Street, which is dying. People are divided over whether the policy response will be to get into the Fed buying equity market instruments on top of the junk ETFs and all the backstopping of the bond market. What’s your stance and what Jerome Powell is going to do next?

 

TN: They can do that. It’s certainly within their remit to lend money. The ETFs are kind of an indirect way to lend money. It’s radical, but it’s not beyond their capability. Where it looks like the Fed is going is with yield curve control. That means they’re likely to target a rate for the 10-year Treasury, and then they will spend almost unlimited cash to make sure that the rates stay there.

 

If the Treasury yield curve rises too much and people stop taking out long-term loans for infrastructure projects or for other things, if that rises too much, the Fed will push that yield curve down, let’s say, to a half percent rate so that people can borrow over long terms for cheaper. That’s the way for the Fed to encourage investing. That’s not a direct government fiscal policy, but it’s a way to get the private sector to spend cash. This is really for the larger, private sector companies. It’s a signal to me that the federal government itself is preparing itself to spend a lot more money in terms of fiscal policy, and also encourage the private sector to spend a lot more money on these long-term projects.

 

BFM: That is a theoretical concept, which hasn’t proved right in the last 10 years, because what corporations have done is that instead use that easy money to buy back shares and to return dividends to shareholders, not to invest for the long term. So that’s to be the problem.

 

TN: Well, either way, shareholders win, right? Either way, cash is spent or they get it in their return. U.S. equity markets are broadly held among most working Americans. So on some level, if that is done through share buybacks, it will help a broad base of shareholders through those equity prices. Share buybacks sound morally questionable, but either way that money is spent, it helps the broad economy.

 

BFM: So the U.S. Fed is now buying junk bonds, why ETF for the first time. Why these instruments? What’s the significance of it?

 

TN: They can’t invest directly in equities. Some of this stuff is a signal that they want to do more in debt markets. They’re too big to help out small companies. They’ve put together this main street lending program as a way to lend to, quote, unquote, small companies. But those small companies are actually pretty big. Most of the corporate entities in the U.S. are actually pretty small. The Fed is trying to alleviate the market of certain risk assets. I believe and hope that banks will lend to small and medium-sized companies. They’re trying to take the risk out of the market and off the balance sheets of banks so that those banks will invest more directly in actual operating companies that need the money and not necessarily the risky, junk bond companies.

 

BFM: A little bit on oil. Saudi Arabia has called for larger production cuts. Will the whole OPEC plus community back them? Should we expect some pushback? And what does this look like for oil prices?

 

TN: I don’t think you’re going to get a lot of pushback. We have about three months of crude supply overhang right now. Given that economies are locked down, there’s really no way to burn that off. So the only way to get prices back up to a sustainable level is really to cut off supply. Until the largest producers really slow down their production, and we can burn off some of that supply overhang, we’re not going to see prices rise much.

 

Demand’s not necessarily coming about quickly. It’s going to be gradual. As demand gradually accelerates and supply declines gradually, hopefully, we’ll meet in the middle somewhere and get a price that’s a little bit more livable for oil producers globally.

 

 

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QuickHit: There’s no going back for O&G sector jobs

In this week’s QuickHit episode, we have Vandana Hari, CEO and founder of Vanda Insights. She has 25 years of experience in the oil and gas and we asked what she expects to see happening in the near future. Will the oil industry recover, and when? Will bankruptcies and layoffs in big oil firms continue? And what can these companies and the government do to prevent the worst from happening?

 

We also discussed the oil and gas industry in the previous QuickHit episode on what companies can do right now to win post-COVID.

 

The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

TN: Today we’re joined by Vandana Hari of Vanda Insights. She is one of the top energy market experts in the world. Can you tell us a little bit about your firm and what you do?

 

VH: I have been looking at the oil markets for 25 years now. I started my firm Vanda Insights, which provides global oil markets macro analysis about 4 years ago. Prior to that, I worked with Platts, which is a very well-known name in energy commodities. I looked at the pricing of crude, refined products and various other energy commodities. I covered news and analysis.

 

TN: Great. So it’s obvious why you’re here. Crude markets are in crisis. The big, big question is how long are we in this kind of sub $20, sub $30 zone? Generally, what’s your expectation for the length of that super depressed pricing?

 

VH: It’s certainly not going to be a v-shaped recovery. As we speak Brent, a benchmark crude, is trading around $22 to $23 a barrel. US WTI, another benchmark, is trading around $12 or $13 dollars a barrel. Now where do I see these going?

 

As we look out into May, and I’m taking into consideration a couple of factors there. One is that we are starting to see gradual reopening of the economy in Europe, the worst-hit countries Italy, Spain, France, Germany, and then we have the US and as we were discussing offline, Texas is looking to reopen. Some of the other US states are going to reopen as well. The oil markets will have a very close eye on these re-openings because they have the answer to demand revival. We are coming out of an unforeseen, unprecedented trough in global oil demand close to 30%–30 million barrels per day–of global oil demand has been destroyed. How does this go into May?

 

I’m expecting a very extremely slow gradual revival. There may be a bit of an impetus and upward boost to oil prices from a gradual reopening. Nothing like what we are seeing in the stock markets, though. I think that’s where stocks and stock markets and oil are going to decouple and have already started to decouple from what I can see.

 

The other element is going to be supply. So OPEC and non-OPEC alliance of 23 members. 20 out of those 23 have committed to reducing production collectively by about 9.7 million barrels per day for May and June. Now typically, that sort of an announcement, which happened back on the 12th of April would have in itself boosted oil prices. But this one didn’t. Now clearly it is seen as too little too late. Nonetheless, it will start mopping up some surplus. It’s just that it will again be very slow in giving any sort of positive signals to oil because remember, oil has to work through nearly three months of oversupply and an overhang. So the glut is going to take its time to disappear.

 

TN: It’s a demand problem, right? It’s a supply problem, but you do have lack of demand from the government shutdowns, and then there is supply continuing to come online. All of this issue, it makes me wonder bout the shale companies. I’m curious about shale and kind of privately held independent oil companies. But I also want to learn a little bit about NOCs, the national oil companies. If you don’t mind telling us, what is your view on shale? And how do you expect the NOC’s to fare after this? Do you think they’ll thrive? Do you think they’ll cut the fat? Do you think they’ll change at all, or do you think they’ll just continue to lumber along as they have for the past whatever 70 years?

 

VH: The one characteristic of this crisis is that the pain in the oil sector is being felt and will continue to be felt across the spectrum, all the way, from oil production to refining to logistics. And we can talk about logistics in a little bit as well, because that’s doing quite well now because of storage demand.

 

However, the pain is going to be felt all the way down to refining and retail. It’s also going to be spread across geographies. It’s going to be spread across the size and nature of companies, whether you are an oil major or an independent or an NOC.

 

Let’s talk about shale first. It’s not just the OPEC, non-OPEC enforced mandated cuts, but I am expecting to see major decline starting to happen in North America, in Brazil and perhaps in other places like the North Sea as well. What happens in the US is going to be key because it’s the biggest oil producer, thanks to the shale boom. Shale contributes nearly 80% of US oil production. What happens to shale is also going to hold the key to US energy independence in the future.

 

I also look at a couple of very key metrics in the shale patch. One is the weekly rig count that I monitor from Baker Hughes. The other one is a weekly count of the fracturing fleet. So in the hydraulic fracturing, it is far more jaw-dropping decline in numbers that have seen. 70% drop in the frat fleets currently versus the start of this year.

 

What all of that tells me, and we’ve done some number crunching of our own, is we expect to see close to a million barrels per day of decline in June going up to 2 million barrels per day in July. That’s something that the oil market is not quite factoring in yet. Let’s remember that shale bounced back phenomenally after the 2014-16 downturn. That’s the impression that the market has. That shale may be down on its knees, but it will bounce back. But this time, I think it’s going to be very, very different. It’s going to be nothing like a bounce back.

 

As far as national oil companies are concerned, I look at them quite closely sitting here in Asia, they are a breed in themselves. A lot of them are lumbering giants, very slow to change. Most of them are directly controlled by the government or have majority state ownership.

 

Now, one of the things that I have noticed that is going in favor of the NOC’s, especially in Asia–countries like India, China, even places in Southeast Asia–is that they have a captive, domestic, fast-growing market. These NOCs also tend to be vertically integrated, so and more often than not, Asia is a net importer of crude. They have giant refining operations and relatively less upstream or oil and gas production operations.

 

Refining is also getting hit in the current downturn. What we see refiners doing, which includes these NOCs of course, are they’re cutting back out. Port refining margins are terrible. They have gone into negative for a lot of the major products. How will the NOCs survive this? I think they come out of this with a great deal of financial strain. We have to see to what extent they get government support. Some of the NOCs, unfortunately, especially in countries like Indonesia, also struggle with fuel subsidies. So those might fare even worse in the recovery mode. Overall, I think another transition that’s going to take hold for NOCs is the investment in technology: to be more efficient whether you’re producing or refining or retailing oil. And to be more environmentally-friendly with products.

 

TN: Do you think they’ll be more productive? Do you think they’ll invest in technology? Just across the board with oil and gas companies in general. Do you think they’ll actually invest in productivity or do you think they’ll just kind of hold their breath and buckle down like they have always done? Can they afford to do that this time?

 

VH: So when it comes to technology, specifically for cleaner energy, it tends to be driven more by regulation than by market forces or by just companies one day waking up and deciding “Hey, I’m going to be more environmentally friendly.” It just doesn’t happen that way, and that’s certainly true for NOCs. I think oil majors are under a slightly different kind of dynamic. We’ve seen, for instance, only in recent weeks, BP and Shell double-down on their commitment towards greener, cleaner energy. Of course, their feet are being held to the fire by their shareholders.

 

NOCs are in a very different environment. I think a lot will depend on to what extent governments in Asia re-commit themselves to the Paris Agreement, and are part of the global drive towards cleaner energy. We have seen in recent years visible, tangible air pollution has been a major concern in cities all the way from Delhi to Beijing.

 

TN: As we as we stop under COVID, you know, air quality has improved dramatically, right?

 

VH: Yes indeed. You have to think when people go back to the new normal, and they are out and about and the pollution levels increase, what will that do in terms of pressure on these companies? So overall, I think the pressure from the environment will remain, to adopt new technologies, to move towards cleaner fuels.

 

Pressure from oil prices to be more efficient may be the case for NOCs. I see that a little bit less, and they’ll have to just pick and choose basically, right? But your big question, where does the money come from? I think that remains a major, major issue. Will they be able to raise money? So we’ve seen in the latest crisis, a few oil companies that are well-regarded, oil majors have tapped banks and raised loans. What I would personally love to see is for these NOCs to come out there a little more aggressively, because after all, they will be back in favor, thanks to the captive market. So I’d love to see them raise money with bonds, bank loans, or whatever, because they will need money from outside. There certainly won’t be enough to dip into their pockets.

 

TN: Yeah. The national accounts from any of these countries can’t really handle it. So that’s a great point.

 

We’re running long, but I don’t want to stop this conversation. So normally, I’d cut this off. But let me ask you one last question, okay? I live in Houston, Texas, and oil and gas town. We’ve seen some layoffs. But we actually haven’t seen a lot yet. You don’t live here so, you know, you can give us an unbiased view of the energy sector. What do you expect, and it’s not just Houston, of course, it’s the energy sector globally. Are we at the midpoint of energy layoffs, are we early, are we late? I mean, how bad do you expect it to get?

 

VH: I think we are probably at the beginning of it. So we have started seeing bankruptcies in the shale sector. Well, to be clear, the bankruptcies in the shale sector accelerated even in 2019. Shareholders and lenders have been becoming disenchanted with the sector for a while. But I do expect bankruptcies to set a record unfortunately in 2020, perhaps spilling over into 2021 as well.

 

But when I look at the US energy sector, I’m also paying attention to a lot of news about the US government making a lot of noise about wanting to help the energy sector. So whether it be, opening up the Strategic Petroleum Reserve, allowing producers to store oil there or to giving them loans from the Fed’s Main Street Lending program. All of that, remains to be seen, and we’ve heard some ideas about banning or putting tariffs on OPEC crude and so on, which probably won’t happen. But I think some of these other measures will happen.

 

My concern is that for most companies, it will probably be too little too late. So I do expect a huge consolidation, and unfortunately a lot of layoffs. People will just have to reinvent themselves, learn new skills, because there may be no going back to oil sector jobs.

 

TN: I think you’re right. I think it’s a generational change. I think it’s a really tough time, and you know these people, it’s nothing they deserve, it’s nothing they’ve even done. But it’s just a very tough global situation where supply outweighs demand. It’s that simple.

 

So Vandana, this has been amazing. I haven’t done any of these interviews that are this long. I’m so grateful to get this much of your time. Thanks you and I’m hoping maybe we can revisit with you in a few months see where things are and take stock of what the future holds?

 

VH: It’s been my pleasure, Tony and I’d love to do this again and thank you to our viewers who’ve stayed with us all the way to the end. I hope it has been worth it.