Anti-viral drug and oil hold the key to market's recovery

US stocks fell slightly last week giving back some of the largest two-week gains since the 1930s, after an oil crash threatened to complicate efforts to get the global economy back on an even keel in the wake of the novel coronavirus lockdown.

This week, the improbable bull market could march on, as long as there are no nasty surprises from the Covid-19 drug development, the Federal Reserve or the oil markets.

For individual biotech companies, clinical-trial data is often a make-or-break factor. But the trial of Gilead Sciences' remdesivir on patients with severe Covid-19 symptoms may be the first on which the fate of the entire stock market has hung. In the last two weeks, the broad market has been swayed twice by leaked data from remdesivir trials. The first, from a University of Chicago test site, was positive, giving the market a boost. Last week's information suggested the drug had not performed well in a test in China.

This week's data will be the first official update and, could shift views on the likelihood of a near-term medical solution to the novel coronavirus pandemic.

"To get the economy to come back you need consumers to come back and shop, you need a therapy. With any positive headline on therapy you can see a connection because what you want is the demand side to pick up," said Quincy Krosby, chief market strategist at Prudential Financial. "If there is a therapy and restrictions are lifted, at some point consumers will return to the stores, restaurants included, albeit with social distancing."

Since the lockdown induced a sudden recession in mid-March, the stock market has behaved like a "balloon held under water" and the appearance of a viable cure could cause it to fly up further, said strategists at brokerage Alpha Capital Management.

There are some hopeful signs of that economic activity is rebounding in China, in Austria and other nations that have ended lockdowns. In the US, however, home to the deadliest outbreak, with more than 50,000 fatalities so far, there are indications that the return of commercial activity may be more tentative. National chains such as Macy's have said they would not reopen even as they received permission to do so in Georgia, South Carolina and elsewhere.

To Edward Moya, senior market analyst at foreign-exchange brokerage, Georgia could be the canary in the coal mine for the US economy and markets. "Georgia will give key insights to how comfortable businesses and consumers are with reopening their economy," said Mr Moya, in a note to clients. If there is a "spike" in cases, the Georgia experiment could send new shock waves through markets, he said.

The initial bounce in the stock market from mid-March lows was partly thanks to the Fed's intervention. "What the Fed did was to come in as the cavalry and provide stability across the financial spectrum," said Ms Krosby of Prudential Financial.

When the Fed delivers its policy statement on Wednesday, the central bank may face questions about how long it can support municipal finances and business lending, according to Ms Krosby. The question sceptics raise is: "'How do they extract themselves afterwards?'," she said.

Another major risk to the budding bull market is the oil crash and its repercussions. A game of chicken between the world's two largest producers, Saudi Arabia and Russia has led to a situation where production has remained more or less steady in the last two months even as demand has plummeted by 40 per cent or more. As a result, the world is drowning in the excess. The largest US storage facility in Cushing, Oklahoma, is near capacity and super tankers full of oil are drifting in oceans around the world, waiting for normal service to resume.

That led to the historic event on US futures markets last Monday. Not only did the price drop to zero: traders were paid US$37 a barrel to take oil for May delivery, meaning that prices were quoted as negative values.

"Nobody's flying, nobody's driving anywhere, the trains are running less," said one oilman with ownership interest in West Texas wells. He said spot prices received on crude from one of his wells had dropped to US$4 per barrel midweek. He did not expect a significant recovery in oil prices in the coming months. He also said the deals that sometimes emerge during oil busts were unlikely to happen, as drillers were left "confused" and "frustrated" by the rapid changes in production and consumption levels, leaving the mood on the Texas oil patch closer to hari-kari than opportunism, he said.

With major independent producers such as Chesapeake Energy already in distress, the oil crash threatens to destabilise the high-yield bond market and cause another round of layoffs. Most of the drillers on the Permian Basin of West Texas and New Mexico, the largest oilfield in the US, borrowed heavily to expand their operations, said the oilman. Even after a sharp recovery at the end of the week, the price of oil at US$17 a barrel was far below where most of these drillers could break even, he said.

One strategist said that the bull market in stocks may prove resilient as the world adjusts to the "new normal" of life with the novel coronavirus pandemic.