Afternoon Markets Brief 3-4-2020

Summary and Price Action Rundown

US equities posted significant gains for the second time this week as global central banks and governments redoubled their commitment to coordinated stimulus after yesterday’s false start, while investors also pointed to easing US political uncertainty. The S&P 500 soared 4.2%, nearly matching Monday’s 4.6% rebound and negating yesterday’s 2.8% loss, as investor optimism over coordinated global stimulus measures rebounded amid a barrage of official communications and news reports outlining increasingly synchronized and energetic stimulus measures to counterbalance the impact of the coronavirus epidemic. The index is now down 7.6% from mid February’s record high. Overnight, equities in Asia and the EU were posted more moderate gains. Treasuries were mixed, as the 10-year yield popped above 1.00% after touching a record low of 0.90% yesterday, while the 2-year yield continued to fall on building expectations for further Fed easing (more below). The dollar posted modest gains to stabilize below its recent multi-year highs. Brent crude gave up early gains but remained above $51 per barrel as traders anticipate more supply curbs from OPEC. – MPP note: Please listen to a special edition of our podcast, A Conversation on Coronavirus, featuring noted epidemiologist Dr. Christopher Mores. Links available on our website:


Investor Optimism Over Global Stimulus Rebounds Amid Increasing Signs of Coordination

After financial markets registered disappointment with yesterday’s lukewarm G-7 statement and isolated emergency Fed rate cut, global central banks and governments started to get their act together today. With investors focused on prospects for robust and unified action by central banks and governments to mitigate downside risks to the global economy and financial markets from the epidemic, messaging improved today. French President Macron tweeted that he had engaged in a productive discussion with President Trump and that the G-7 leaders were preparing to “coordinate our scientific, health, and economic response” to the virus. This contrasted with yesterday’s G-7 statement, which provided scant reference to any actual coordination, indicating only that each member country would employ “all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks.” Regarding fiscal stimulus, the statement merely noted that it could be used “where appropriate,” while central banks “will continue to fulfill their mandates.”

Given that investors are cognizant that already-low interest rates render central bank cuts less impactful, it was important that the emphasis on fiscal stimulus was deepened today. French Finance Minister Le Maire indicated that EU governments must be ready to deploy fiscal stimulus, which will be “more effective” than monetary easing, a view echoed by the Eurogroup Chair Centeno. In the US, Congress is set to approve an $8 billion spending package aimed at countering the outbreak. Nevertheless, expectations for further monetary easing deepened (more below) – MPP view: Yesterday, we predicted that the G-7 would deepen its engagement and coordination going forward but that it would take time. The timeline for stimulus may be shorter than we expected and the fact that it only took them a day to fix the messaging is encouraging. Hopefully execution will be similarly swift, as the worst of the social and economic impact of the virus likely lies in the months and weeks ahead for the EU and US.

Expectations for More Aggressive Policy Easing Overbalance Initial Disappointment

The Fed’s proactive easing yesterday, alongside ongoing accommodation efforts from other global central banks, matched investor expectations but failed to boost sentiment yesterday, but investors have refocused on prospects for even more monetary stimulus. Market participants expressed concern that yesterday morning’s emergency 50 basis point (bps) rate cut by the Fed, its first such intra-meeting cut since the global financial crisis, and Chair Powell’s subsequent press conference failed to steady market sentiment. Analysts pointed to a variety of factors, including the lack of any guidance for further rate cuts or extraordinary stimulus measures, as well as Chair Powell’s clear concern over the potential economic impact of the virus.

Rather than reflecting a policy pause, futures markets shifted the goalposts to price in yet another cut at the March 18 meeting, with around a 60% chance that the FOMC opts for another 50bps reduction at that meeting. Around 75bps of total additional easing is reflected by September. Some analysts project that rate cuts will be accompanied by an increase in liquidity operations, including the transformation of the ongoing asset purchase program into official quantitative easing. This morning’s Fed injection of liquidity into funding markets to meet outsized demand for cash has raised speculation that the FOMC will need to augment its asset purchase efforts.

Meanwhile, Australia’s central bank cut rates yesterday, as did Bank Negara Malaysia, and the Bank of Canada reduced rates by 50bps at its meeting today. The Bank of Japan has been injecting additional liquidity into its markets, the European Central Bank is expected to cut rates at their meeting next week, and the Bank of England (BoE) has pledged “powerful and timely” support, with analysts anticipating an emergency BoE rate cut. – MPP view: We have expected the Fed to be responsive to the impact of the epidemic but we worried that there may be a critical lag in their response due to general policy inertia and specific concerns about making major monetary policy moves in an election year.

We noted yesterday that the Fed cuts should be made at an emergency meeting this week and ought to be accompanied by signals that quantitative easing (QE) will be deployed if necessary in order maximize that odds of durably calming investor nerves, steepening the Treasury yield curve, and capping dollar appreciation. The omission of any reference to the potential for extraordinary easing measures like QE, we believe, was a significant factor in the adverse market reaction and expect the Fed to correct this oversight promptly.

Additional Themes

US Political Uncertainty Eases – Some analysts are suggesting that Joe Biden’s strong showing on Super Tuesday, which has dramatically upped his delegate count and vaulted him back into front-runner status, is a key factor in today’s rally in US equities. But this narrative fails to explain why EU stocks would also be advancing this morning. For now, the impact of US politics is likely to be stronger in certain sectors, like policy-sensitive healthcare which rallied substantially today, than in the broader indexes.

Global Economic Data Shows Uneven Virus Impact – China’s service sector purchasing managers’ index (PMI) for February plummeted to a record low of 26.5 after last month’s reading of 51.8. For context, PMIs above 50 denote expansion. The US service PMI is due today.

OPEC Prepares to Support Oil Prices – Crude futures are receiving support this week on reports that Russia is set to cooperate with additional OPEC supply cuts designed to stem oil price downside. The cartel’s summit in Vienna on Thursday and Friday is set to yield steeper output curbs, which sources suggest could be up to 1 million barrels per day (bpd).