Author: marketsp

Morning Markets Brief 3-18-2020

Summary and Price Action Rundown

Global financial markets are relapsing to the downside this morning as investors ponder whether even the radical stimulus and support measures being enacted by central banks and governments will be sufficient to counteract the unprecedented economic fallout from the pandemic. S&P 500 futures are under pressure and point to a retracement of yesterday’s 6.0% rally, triggering another “circuit breaker” trading halt. The index is struggling to rebound even after shedding 12.0% on Monday, the worst percentage point loss since “Black Monday” in 1987. Amid wild swings over the past week, the S&P 500 is down 21.7% on the year, and 25.3% below its mid-February record high, as investors come to grips with the unprecedented ramifications of the pandemic and question the potential for government measures to counterbalance the multifaceted economic and financial impact. EU equities are down nearly 6% while Asian stocks posted more moderate downside overnight. Prospects for muscular fiscal stimulus are pushing Treasury yields higher, with the 10-year yield above the key 1.00% level, but EU sovereign bond markets are selling off in a less orderly manner (more below). Meanwhile, the dollar continues to march to multi-year highs. Lastly, oil prices are continuing their swoon, with international benchmark Brent crude sinking below $28 per barrel.

Heightened Uncertainty Persists Despite Bold Policy Efforts to Cushion the Economic Shock

With policymakers enacting ever more radical measures to confront the interlocking public health, economic, and financial crises brought on by the pandemic, investors are grappling with questions over the sufficiency, as well as the potential side-effects, of such policies. Monday’s panicky price action, even after powerful easing on Sunday evening by the Federal Reserve, shifted the onus back to the Trump administration and Congress, as investors confront the fact that broad swaths of the US economy, businesses and workers alike, will need direct and significant financial support from the government to make it through the coming weeks and months. In response, the Trump administration stepped up its efforts on the fiscal front yesterday (“going big”), with Treasury Secretary Mnuchin urging the Senate to quickly pass the emergency spending bill that he hammered out with House Speaker Pelosi last week and outlining the basics of a massive follow-up package. Mnuchin indicated that this third stimulus bill would feature up to $1.2 trillion in spending, encompassing “checks to Americans… in the next two weeks,” assistance for small and medium sized businesses, and liquidity for impacted industries, alongside $300 billion in tax payment deferrals as the April 15 deadline is pushed back for three months. Mnuchin downplayed concerns over the ballooning federal deficit and reportedly warned Republican lawmakers that unemployment could reach 20% in the absence of fiscal countermeasures. Meanwhile, analysts are noting a leaked US government report suggesting that the pandemic response could last 18 months and may require direct intervention in private sector by the executive branch, which is authorized during wartime conditions. While the US Treasury market appears to be absorbing the prospect of enormously increased supply, investors are noting dislocations in EU sovereign bond markets overnight, with sharp selloffs in the periphery, particularly Italy, but also in safe have German bunds. The European Central Bank is reportedly intervening to calm Italian bond market this morning.

 Some Easing of Systemic Stress Signals Amid Forceful Fed Moves

With the Federal Reserve enacting increasingly muscular liquidity programs, analysts are noting signs of selective improvement. After the extraordinary easing announced on Sunday night, including a steep rate cut and a return to quantitative easing (large scale asset purchases), the Fed has continued to activate crisis-fighting programs. Yesterday, it upped liquidity injections into short-term funding markets, announced support measures for the commercial paper market (with backing from the Treasury), and activated a lending program for primary dealers, accepting a wide range of collateral for the loans. Analysts are noting positive effects in US short-term funding markets, although repo rates remain choppy, and signs of interbank pressures and overseas dollar scarcity have moderated. However, credit markets remain consistent with a broad and worsening solvency crisis, and the commercial paper (CP) market is also experiencing continued stress despite Fed intervention.

Additional Themes

Increasingly Evident Economic Fallout from the Outbreak – In Germany, the ZEW Economic Sentiment Index plunged by 58.2 points to -49.5 in March, the lowest level since December 2011. Meanwhile, US February retail sales dropped 0.5% month-on-month (m/m), which was the largest decline in sales since December 2018. Economists expect a worldwide recession.

Boeing and US Airlines Request Government Support – An industry group has put forth a suggestion for up to $58 billion in aid and Boeing is seeking $60 billion in government support.

Afternoon Markets Brief 3-16-2020

Summary and Price Action Rundown

Major US equity benchmarks plunged today, erasing Friday’s outsized gains and extending losses deeper into “bear market” territory, defined as a 20% drop from recent highs, as investors assessed the mixed impact of forceful Fed liquidity operations and braced for a sweeping solvency crisis as the US and global economy grinds to a halt. The S&P 500 crashed 12.0% today, tripping another “circuit breaker” trading halt in the morning and posting its worst loss since “Black Monday” in 1987. This retraced Friday’s huge countertrend 9.3% rally that followed Thursday’s plunge of 9.5%. Amid these wild swings, the index is down 26.1% on the year, and 29.5% below its mid-February record high, as investors come to grips with the unprecedented ramifications of the pandemic and question the potential for government measures to counterbalance the multifaceted economic and financial fallout. Equities in Asia and the EU posted more moderate losses. Fed rate cuts over the weekend and acute risk aversion sent Treasury yields lower, with the 10-year yield closing at 0.74%, while the dollar edged back toward multi-year highs. Meanwhile, oil prices continued their swoon, with international benchmark Brent crude losing nearly 13% to sink below $30 per barrel.

Global Financial Markets Relapse Despite Powerful Fed Easing

Although the US public health and economic policy response to the pandemic has become increasingly energetic over the past week, the intensifying magnitude of the economic shock required to slow the contagion has forced investors to contemplate potentially severe economic and personal hardship over the coming months. More disorderly price action today has put the spotlight back on the Fed, the Trump administration, and Congress as investors ponder what measures beyond those already enacted might quell the panic. Some analysts cited President Trump’s indication that countermeasures against the virus could last into late summer months as adding to the pessimism, although others noted that policymakers need to level with the public about the outlook, no matter how dire. Travel restrictions and quarantines continued to tighten in the US and overseas, with increasing numbers of cities and states ordering restaurants, cafes, and bars to close. Meanwhile, the Senate is continuing to amend the emergency bill passed by the House last week, in cooperation with the Trump administration, as investors await details and the IMF announced that it would allocate up to $1 trillion to fight the impact of the outbreak. Though analysts continue to point to fiscal policy as the most appropriate form of stimulus to confront this crisis, monetary easing is becoming increasingly aggressive. Last evening, the Fed executed a surprise 100 basis point (bps) rate cut and announced a $700 billion quantitative easing program, alongside other measures to boost dollar liquidity in the US and overseas. But with this huge magnitude of monetary accommodation failing to steady market nerves, skeptical analysts are pointing to the inability of liquidity measures to address the economic reality that broad swaths of the US economy, businesses and workers alike, will need direct financial support from the government to make it through the coming weeks and months. – MPP view: We have suggested that the $8bn US fiscal package to fund the Covid-19 response is likely to be a down payment / first installment / foot in the door that would lead to more (possibly much more) fiscal spending to fight the virus, support industries, etc., and expected that the next tranche would top $150 billion, whatever form it takes. We also anticipated that reservations expressed by some administration officials and Congressional leaders over larger and broader fiscal stimulus would fade in the face of the worsening human and economic costs of the outbreak and rising systemic market stresses. We believe that the exceptionally adverse market reactions are helping spur necessary action, and Senator Schumer is upping the ante with calls for a $750 billion emergency spending bill.

Despite Strenuous Fed Accommodation, Signs of Heightened Systemic Stress Persist

Though the Federal Reserve has enacted major liquidity programs, significant fundamental strains remain evident in global financial markets, drawing comparisons with the global financial crisis. Analysts have monitoring significant and rising pressure in short-term funding markets (which first emerged in September), overseas dollar liquidity, credit market metrics, commercial paper markets, and interbank funding. For context, systemic risks, like those that manifested themselves in the global financial crisis in 2008, involve threats to the functionality of markets, availability of liquidity, and creditworthiness of companies and banks as opposed to standard market stress, which results in sometimes deeply adverse, but still orderly, price action. The Fed’s actions on Friday and over the weekend appear to have had a positive effect on US short-term funding markets, although repo rates remain choppy, though overseas dollar liquidity gauges have worsened further. Credit markets, however, remain consistent with a broad and worsening solvency crisis, particularly in some of the most impacted sectors, like energy, which is suffering further damage from the Saudi versus Russia oil price war. The commercial paper (CP) market is also experiencing continued stress, with some analysts suggesting that the Fed should begin to directly purchase CP in an effort to unfreeze this key source of corporate funding. EU financials, a perennial weak link in the global systemic risk chain, are also evidencing increasing credit pressure, as the cost to insure against default of European subordinated bank debt reaches levels last seen in 2012. – MPP view: The Fed continues to battle the acute liquidity strains on various fronts, and we do not doubt that it has the tools to address these shortages, both here and abroad. However, the continually worsening outlook for a severe economic impact from pandemic has forced market participants to confront the likelihood of a major, multi-sector corporate and household solvency crisis over the coming months. We had hoped that the market panic over the looming solvency risks could be temporarily stalled by Fed liquidity operations and promises for more coordinated fiscal and monetary action, but it appears that market participants are demanding more clarity, if not outright action, on direct government financial support to impacted industries and workers.

Additional Themes

Increasingly Severe Economic Impact of the Pandemic – Investors are now expecting a global recession or something even worse given the intensifying and unprecedented economic fallout from the epidemic. Over the weekend, China’s January-February economic releases were deeply negative. Industrial production fell 13.5% year-on-year while retail sales and fixed asset investment cratered 20.5% and 24.5%. And while US data has only evidenced a minor impact of the outbreak thus far, the New York region manufacturing activity gauge for March crashed from 12.9 to -21.5, its worst level since 2009, providing a grim harbinger of the economic damage to come. Tomorrow’s retail sales and industrial production numbers for February are expected to remain steady before almost certainly succumbing to steep contraction this month. Goldman Sachs has joined other economists in forecasting stagnant growth in the first quarter (1Q) and a steep contraction in 2Q.

 US Airlines Request Government Support – With Trump administration officials already expressing an openness to supporting US airlines, the industry trade group has put forth a suggestion for up to $58 billion in aid of various kind, including tax rebates and grants. Airline stocks moderately outperformed the broader S&P 500 today but have suffered outsized year-to-date losses between 40% and 60% for the major US carriers.

Morning Markets Brief 3-17-2020

Summary and Price Action Rundown

Global financial markets are attempting to stabilize this morning amid increasingly forceful stimulus and support measures from central banks and governments, though historic levels of volatility and some heightened indications of systemic risk persist. S&P 500 futures have been choppy this morning but remain in positive territory despite surrendering more significant gains overnight. The index is still struggling to rally even after shedding 12.0% in yesterday’s session, the worst percentage point loss since “Black Monday” in 1987, while the past week has featured multiple sessions with moves of over 9%. Amid these wild swings, the S&P 500 is down 26.1% on the year, and 29.5% below its mid-February record high, as investors come to grips with the unprecedented ramifications of the pandemic and question the potential for government measures to counterbalance the multifaceted economic and financial fallout. Equities in Asia were mixed but relatively steady overnight while EU stocks have retreated from their earlier highs of the day. Treasuries are pausing their rally, with the 10-year yield rising to 0.81%, while the dollar is reaccelerating to the upside amid overseas demand. Oil prices remain depressed, but international benchmark Brent crude is edging above $30 per barrel.

Policy Countermeasures Arrayed to Quell Market Panic

With the intensifying magnitude of the pandemic forcing investors to contemplate potentially severe economic and personal hardship over the coming months, policymakers are seeking to enact even more radical measures to confront the interlocking public health, economic, and financial crises. Yesterday’s panicky price action, even after powerful easing on Sunday evening by the Federal Reserve, shifted the focus back to the fiscal and public health response, as investors grapple with the fact that broad swaths of the US economy, businesses and workers alike, will need direct and significant financial support from the government to make it through the coming weeks and months. Though some analysts cited President Trump’s remark that countermeasures against the virus could last into late summer months as adding to yesterday’s pessimism, others noted that contemplation of such an adverse outlook should help stiffen the resolve and focus the efforts of US policymakers. On the public health side, travel restrictions and quarantines continued to tighten in the US and overseas, with increasing numbers of cities and states ordering restaurants, cafes, and bars to close. On the fiscal front, Treasury Secretary Mnuchin is urging the Senate to quickly pass the emergency bill that he hammered out with House Speaker Pelosi last week. Mnuchin is reportedly set to propose a third stimulus bill that would offer $850 billion in economic support, though much of the total is said to be a payroll tax cut, a proposal which received a chilly reception on Capitol Hill last week. In addition to any such broad stimulus, analysts expect that large-scale industry bailouts will also be necessary.

 Some Easing of Systemic Stress Signals Amid Forceful Fed Moves

With the Federal Reserve enacting major liquidity programs on Sunday, short-term funding and interbank markets appear calmer, though some significant fundamental strains remain evident in global financial markets. Analysts have been monitoring significant and rising pressure in short-term funding markets (which first emerged in September), overseas dollar liquidity, credit market metrics, commercial paper markets, and interbank funding. The Fed’s actions on Friday and over the weekend appear to have had a positive effect on US short-term funding markets, although repo rates remain choppy, and some signs of interbank pressures have moderated, while major US banks have agreed to tap the Fed’s discount window in unison in an attempt to facilitate its wider use (as in 2008). Still, overseas dollar liquidity gauges have worsened further. Also, credit markets remain consistent with a broad and worsening solvency crisis, particularly in some of the most impacted sectors, like energy, which is suffering further damage from the Saudi versus Russia oil price war. The commercial paper (CP) market is also experiencing continued stress, with some analysts suggesting that the Fed should begin to directly purchase CP in an effort to unfreeze this key source of corporate funding.

Additional Themes

Boeing and US Airlines Request Government Support – With President Trump expressing an intention to support US airlines, an industry group has put forth a suggestion for up to $58 billion in aid of various kinds, including tax rebates and grants. Airline stocks moderately outperformed the broader S&P 500 yesterday but have suffered outsized year-to-date losses between 40% and 60% for the major US carriers. Boeing is also seeking government aid.

Increasingly Evident Economic Fallout from the Outbreak – While US data has only evidenced a minor impact of the outbreak thus far, the New York region manufacturing activity gauge for March crashed from 12.9 to -21.5, its worst level since 2009, providing a grim harbinger of the economic damage to come. Today’s retail sales and industrial production numbers for February are expected to remain steady before almost certainly contracting steeply this month.

Five Minute Macro 3-16-2020

Coronavirus Fears continue to drive markets lower and now that fear is spreading into Heightened Systemic Risks. Global Central Banks and Governments continue to Deploy Emergency Stimulus as Global Data shows the Dire Impact of the Virus. Finally, Oil Crashed to Multi-year lows on the Saudi/Russia price war.

Morning Markets Brief 3-16-2020

Summary and Price Action Rundown

Global financial markets are again under severe duress this morning as historic levels of volatility translate into more disorderly trading conditions and rapidly rising systemic risks despite the increasingly proactive response from central banks and governments to restore calm. S&P 500 futures are frozen at a 4.8% “limit down” decline at the open, with ETFs suggesting a loss of over 9%. This would retrace Friday’s huge countertrend 9.3% rally that followed Thursday’s plunge of 9.5%, which was the heaviest percentage point decline for the index since “Black Monday” in 1987. Amid these wild swings, the index is down 16.1% on the year, and 19.9% below its mid-February record high, as investors come to grips with the unprecedented ramifications of the pandemic and ponder the ability of government measures to address the multifaceted economic and financial fallout. Equities in Asia posted more moderate losses overnight but risk aversion has re-intensified during EU trading. Treasuries are again reflecting safe-haven demand, with the 10-year yield at 0.76%, while the dollar is dipping below its recent multi-month top. Brent crude is again spiraling below $31 per barrel.

Global Financial Markets Relapse Despite Powerful Fed Easing

Although the US public health and economic policy response to the pandemic has become increasingly energetic over the past week, price action this morning indicates that the intensifying magnitude of the economic shock from the outbreak and the impact on investor confidence is threatening to overbalance all current policy countermeasures. Disorderly price action overnight has put the spotlight back on the Fed, the Trump administration, and Congress as investors ponder what measures beyond those already enacted might quell the panic. Last week, the halting US policy response through Thursday saw extreme market volatility devolve into panicked and disorderly trading, implicating 2008-like systemic risks (more below). On Friday, the Fed’s enormous liquidity injection of $1.5 trillion into short-term funding markets (with expectations of more to come), and an increasingly focused response from the Trump administration, alongside agreement on a bipartisan spending package, headed off a market seizure and sent risk assets higher to close a challenging week on a positive note. However, sentiment deteriorated over the weekend as investors contemplated a sudden stop of the US and global economy that could last for weeks, if not months, as stricter quarantines and travel restrictions were rolled out across the US, EU, and elsewhere. Last evening, the Fed executed a surprise 100 basis point (bps) rate cut and announced a $700 billion quantitative easing program, alongside other measures to boost dollar liquidity in the US and overseas. With this huge magnitude of monetary accommodation failing to steady market nerves, at least so far, skeptical analysts are pointing to the inability of liquidity measures to address the economic reality that broad swaths of the US economy, businesses and workers alike, will need direct financial support from the government to make it through the coming weeks and months.

 Signs of Heightened Systemic Stress

Alongside extreme equity market volatility and panicked Treasury trading, significant fundamental strains are appearing in global financial markets, drawing comparisons with the global financial crisis. Analysts have monitoring significant and rising pressure in short-term funding markets (which first emerged in September), overseas dollar liquidity, credit market metrics, and interbank funding. For context, systemic risks, like those that manifested themselves in the global financial crisis in 2008, involve threats to the functionality of markets and availability of liquidity, as opposed to standard market stress, which results in sometimes deeply adverse, but still orderly, price action. The Fed’s actions on Friday and over the weekend appear to be having some positive effects on dollar liquidity overseas, while analysts are monitoring US short-term funding markets to see if Friday’s improvements persist. Credit markets, however, indicate a broad and worsening solvency crisis, particularly in some of the most impacted sectors, like energy, which is suffering further damage from the Saudi versus Russia oil price war. The commercial paper (CP) market is also experiencing stress, with some analysts suggesting that the Fed should begin to directly purchase CP in an effort to unfreeze this key source of corporate funding. EU financials, a perennial weak link in the global systemic risk chain, are also evidencing increasing credit pressure, as the cost to insure against default of European subordinated bank debt reaches levels last seen in 2012.

Additional Themes

Chinese Economic Data Reflects Severe Coronavirus Impact – Over the weekend, China’s January-February economic releases were deeply negative. Industrial production fell 13.5% year-on-year while retail sales and fixed asset investment cratered 20.5% and 24.5%.

Economists Forecast US Recession – Goldman Sachs has joined other economists in forecasting stagnant growth in the first quarter (1Q) and a steep contraction in 2Q.

Looking Ahead – Political Economics of a Pandemic 3-6-2020

The coronavirus outbreak may not yet fit the scientific definition of a pandemic but it is clearly heading in that direction, according to some leading public health officials. Global financial markets are certainly not waiting for the official notification. Price action this week in Treasury markets is consistent with an exceedingly grim economic outlook and acute risk aversion, while the previously resilient S&P 500 is under increasing pressure.

Policymakers are not standing idly by. This week has seen a raft of rate cuts from global central banks, including an emergency 50 basis point reduction from the Fed on Tuesday. Meanwhile, the Trump administration is deploying an $8 billion spending package, which the President signed this morning after its swift trip to approval in Congress, and National Economic Council Director Kudlow is indicating that more fiscal measures are in the pipeline.

Meanwhile, US politics played out as a side-plot to the main narrative of the unfolding outbreak and the official responses being marshaled against it. There was plenty of debate among market participants over the extent to which US politics played a role in last week’s selloff, as Senator Sanders gained momentum in the Democratic field, and this week’s twin rallies on Monday and Wednesday, of 4.6% and 4.2%, respectively, which bookended a storming Super Tuesday comeback for Joe Biden, who is back as the presumptive frontrunner.

Many market contacts opined that Wednesday’s surge in the S&P 500 was specifically driven by Biden’s big win, and we certainly agree that healthcare stocks in particular received a boost given Biden’s opposition to Medicare-for-all. Shares of UnitedHealth and Anthem, two managed care giants, are up 9.2% and 6.8% this week despite all the chop in broader indexes. The degree of Joe-mentum in broader indexes and financial markets, however, is debatable.

Whether Medicare-for-all and other more radical healthcare reform proposals really are going to disappear with the Sanders campaign is also not so clear. Analysts are noting that a true pandemic has the power to shape societal norms and ideas, supporting (as one put it) “collectivist notions.” Calls from even Republican quarters that coronavirus patients should receive free treatment even if not insured may be just politicking, or it may represent a real shift. Bailouts for the service sector are unworkable, so perhaps direct payments to service sector workers (aka “helicopter money”) might be considered. It is certainly the time for policymakers to try to think creatively about responses to the epidemic, some of which might be difficult to entirely reverse when the coronavirus mercifully abates.

Looking ahead to next week, the European Central Bank is set to ease and global economic data will be scrutinized for any impact from the coronavirus epidemic.

  • US Economic Data
  • European Central Bank
  • EU Economic Data
  • China Economic Data

US Economic Data: Focus on consumer sentiment for virus impact  

Wednesday’s focus will be on the US Consumer Price Index (CPI) for February. January Headline CPI rose 0.1% m/m, coming in below forecasts of 0.2%. Shelter accounted for the largest increase, with cost of food and medical care services also rising. These increases offset a 1.6% decrease in the gasoline index. On a year-over-year basis CPI climbed to 2.5% from 2.3% in December and is the highest rate since October of 2018, mainly boosted by a 12.8% jump in gasoline cost. Core CPI, which excludes volatile items such as food and energy, increased 0.2% m/m, following a 0.1% gain in December and matching market expectations. Core CPI has risen 2.3% y/y, the same as in December.

The Producer Prices Index (PPI) for February will be released on Thursday. In January the PPI jumped 0.5% m/m, coming is well above market expectations of 0.1% rise. This was the largest monthly gain since October 2018, as services prices rose 0.7% and boosted by apparel, jewelry, footwear, and accessories retailing. On the other side, goods cost only advanced 0.1%. Year-on-year, the PPI rose 2.1%, the largest advance since May 2019. Core PPI also rose 0.5%, also well above the 0.1% forecasted.

On Friday the University of Michigan Consumer Sentiment Index for March will be released and will provide one of the first readings on how the coronavirus is affecting the consumer. February was revised slightly higher to 101 from a preliminary 100.9 and is the highest reading since March of 2018. The gauge for current conditions was higher than expected, while expectations rose less. One-year inflation expectations were 2.4%, while the five-year outlook was 2.3%. The coronavirus was mentioned by 8% of all consumers in February although on the last days of the February survey, 20% mentioned the coronavirus due to the steep drop in equity prices, as well as the CDC warnings about the potential domestic threat of the virus. While too few cases were conducted to attach any statistical significance to the findings, it is nonetheless true that the domestic spread of the virus could have a significant impact on consumer spending.

European Central Bank: No time to waste 

On Thursday the ECB will hold their Interest Rate Decision. At its January meeting the ECB left the key interest rate on the main refinancing operations steady at 0%, which was widely expected. The marginal lending facility was also kept at 0.25% and the deposit facility at -0.50%. During the press conference, ECB President Lagarde failed to provide any new information on the monetary policy, economic outlook and strategic review. Lagarde added that incoming data is in line with the ECB baseline scenario and there are some signs of moderate increase in underlying inflation. She added that the governing council stands ready to adjust the instruments if needed. At a subsequent speech in February, Lagarde called for fiscal stimulus measures in the Eurozone, warning that monetary policy isn’t “the only game in town” and the longer the accommodative measures remain in place, the greater the risk that side effects will become more pronounced.

EU Economic Data: Feeling contractions 

Thursday begins with Eurozone Industrial Production (IP) for January. December IP plunged 4.1% y/y, following a 1.7% contraction and compared to market forecasts of a 2.3% decline. The latest figure matched the December 2018 drop, which was the biggest since November 2009. Capital goods output led the fall, followed by intermediate goods, energy and durable consumer goods. Among the bloc’s largest economies, there was a contraction in Germany, Italy and France, while Spain’s output was little changed. For full year 2019, IP shrank 1.7%, the steepest contraction since 2012.

Chinese Economic Data: Price check  

The week begins with China’s Consumer Price Index (CPI) for February. January CPI jumped to 5.4% y/y from 4.5% in December and above market consensus of 4.9%. This is the highest inflation rate since October 2011 due to rising pork prices, stronger demand during the Lunar New Year holiday and the ongoing coronavirus outbreak. Food prices went up 20.6% y/y, the most since April 2008, with pork prices rising for the 11th month in a row and at a steeper rate. Pork prices have been rising during the last year amid a prolonged African swine fever epidemic and in January 2020, several lockdowns and transport restrictions due to the coronavirus outbreak weighed on the pork cost even more.

Friday begins with Chinese Foreign Direct Investment (FDI) for February. In January FDI into China rose 4% y/y to CNY 87.57 bil, or 2.2% to $12.68 bil. In yuan terms, foreign investment in high-tech industries went up 27.9 percent and accounted for 35.8 percent of the total FDI, with investment in high-tech service increasing 45.5 percent. Among the main sources of investment, FDI into China rose mainly from Singapore (40.6 percent), South Korea (157.1 percent), and Japan (50.2 percent); while FDI from the countries along the “Belt and Road” and ASEAN advanced by 31.3 percent and 44.8 percent, respectively.

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: https://marketspolicy.com/podcast-2/

 

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).

Looking Ahead – Increase the Dosage

With the outbreak widening in the US and our lives facing an increasing degree of disruption, the obvious priority is the public health response, and of course any meaningful improvement on slowing the spread of cases or widening the diagnostic net (let alone finding more effective treatments or a vaccine) would induce a chain reaction of positive developments…

Looking ahead to next week, the Fed will be in the white hot spotlight, while the Chinese central bank is also likely to ease and some economic data is due. Stay safe and well!

  • Federal Reserve
  • US Economic Data
  • China Central Bank
  • EU Economic Data

Morning Markets Brief 3-13-2020

Summary and Price Action Rundown

Global financial markets are attempting to stabilize this morning after historic levels of volatility this week began to translate into more disorderly trading conditions and rapidly rising systemic risks, prompting an increasingly proactive response from central banks, though fiscal measures, particularly in the US and Germany, remain lacking. S&P 500 futures point to a 4.4% jump at the open, though this is dwarfed by yesterday’s plunge of 9.5%, which was the heaviest percentage point decline for the index since “Black Monday” in 1987. The index’s year-to-date losses stand at 23.2% while the downside from the mid-February record high is 26.7%. For context, investor optimism over prospects for synchronized stimulus from global central banks and governments to counteract the economic costs of the coronavirus epidemic evaporated yesterday as wrangling continued over US fiscal support and central bank action failed to support broad investor confidence. But nerves are steadying a bit this morning as headlines suggest that Congress and the administration may be closing in on an emergency spending deal today, while investors are focused on potentially dramatic stimulus from the Fed at their meeting next week, if not before. Equities in Asia posted steep losses overnight but today’s equity rebound began this morning in the EU. After the Fed stepped in yesterday to address some trading dislocations in Treasuries, the 10-year yield is up to 0.86%, and the dollar is hovering near top of its recent trading range. Brent crude is bouncing to $35 per barrel.

Hope Reemerges for a More Concerted US Government Response to the Pandemic  

After market confidence was progressively undermined by this week’s lagging US efforts to marshal a significant fiscal response to counter the economic fallout from the pandemic, investors will be intently focused on the US spending bill expected to be finalized today. With fiscal support widely deemed to be the most effective means for governments to diminish the human and economic toll of the outbreak, a sizeable and strategic US emergency budget that is emblematic of bipartisan unity would be a key step toward stabilizing market sentiment. Lack of apparent progress and partisan bickering over government budgetary support to help address the growing economic impact of the pandemic has been a significant downside catalyst this week, alongside President Trump’s Wednesday address to the nation, which focused on travel restrictions from the EU rather than domestic economic support or progress on virus testing capabilities. Meanwhile, fiscal stimulus measures have been ramping up overseas this week. The UK unveiled a $39 billion spending package, Australia announced a $10-13 billion plan, and Italy upped its program to $28 billion, which includes tax credits to hard-hit companies as the EU provides fiscal leeway to the indebted country. Also, Japan is marshalling a $15.6 billion anti-virus budget and Germany’s central bank president Weidmann advocated deficit spending. Meanwhile, the governments of Spain, Italy, and South Korea took a step reminiscent of the global financial crisis and banned short-selling of certain equities.    

 

Focus on the Fed as Extraordinary Easing by the European Central Bank Rings Hollow 

Monetary accommodation is being deployed in an attempt to blunt the deepening economic impact of the coronavirus and address liquidity issues, but the European Central Bank (ECB) underwhelmed yesterday, putting additional pressure on the Fed to step up its stimulus. The adverse market reaction to central bank easing yesterday highlights the difficult situation for monetary policymakers who lack cover due to stalled fiscal efforts. The ECB did not cut rates as expected but augmented its extraordinary monetary support by creating a new concessionary loan facility for small businesses and upping the asset purchase program, though some analysts were unimpressed with the temporary nature of the increase as well as well as ECB President Lagarde’s remarks that suggested a less permissive stance toward stabilizing the sovereign market pressures in the EU. Italian bonds sold off sharply following the ECB decision but have stabilized this morning. Later in the day, the Fed announced that $1.5 trillion would be on offer to address liquidity strains in short-term funding markets, as well as indicating that its balance sheet expansion program would now include purchases beyond three months, although this was not explicitly labeled quantitative easing. While short-term funding markets were soothed, broader markets received only a temporary lift from the targeted action. Futures markets project at least 75 basis points (bps) of Fed rate cuts by next week’s meeting and market participants are broadly expecting the official restart of quantitative easing.

 

Additional Themes

Overseas Monetary Easing – Overnight, central banks in Australia, China and Sweden released further liquidity into their banking systems, while Norway enacted an emergency 50bps rate cut. The Bank of Japan is reportedly mulling buying commercial paper and corporate bonds.

US Consumer Confidence in Focus – This morning, the March U. Michigan Consumer Sentiment index will be one of the earliest indicators of how the US economy is weathering the epidemic.

 

Morning Markets Brief 3-11-2020

Summary and Price Action Rundown

Global financial markets are mostly retreating anew after yesterday’s rebound, as investors continue to grapple with deep uncertainty over whether government stimulus efforts can counteract the widening human and economic toll of the coronavirus outbreak. S&P 500 futures point to a 2.1% loss at the open, which would retrace a meaningful portion of yesterday’s 4.9% rally that followed Monday’s 7.6% plunge. Amid the wild swings, the index’s year-to-date losses stand at 10.8%. This sharp back-and-forth price action continues the pattern from last week, as markets are driven by the waxing and waning of investor optimism over prospects for synchronized stimulus from global central banks and governments to counteract the economic costs of the coronavirus epidemic, with the start of an oil price war between Saudi and Russia over the weekend exacerbating the volatility. Equities in Asia and the EU were mixed overnight, while oil prices are turning lower again, with Brent crude sinking toward $36 per barrel. Meanwhile, Treasuries are resuming their historic rally, with the 10-year yield declining to 0.70%, and the dollar is settling lower amid questions over US fiscal stimulus.

Global Central Banks Continue Enacting Proactive Stimulus  

Vigorous monetary accommodation is being deployed in an attempt to blunt the deepening economic impact of the coronavirus, with an emergency rate cut by the Bank of England this morning and further easing expected from the European Central Bank and Federal Reserve in the coming days. Though fiscal support is a key focus, given the expectation of diminished efficacy of monetary easing with rates already so low, central banks have been acting swiftly to frontload their easing. Earlier this morning, the Bank of England announced an emergency 50 basis point (bps) rate cut, bringing the policy rate to 0.25%. Governor Carney emphasized that the impact of the virus is likely to be temporary but noted that monetary policy can augment fiscal support, which is set to be announced today in the UK. Meanwhile, European Central Bank (ECB) President Lagarde issued a warning about the potential severity of the economic and market fallout from the virus, stating that it could equal the impact of the global financial crisis if not addressed properly. German Chancellor Merkel this morning is echoing Lagarde’s call for a unified EU economic response. The ECB is set to cut rates and add to liquidity measures at tomorrow’s meeting. The Fed has been upping its cash injections into short-term funding markets, while futures markets continue to price in steep interest rate cuts. Specifically, futures reflect 50 basis point (bps) of cuts by the March 18 Fed meeting, with around 75bps of total easing reflected by April. Some analysts project that rate cuts will be accompanied by the transformation of the ongoing asset purchase program into official quantitative easing.   

 Prospects for Fiscal Stimulus Remain in Focus 

On the assumption that fiscal support will be the most effective means for governments to diminish the human and economic toll of the outbreak, investors are highly attuned to US and overseas efforts to marshal strategic and significant government spending. Although President Trump did not fulfill his pledge to announce “very dramatic” economic stimulus measures yesterday, statements of intent, discussion of options, and signs of bipartisan support helped shore up shaky market sentiment in later trading, though risk aversion has re-intensified again overnight. Speculation over the timing and size of additional fiscal support following the initial $8 billion stimulus bill has been among the factors driving considerable swings in US equities over recent days. President Trump is reportedly pushing for a payroll tax cut through year-end, Secretary Mnuchin indicated that House Democrats were on board in principle with further budgetary support, and reports detailed deepening cooperation between federal agencies, the Fed, and Capitol Hill, including a potential consensus on extending the April 15 tax deadline. Overseas, fiscal stimulus measures are also ramping up in tandem. Australia announced a $10-13 billion spending package overnight, while Italy upped the program it announced yesterday to $28 billion, which includes tax credits to hard-hit companies as the EU provides fiscal leeway to the indebted country. Also, Japan is marshalling a $15.6 billion anti-virus budget and ECB President Lagarde demanded a fiscal response from EU leaders.

Additional Themes

Economic Impact Increasingly Evident – Japan’s February machine tool orders sank to their lowest level since January 2013 as early datapoints continue to suggest a severe impact from the outbreak on global growth. Today’s US inflation data for February will be discarded as stale, with Friday’s release of March U. Michigan Consumer Sentiment to be among the earliest indicators of how the US economy is weathering the epidemic.

Oil Price Shock Reverberates – With oil prices relapsing again today and spreads on high yield energy credits widening to a four-year peak, nearly equaling the worst levels from the 2016 oil price crash, the White House is reportedly mulling support for shale oil producers.