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As each month comes to an end, we always take a moment to reflect on what has happened and where the markets are headed. And this month, we have a lot to reflect on. Yesterday, April 29th, the US market rallied to a seven week high on a fury of good news,  strong earnings from Alphabet (Googles Parent company), hopes for a corona virus treatment, opening of several states and positive news on the ability for the Federal Reserve to keep spending.  

Like the old saying goes, April was a surly cat and threw the market some good punches; record setting negative oil, slowed consumer spending, record high government spending and soaring unemployment. But the market was prepared, blocked April’s moves and kept driving forward bolstered by indications of possible treatments and the gradual reopening of the world’s major economies.  The S&P500 has regained 30% since the March 23rd lows, with half those gains being posted in April. April 2020 is on track to become the best month for stocks since 1974 according to data from Howard Silverblatt, from S&P Dow Jones Indices. 

As we enter earning season, we will begin to see a much clearer picture of how the coronavirus crisis has affected businesses. So far major companies like Facebook, Microsoft, Amazon and Alphabet have all reported that they saw strong growth in sales and profit for the 1st quarter while Yum Brands, who owns KFC, Pizza Hut and Taco Bell are reporting mix results. Their Pizza Hut and KFC locations have seen reduced sales while Taco Bell has seen an increase.

Back home, in Canada, the first quarter included railway blockades, a teacher strike in Ontario, and finally, travel bans causing the steep declines in air and accommodations services. Then April came and we saw record low oil prices. But then suddenly, the good news started to come in. Much like the US, the Canadian government dedicated billions of dollars in stimulus money combined with the periodic glimmer of positive news; like Saskatchewan reopening for business, fueled investors optimism and that the glut of oil, perhaps, isn’t as bad as we thought.

The direction of the stock market is a combination of hard data and investor psychology. The price of a stock is based on how much investors think a company can make in the future. The market cares about the facts reflected today and more about how those facts affect the coming year. So when the news reports that March GDP fell 4.8%, that information was already built into the market and the investors are looking beyond that for the recovery to start.  Instead, market participants have latched on to the idea that the worst-case scenarios have been mitigated.

As we head into May, I believe that Aprils positive trend will continue. May will become a month of optimism as we begin to reopen the world, after successfully slowing the spread of COVID.  Now is a time to re-evaluate your holdings and position yourself for a post-covid reality. Being an investor means worry more about the quality of the stocks over when the perfect day to buy them is. Do not miss out on opportunities by trying to outsmart the market.

For the past six weeks, it seems like we are continually making history, and to be honest, I am ready for a bit of normalcy. Unfortunately, today was anything but normal, as the price of WTI broke all the previous records and traded below zero for the first time.

Today was unprecedented; the price for the May contract is breaking every price low since 1946, and at one point hitting -$40.32 a barrel. The extreme price lows show just how oversupplied the US oil market has become as COVID-19 shuts down industrial and economic activities reducing demand.  And while it was hoped that the deal from OPEC last week curbing supplies would help, it was too little too late. ​

So here we are today, facing a technical oddity, caused by traders flee the May Future contract ahead of its expiration tomorrow.  US storage room is non-existent, and while production cuts are being announced daily, it hasn’t happened quickly enough to avoid maximum storage levels.  The result is producers having to pay buyers to take the crude that they can not store. ​

What does this mean for Western Canadian select? Usually, WCS, which generally trades at a discount to WTI due to transportation, but today it is trading above WTI, as WCS was trading against the June contracts, not the May contracts. WCS is still not selling at a price that is supportive of production costs, closing at $9.02USD.​

I always like to include little positive thoughts to my writings, and I would like to note that we do expect as production is reduced and eventually, the easing of travel restrictions, we will see a rising demand for oil. While it is unlikely that we will see prices that we expected heading into 2020; hopefully, negative oil prices will be a once in a lifetime event. ​

Closing Prices April 20th, 2020​

WTI May contract -$37.63. ​

WTI June Contract $21.04​

WCS $9.02 USD

Last night while you were sleeping the British pound value plunged 6% in less than two minutes. The pound dropped to $1.18 against the USD crashing through its support levels which lead to a sharp selloff. The event created a new 31 year low for the pound after it leap past the previous three decade low.

The entire event took place over 2 minutes and 6 seconds. And changed the entire nation of Britain value by 6% in mere seconds. While the currency did eventually recover the question becomes how did this happen?

There are several scenario’s floating around to what could have caused the currency drop from a fat fingered trader, a wise trader taking advantage of low liquidity, option expiration dates, stop loss orders or the a statement by the French President Francois Hollande.

1) The first belief is that computer algorithms or fat finger trader resulted in big consequences. What most people believe happened is that a trade entered the wrong number or that a glitch in a trading algorithm resulted in the trade. This is not uncommon and occurred back in the flash crash of 2010. Usually, the trades are wiped from the records within hours as if they didn’t occur. Since this has not yet happened does make this less likely.

2) Low liquidity- If you look at the time that the trades occurred it was at an intersection of markets. New York traders had gone home for the day while the biggest markets in Asia were just drinking their coffee’s. If someone wanted to do this deliberately, this would be an ideal time. This, again, does seem unlikely, but is being talked about on the news.

3) Option expiries- Friday is the day that forex options tend to expire and can cause trading moves if the writers (banks) need to cover themselves. If you look at the option expiring last night, the majority was at 1.25 with a small amount at 1.23. What this means is that when the pound dropped below 1.25 it triggered a scramble of traders trying to sell the pound to protect themselves from losses.

4) Stop Loss orders- We have talked about this before- stop losses can cause unintended events. Stop loss can lead to unexpected trades that can drive a down day into a sharp drop. While you think a stop loss at 1.25 would sell your position at 1.25 the reality is it triggers selling as soon as it hits that level. This means you could be filled at the next buyer prices far below 1.25. Traders use stop losses to mitigate losses at pre-agreed levels when the markets move or when they are asleep like last night. It is possible that there was a large volume of stop loss orders that were executed last night.

5) The final theory is that an article by the French President on their stance of Brexit was published at 7:07am Hong Kong time. Because computer algorithms are made to find news regarding breaking stories and interpret them as negative or positive it Is possible the computer traded on the article. The publishing of the article occurred seconds after the pound started moving.

Uncovering the source of the pound’s sudden drop will be difficult as forex markets cover many trading systems and time zones with no single repository for information. As a result, it will be difficult to flag what exactly happened.

Australia is considering removing the AU$100 bill from circulation. The AU$100 bill is the largest circulating bill in Australia and there is 3 times as many AU$100 bills in circulation then AU$5 bills. Australia’s $50 and $100 bills make up 93% of all currency in the country.
Australia, like many developed countries, has seen an increasing reliance on digital transactions; credit card transactions for example increased 7.3% per annum since 2009. The task force in charge of analyzing the decision says that removing the AU$100 bill would reduce crime, increase tax revenue with few cash transactions and reduce welfare fraud.
Australia has a problem with mass welfare fraud by the elderly who use the $100 bills as a store of value. Instead of depositing their money at the bank, they withdraw the funds and store them in their cupboards so that they can qualify for discounted council rates, insurance, and phone rentals. The task force claims that the removal of the AU would reduce tax and welfare fraud$100 bill.
Last month, India suddenly withdrew their 500 and 1000 rupee banknotes to shut down a massive market of untaxed transactions.
As an investor, this just once again proves the growing need to watch out for investment opportunities in financial companies that facilitate cashless transactions.

It is not surprise to anyone living in Central Alberta that 2016 has been a difficult economy.
Throughout Central Alberta agencies looking to support families affected by the low oil prices are finding increased needs for support.
Retire First is pleased that for the 10th year, we are spreading the Christmas cheer by adopting a local family for Christmas. The staff of Retire First takes great care to make sure the children have the presents that they desire for Christmas morning along with money for groceries and a gift for their parents.
Doug Allan, President of Retire First, is pleased of his staff’s commitment to giving back to the community. “It is fun to be a secret Santa. Giving smiles to children and expecting nothing in return is the true meaning of Christmas.”

 

 

 

 

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