Category: Morning Markets Brief

Summary and Price Action Rundown

Global risk assets are on the upswing again after yesterday’s setback, with support from some key earnings reports and anticipation of exceptionally accommodative messaging from the Fed at the conclusion of its meeting this afternoon. S&P 500 futures indicate a 0.6% higher open, which would erase yesterday’s 0.5% loss that put year-to-date downside at 11.4% and the decline from February’s record high at 15.4%. Equities in the EU are lagging this morning, though Asian stocks were mostly higher overnight. Longer duration Treasury yields are edging lower, with the 10-year yield at 0.58%, while a broad dollar index is retracing more of last week’s upside ahead of a Fed meeting that will provide further details on its unprecedented level of monetary easing and credit support measures. Crude oil is extending yesterday’s recovery from nearly 20-year lows, with Russia’s Energy Minister urging unified price support.

 

Equities Find Support from High-Profile Earnings Releases

First quarter (Q1) earnings reports remain uneven but Google’s results set a positive tone for the upcoming reports of other tech giants, many of which report this week after their stocks have led the month-long rebound. After yesterday’s closing bell, Google released its earnings report with an earnings-per-share (EPS) value of $9.87, narrowly missing on consensus by just 0.34 cents per share. However, sales from the company are up 13.3% from last year’s Q1 results. This dispelled investor concerns of weak advertisement revenue during the pandemic. Shares of Google are up 7.8% in pre-market trading, which would nearly erase their year-to-date downside. Starbucks also issued its results after market close, generally meeting analysts’ expectations for the quarter, with revenue falling 5% year-on-year due to lost sales from the pandemic. In the earnings statement, Starbucks declared it has opened virtually all locations in China with modified operations and is looking to reopen in the US with “the best in-class-safety protocols.” The coffee chain’s stock price is only down 10.5% on the year after a strong April rebound and is consolidating in pre-market trading. Ford’s results were more downbeat, however, dramatically undershooting earnings forecasts and sending its shares 3.9% lower in early trading after already losing 42.2% on the year. Today, investors will parse Q1 results from Facebook, Boeing, Microsoft, GE, Mastercard, and Tesla. The remainder of the week features Apple, Amazon, Visa, McDonalds, and Comcast tomorrow, and ExxonMobil, Honeywell, Clorox, and Colgate Palmolive on Friday. Amazon will be of particular interest, with its stock at a record high and its delivery services taking on an even greater importance during the widespread lockdowns. With 173 of the S&P 500 companies having reported, 66% have surprised to the upside on sales and 68% have topped earnings expectations. However, aggregate earnings have come in 3.2% below estimates thus far.

Fed Accommodation in Focus

Market participants are awaiting today’s Federal Reserve decision, with communications over ongoing programs and strategies for further easing likely to feature most prominently. No major monetary programs are expected to be unveiled by the Fed today at the conclusion of its two-day meeting, though there is speculation that the FOMC may tweak some of its policy levers in order to put a floor under the effective federal funds rate, which is languishing at the low end of its 0-0.25% range. Overall, analysts will be highly attuned to details provided by the FOMC and Chair Powell on existing programs, with a particular focus on the volume of bond purchases. There is also likely to be discussion of further easing options in case the Fed needs to up the ante in its fight against deflation, which some market-based gauges of inflation expectations suggest is a deepening risk. Specifically, Chair Powell is likely to review his assessment of yield curve control, which the Bank of Japan (BoJ) is employing, and negative interest rate policy (NIRP), which is predominant in the EU and also being used by the BoJ. Questions about equity purchases by the Fed are also likely to be raised.

Additional Themes

US Q1 GDP Set to Contract – This morning’s release of Q1 GDP is expected to reflect a 4.0% annualized rate of contraction after a 2.1% pace of expansion in Q4 of last year, with estimates varying widely from 0% to -10%. This retrenchment, though the worst quarter since early 2009, pales in comparison to forecasts for Q2, which are exceptionally diffuse and uncertain but feature stunning estimates of a 30-40% range of economic contraction.

US Consumer Sentiment Conveys a Hint of Optimism – The Conference Board Consumer Confidence Index deteriorated further in April, following a sharp decline in March. The Index now stands at 86.9, down from 118.8 in March. However, the Expectations Index, based on consumers’ short-term outlook for income, business and labor market conditions, improved from 86.8 in March to 93.8 this month, in anticipation of “the possibility that stay-at-home restrictions will loosen soon, along with a re-opening of the economy.”

 

Summary and Price Action Rundown

Global risk assets are rising this morning as investors look ahead to key earnings reports and global central bank meetings this week, while closely monitoring plans to reopen some segments of the economy. S&P 500 futures point to a 1.1% higher open, which would extend yesterday’s 1.5% gain that put year-to-date downside at 10.9% and the decline from February’s record high at 15.0%. Equities in the EU are higher this morning as well, though Asian stocks were mixed overnight. Longer duration Treasury yields are holding yesterday’s modest upside, with the 10-year yield at 0.66%, while a broad dollar index is retracing more of last week’s upside but remains within its recent trading range. Oil prices are fluctuating near their 20-year lows from early last week, but the volatility is not spilling over into broader risk aversion.

 

Equities Increasingly Optimistic Ahead of High-Profile Earnings Releases

Though uneven first quarter (Q1) earnings have provided scant direction to equities thus far, indexes have been rallying sharply ahead of this week’s calendar of key reports. Today, investors will parse Q1 results from Google, Ford, 3M, Caterpillar, and Starbucks. The remainder of the week also features household names, including Facebook, Boeing, Microsoft, GE, and Tesla tomorrow, Apple, Amazon, Visa, McDonalds, and Comcast on Thursday, and ExxonMobil, Honeywell, Clorox, and Colgate Palmolive on Friday. Amazon will be of particular interest, with its stock at a record high and its delivery services taking on an even greater importance in people’s lives during the widespread lockdowns. Other companies reporting this week include D.R. Horton, Harley-Davidson, Southwest, Mondelez, Pfizer, United Airlines, UPS, Archer-Daniels-Midland, ADP, eBay, The Hartford, Mastercard, Qualcomm, and Yum! Brands. Thus far, earnings season has featured stark divergence between the corporate winners and losers from the pandemic. While companies like Netflix and Target have benefitted from increased subscribers and robust online sales, respectively, banks and credit card companies have had to aggressively prepare for credit deterioration. Brick and mortar retailers like JC Penney, which is in advanced bankruptcy talks with lenders, and travel sector companies have suffered an exceptionally adverse impact. With 133 of the S&P 500 companies having reported, 62% have surprised to the upside on sales and 67% have topped earnings expectations. However, aggregate earnings have come in 4.3% below estimates thus far.

Fiscal and Monetary Support Remain in Focus

As market participants await tomorrow’s conclusion of a two-day Federal Reserve meeting, the prospect for swift passage of CARES Act 2.0 appears to be improving on Capitol Hill. Though no new policy actions are expected to be unveiled by the Fed tomorrow, yesterday it announced an expansion of its $500 billion Municipal Liquidity Facility to allow access for more cities and counties and extended the duration of the program. Meanwhile, only days after President Trump signed the latest pandemic relief bill, the focus is already shifting to the next round of support, the CARES Act 2.0. For context, the latest bill that President Trump signed on Friday provided an additional $320 billion for the Small Business Administration’s pandemic relief loan facility, the Payroll Protection Program (PPP), of which $30 billion is set aside for smaller banks and credit unions and another $30 billion will be funneled through even smaller lenders. Reports suggest that this amount could be exhausted within days. Additionally, $60 billion will go to additional Economic Injury payouts, $75 billion to hospitals, and $25 billion to fund testing efforts, $18 billion of which is directly to states’ testing efforts. Yesterday, Senator McConnell indicated that the Senate “probably will” pass another economic support package, while also softening his stance on state and local funding aid and backing off his advocacy of state bankruptcy as a potential avenue for resolving budgetary woes. Additionally, reports suggested that the administration is floating the idea of a “negative payroll tax” and a White House spokesperson said that infrastructure spending will be a “big part” of CARES Act 2.0.

Additional Themes

Oil Prices Near Lows Again – International benchmark Brent crude and US benchmark WTI prices have returned to last week’s multi-decade lows, with WTI again underperforming. Analysts noted that selling of the front-month June WTI future by popular oil ETF USO contributed to the outsized declines for this contract to below $12 per barrel, with the July WTI contract trading around $19. This comes after USO rebalanced its oil futures holdings multiple times last week into longer duration contracts in a bid to avoid implosion and escape the most pronounced volatility. For context, traders abandoned the expiring May contract last week amid aversion to physical delivery due to dwindling storage capacity. A recent Goldman Sachs report estimated that storage capacity may be exhausted within as little as three to four weeks.

GM Conserves Capital – With their US plants shuttered since mid-March, General Motors has suspended its quarterly dividend and stock buybacks to preserve cash during the pandemic.

Summary and Price Action Rundown

Global risk assets were mostly positive overnight at the outset of a week of key earnings reports and global central bank meetings, while investors keenly monitor plans to reopen some segments of the economy. S&P 500 futures indicate a 0.8% higher open, which would extend the index’s 1.4% gain on Friday that put year-to-date downside at 12.2% and the decline from February’s record high at 16.2%. Equities in the EU and Asia posted gains overnight, with the Nikkei outperforming after the Bank of Japan upped its monetary stimulus (more below). Longer duration Treasury yields are edging upward from recent lows, with the 10-year yield at 0.62%, while a broad dollar index is retracing a portion of last week’s upside. Oil prices are giving back some of their recent rebound, which took crude above its 20-year lows from early last week, as analysts remain focused on dwindling storage capacity for the supply glut.

 

Equities Rise into Key Earnings Reports This Week

Though first quarter (Q1) earnings reporting has been uneven thus far, this week’s calendar is set to feature many of the companies that investors expect to be successfully weathering the pandemic. Thus far, earnings season has featured stark divergence between the corporate winners and losers from the pandemic. While companies like Netflix and Target have benefitted from increased subscribers and robust online sales, respectively, banks and credit card companies have had to aggressively prepare for credit deterioration. Brick and mortar retailers like JC Penney, which is in advanced bankruptcy talks with lenders, and travel sector companies have suffered an exceptionally adverse impact. This week’s earnings calendar features household names including Apple, Amazon, Google, Facebook, Microsoft, 3M, Ford, Caterpillar, D.R. Horton, Harley-Davidson, Southwest, Mondelez, Pfizer, Starbucks, United Airlines, UPS, Archer-Daniels-Midland, ADP, Boeing, eBay, GE, The Hartford, Mastercard, Qualcomm, Yum! Brands, and McDonalds. Amazon will be of particular interest, with its stock at a record high and its delivery services taking on an even greater importance in people’s lives during the widespread lockdowns. With 123 of the S&P 500 companies having reported, 63% have surprised to the upside on sales and 67% have topped earnings expectations.

Policy Support in Focus Ahead of the Fed Meeting

With market participants citing aggressive monetary and fiscal policy actions as key factors underpinning the improvement in sentiment and market function over the past few weeks, Fed communications at its meeting this week are set to convey details of enacted programs. The FOMC will convene on Wednesday at a regularly scheduled meeting, and analysts anticipate that the focus will be on communications rather than actual policy action. Given that the Fed has undertaken a panoply of monetary measures of unprecedented size and scope over preceding weeks, this meeting offers the opportunity to provide needed clarity on the progress of the newly enacted programs. For context, gauges of systemic risk and funding market pressures have eased significantly over the past month as the Fed has offered trillions in liquidity support. Meanwhile, fiscal policy support has continued to expand, with Congress and the Trump administration finalizing the latest pandemic relief package, which is meant to backstop programs established in the $2 trillion CARES Act, ahead of the negotiations for CARES Act 2.0, which are expected to begin after Congress returns to session in early May. This latest bill provides an additional $320 billion for the Small Business Administration’s pandemic relief loan facility, the Payroll Protection Program (PPP), of which $30 billion is set aside for smaller banks and credit unions and another $30 billion will be funneled through even smaller lenders. Additionally, $60 billion will go to additional Economic Injury payouts, $75 billion to hospitals, and $25 billion to fund testing efforts, $18 billion of which is directly to states’ testing efforts.

Additional Themes

Reopening Plans in Focus – With Covid-19 hotspots showing a flattening of infection rates, government planning for restarting some segments of the economy, social life, etc. are helping boost sentiment. With lags in economic data, however, analysts’ ability to measure the progress of recovery will be uneven. Over the coming months, the most important metric will remain the infection rates in areas that have begun to reopen. Any significant re-intensification of Covid-19 transmission in places like New York and Italy, or even worse a return to lockdown as experienced in Singapore, would dent investor confidence. A NABE survey showed estimates for business to return to normal ranging from 5-8 weeks all the way out to 3-6 months.

Bank of Japan (BoJ) Augments Policy Support – The yen posted moderate gains versus the dollar, Japanese government bonds (JGBs) were steady, and the Nikkei outperformed overnight after the BoJ pledged to buy unlimited JGBs to achieve its policy goals, upped its cap on corporate bond buying to ¥20 trillion, and increased an emergency liquidity program for banks. For context, Japan has suffered an acceleration in Covid-19 infections recently.

Summary and Price Action Rundown

Global risk assets are mixed this morning after struggling to find direction this week as investors continue to ponder reopening and recovery efforts amid a continuation of dire economic data and uneven corporate earnings reports. S&P 500 futures point to 0.8% higher open, which would pare the index’s week-to-date loss of 2.7% that put year-to-date downside at 13.4% and the decline from February’s record high at 17.4%. Equities in the EU and Asian, however, were mostly lower overnight. Earlier this week, crashing oil prices had spilled over into broader risk aversion, but the ensuing rally as crude markets stabilized was dampened yesterday by news that a potential treatment for Covid-19 had performed poorly in drug trials. Longer duration Treasury yields are hovering near recent lows, with the 10-year yield at 0.60%, while a broad dollar index is flat within its recent range after starting this week on an uptrend. Oil prices are continuing to rebound but remain at very depressed levels.

Markets Look Past Dismal Data to Focus on Possible Recovery

Although initial jobless claims data signals an unemployment rate over 20%, the shock value appears to have completely worn off as investors remain focused on the prospects for a rebound. Yesterday, financial markets remained steady once again in the face of a gauntlet of historically grim economic readings. Last week, 4.427 million Americans filled for unemployment benefits for the first time, down from the previous week’s revised level of 5.237 million and compared to market expectations of 4.2 million. The latest figure brought the total reported over the past five weeks to over 26 million. The largest increases were reported in California, Florida, Texas, Georgia, and New York. The real numbers are most likely higher as some states like Florida have large backlogs due to ineffective systems and the self-employed are not included in these statistics. To put in perspective the magnitude of these losses, the US economy had created 22 million jobs since the Great Recession, which have now been destroyed in a month. Meanwhile, the IHS Markit Manufacturing Purchasing Managers’ Index (PMI) for the US fell to 36.9 in April from 48.5 in March, below market expectations of 38. For context, PMIs above 50 denote expansion. The reading pointed to the sharpest contraction in factory activity in 11 years amid the cancellation or postponement of both domestic and foreign orders. The Services PMI fell to 27.0 from 39.8 and below market expectations of 31.5, the steepest fall since the series began in October 2009. Also, New Home Sales plunged 15.4% month-on-month and 9.5% year-on-year to a seasonally adjusted annual rate of 627K in March, below a downwardly revised 741K in February and below market forecasts of 645K.

Corporate Earnings Reveal Divergent Winners and Losers Amid the Pandemic

Amid this second week of first quarter (Q1) corporate earnings season, certain companies and sectors are displaying resilience and opportunity amid the pandemic while others are severely impacted. Shares of railroad giant CSX rose 1.0% after the company was able to cut expenses by 7% percent as operating income declined by 3% compared to the same period last year. Meanwhile, Gap stock price edged back toward multi-decade lows after the retailer warned it may not have enough cash flow to sufficiently fund its operations. This contrasts to the announcement from Target CEO Brian Cornell that the retailer has benefited from a surge in online shopping but warned it will have lower profits this quarter due to higher costs. Since Feb. 2, Target has seen same-store sales up more than 7% and so far in April, comparable digital sales have increased by more than 275% from a year ago. Shares closed lower but are down less than 20% year-to-date after finishing last year at all-time highs. With 121 of the S&P 500 companies having reported, 65% have surprised to the upside on sales and 67% have topped earnings expectations. Next week’s earnings calendar features household names including Amazon, Apple, Facebook, Google, Microsoft, Boeing, 3M, Ford, and McDonalds.

Additional Themes

Discouraging News on Covid-19 Treatment Dampens Sentiment – Share of drugmaker Gilead Sciences fell 4.3% yesterday following headlines that remdesivir, which had apparently shown some promise in treating severely ill Covid-19 patients “flopped” in its initial trials, according to the Financial Times. The company attempted to qualify this assessment, suggesting that it may have had some positive results but US equities failed to recapture the highs of the morning. After rising as much as 1.6% in early trading, the S&P 500 closed in slightly negative territory.

Looking Ahead – Next week, the Federal Reserve and the Bank of Japan both have meetings that are expected to feature more communications than policy action after weeks of emergency monetary maneuvers. US and EU Q1 GDP figures are due, as are more US and global purchasing managers’ indexes (PMIs). These will surely deliver uniformly awful news though markets are priced for it and investors are firmly focused on prospects for recovery rather then depths of the current trough, as evidenced by the lack of price action in response to dire data.

Summary and Price Action Rundown

After three days of choppy price action to start the week, global risk assets are relatively stable this morning ahead of more US unemployment data and corporate earnings reports, while oil continues to recover from its historic swoon. S&P 500 futures indicate a flat open, which would hold the index’s week-to-date loss at 2.6%, keeping year-to-date downside at 13.4% and the decline from February’s record high at 17.3%. EU equities are similarly muted and Asian equities were mixed overnight. Earlier this week, global stocks had been trading in tandem with oil prices, which crashed on Monday and Tuesday but staged a decent rebound yesterday. With crude extending its moderate rally, the focus is shifting back to growth data, prospects for recovery, and company earnings. Longer duration Treasury yields are steady after pausing their ongoing downtrend, with the 10-year yield holding at 0.62%, while a broad dollar index is flat within its recent range after starting this week on an uptrend.

Investors Continue to Ponder Recovery Amid Deeply Depressed Economic Data

Although the incoming growth and labor market figures in the US and around the world remain historically dire, market participants are now less shocked by the depth of the trough than concerned about the prospects for a rebound. Investors are awaiting another grim tally of US unemployment claims this morning, with a consensus projection of 4.5 million new filings during the week ending April 18^th. In the week ending on April 11^th, 5.2 million Americans filled for unemployment benefits, down from the previous week’s 6.6 million but above market expectations of 5.1 million. This brought the total number of new filings over the last four weeks to 22 million. Earlier this morning, the preliminary April EU manufacturing purchasing managers’ index (PMI) registered a deeply depressed 33.6, dramatically undershooting both estimates of 38.0 and the prior month’s 44.5. For context, PMI readings below 50 denote contraction of the sector. The corresponding EU service sector PMI was even worse, falling to an astonishing 11.7 versus estimates of 22.8 and 26.4 in March. EU leaders are continuing to debate a €2 trillion relief package. In Asia, Japan’s government has downgraded its economic assessment to the worst level since 2009 and its early PMI readings for April also slumped deeper into contraction, with manufacturing at 43.7 and services at 22.8, down from 44.8 and 33.8, respectively, the prior month. South Korea’s first quarter (Q1) GDP data reflected a contraction of 1.4% on an annualized basis, which was slightly better than the -1.5% forecast. Public health experts have pointed to South Korea as setting the standard for testing and coronavirus containment, but economists are still forecasting a challenging Q2, with estimates of -0.4% GDP as economists will focus on the ability of fiscal stimulus to limit the downside.

Corporate Earnings Feature Some Bright Spots but Remain Broadly Challenged

This second week of first quarter (Q1) corporate earnings season is highlighting some notable outperformers but the overall tone is downbeat and the outlook is deeply uncertain. Netflix earnings climbed 106% year-on-year (y/y) and 9% quarter-on-quarter (q/q) while its 15.8 million new subscriptions in the quarter smashed estimates of 8 million. Still, the company’s somber outlook for the remainder 2020 sent its share price 2.9% lower yesterday, albeit from near all-time highs. Meanwhile, Snap’s stock price soared 36.3% after management highlighted a spike in usage during lockdowns. Chipotle also posted an impressive quarter, boosting its stock price 14.0% yesterday. Meanwhile, Delta beat the market’s dour expectations, losing $0.51 per share as opposed to the forecasts of -$0.87. The company maintains its $6 billion in unrestricted liquidity but has been notably reliant on federal support. Its stock price rose 2.8% but remains down 61.6% year-to-date. With 98 of the S&P 500 companies having reported, 65% have surprised to the upside on sales and 69% have topped earnings expectations.

Additional Themes

Oil Price Rebound Helps Stabilize Sentiment – International benchmark Brent crude and US benchmark WTI prices have recovered a portion of their steep losses after bouncing off multi-decade lows yesterday morning. Nevertheless, they remain severely depressed, hovering nearing $22 and $15 per barrel, respectively, and analysts see scant support for a durable rally. Crude oil’s dramatic swoon earlier this week not only impacted currencies of oil-dependent countries and US energy sector credits but spilled over into broader risk aversion.

House Vote Pending on Latest Support Package – After the Senate unanimously passed the latest pandemic relief bill on Tuesday evening, the House is expected to follow today. The bill will provide an additional $320 billion for the Small Business Administration’s pandemic relief loan facility, the Payroll Protection Program (PPP), of which $30 billion is set aside for smaller banks and credit unions and another $30 billion will be funneled through even smaller lenders. Additionally, $60 billion will go to additional Economic Injury payouts, $75 billion to hospitals, and $25 billion to fund testing efforts, $18 billion of which is directly to states’ testing efforts.

 

Summary and Price Action Rundown After two days of steep declines this week, global risk assets are attempting to rebound this morning alongside oil prices, with investors also noting some encouraging corporate earnings reports and progress toward another economic relief package on Capitol Hill. S&P 500 futures point to a 1.1% higher open, which would pare the index’s two-day loss of 4.8% that put year-to-date downside at 15.3% and the decline from February’s record high at 19.2%. EU equities are rallying moderately, and Asian equities were mixed overnight. Global equities have reversed a portion of their rebound from mid-March lows this week as stunning oil price declines weighed against nascent optimism on economic recovery prospects and sparked broader risk aversion. After their historic slide, oil prices are steadying so far today, with Brent bouncing above $19 per barrel, which was its lowest level since 1999. Longer duration Treasury yields are pausing their ongoing downtrend, with the 10-year yield edging up to 0.58%, while a broad dollar index is stabilizing within its recent range after two days of gains this week. US Congress Moves to Augment Fiscal Support Measures Last evening, the Senate passed a $484 billion pandemic relief bill designed primarily to add funding for the CARES Act’s small business lending program, which ran out of money last week. After last week’s partisan wrangling gave way to reports over recent days that a deal was close, the latest economic support package passed the Senate unanimously last evening and the House is expected to follow on Thursday, as the same procedural holdout from the CARES Act is set to force some members to return to Washington DC to vote in person. The bill will provide an additional $320 billion for the Small Business Administration’s pandemic relief loan facility, the Payroll Protection Program (PPP), of which $30 billion is set aside for smaller banks and credit unions and another $30 billion will be funneled through even smaller lenders. For context, the PPP hit its initial $349 billion limit last week and is now out of money. Additionally, $60 billion will go to additional Economic Injury payouts, $75 billion to hospitals, and $25 billion to fund testing efforts, $18 billion of which is directly to states’ testing efforts. Relatively swift and muscular fiscal support has been a key pillar of the rebound in investor sentiment since mid-March lows, but the economic impact remains to be seen in data over the coming months. Corporate Earnings Feature Some Better News Amid this second week of first quarter (Q1) corporate earnings season, certain companies and sectors are displaying resilience and opportunity amid the pandemic. After yesterday’s closing bell, Netflix revealed subscriber growth of 15.8 million, roughly doubling analysts’ estimates, though management was cautious on the outlook. Netflix shares are 1.6% lower in pre-market trading but were hovering near an all-time high. Meanwhile, Snap’s stock price is up 20.2% ahead of the open after management highlighted a spike in usage among bored and lonely kids in lockdown. More traditional corporate bellwethers, however, have tended to show a more clearly adverse impact of virus containment measures. Coca-Cola said its global volumes have plunged 25% so far this month, as the closure of theaters, restaurants, and stadiums are weighing on its sales. Management said its full-year financial results cannot be estimated amid high uncertainty. Shares ended the day 2.6% lower and are down 18.0% year-to-date. Insurance giant Travelers missed earnings but hiked its dividend, stabilizing its shares yesterday though they remain over 25% lower on the year. Lastly, IBM missed on revenue, sending its stock price 3.0% lower to put its 2020 loss at 12.9%. With 73 of the S&P 500 companies having reported, 65% have surprised to the upside on sales and 66% have topped earnings expectations. Additional Themes Oil Prices Try to Find a Floor – International benchmark Brent crude and US benchmark WTI prices are attempting to stabilize this morning but remain severely depressed, hovering around $19 and $11 per barrel, respectively. Currencies of oil dependent countries, like Russia and Mexico, have fallen steeply versus the dollar and pressure has re-intensified on US energy sector credit spreads as oil prices plunged this week. Meanwhile, Texas regulators have deferred any decision on statewide output curbs until early next month. Treasury Support for Airlines – Yesterday, the Treasury Department concluded Payroll Support Program agreements with Allegiant Air, American Airlines, Delta Air Lines, Southwest Airlines, Spirit Airlines, and United Airlines. Meanwhile, Alaska Airlines, Frontier Airlines, Hawaiian Airlines, JetBlue Airways, and SkyWest Airlines have also indicated that they plan to participate in the Payroll Support Program, which encompasses 95% of airline capacity. The Treasury is initially distributing 50% of funds awarded and releasing the remainder in a series of payments. In total, Treasury is awarding U.S. passenger airlines $25 billion in funds earmarked for payroll costs. Airlines must repay 30% of the funds in low-interest loans and grant Treasury warrants equal to 10% of the loan amount, terms that airline executives had argued against.

Summary and Price Action Rundown

Global risk assets remain under pressure this morning as disorderly downside continues for oil prices, while mixed corporate earnings and heightened policy and geopolitical uncertainty also weigh on market sentiment. S&P 500 futures indicate a 1.5% lower open, which would extend yesterday’s 1.8% decline that put year-to-date downside at 12.6% and the decline from February’s record high at 16.6%. Global equities had extended their rebound from mid-March lows last week as investors focused on the potential for economic recovery amid improving coronavirus containment data and hopes for an effective treatment, alongside massive fiscal and monetary stimulus. But other asset classes, such as crude oil, failed to validate equities’ apparent optimism and this week’s stunning crude price declines have contributed to a renewed sense of risk aversion. Oil remains under severe pressure after the expiring May contract for US benchmark WTI crashed into unprecedented negative territory yesterday. EU stocks are down more than 2% this morning and Asian equities were uniformly lower overnight. Longer duration Treasury yields continued to edge down toward historic lows, with the 10-year yield at 0.58%, while a broad dollar index is extending yesterday’s rebound.

 

Crashing Oil Prices Exert Pressure on Global Markets

Accelerating downside in crude futures has reverberated across asset classes this week, highlighting the grim outlook for demand. International benchmark Brent crude and US benchmark WTI prices posted dramatic losses yesterday, with the changeover from the WTI contract from May to June exaggerating the slide and sending prices negative for the first time for the expiring WTI contract. Crude prices remain under pressure this morning. Currencies of oil dependent countries, like Russia and Mexico, have depreciated sharply versus the dollar and pressure has intensified on US energy sector credit spreads. For context, oil prices had rebounded from nearly 20-year lows in early April as OPEC, Russia, and other major producers (collectively known as OPEC+) ended the price war and agreed to reduce supply by 10 million barrels per day over the next two months. Still, traders clearly believe that even these significant production cuts cannot balance the dramatically oversupplied oil market, which has seen demand collapse amid the coronavirus pandemic. Meanwhile, Texas regulators continue to debate output curbs. The White House is exploring options for supporting the industry (paying producers not to pump oil, investing in additional storage solutions, filling the Strategic Petroleum Reserve) but Congress would have to approve the bulk of these appropriations.

Corporate Earnings Provide Little Optimism on the Outlook

This second week of first quarter (Q1) corporate earnings season features a more diverse group of companies than last week, offering insight on the divergent impact of the pandemic. United Airlines expects to report a $2.1 billion pretax Q1 loss, showing the impact that the pandemic had on airlines in March. United has applied to the Treasury Department to borrow as much as $4.5 billion, and if so, would issue warrants for the Treasury to buy 14.2 million shares at $31.50 per share, about 5.7% of shares outstanding. The loan would be in addition to the roughly $5 billion in grants and loans that United expects to receive under the Payroll Protection Program (PPP) to pay salaries and benefits this summer. Under that arrangement, United will issue warrants for the Treasury to buy up to 4.6 million shares. United shares fell 4.4% yesterday and are down 68.5% year-to-date. Meanwhile, oilfield services giant Halliburton reported a $1 billion Q1 loss and warned that bleak conditions in the shale patch would depress its results for the rest of the year. Shares of Halliburton posted a moderate gain but remain 68.8% lower this year. Lastly, subprime auto lender ALLY Financial reported a downside earnings surprise, driven by a major loan loss provision build related to a weakened customer credit outlook. Shares ended the day 2.2% lower. With 54 of the S&P 500 companies having reported, 70% have surprised to the upside on sales and 68% have topped earnings estimates.

Additional Themes

US Policy Action in Focus – The Senate is poised for a vote today, and the House may follow on tomorrow, on a bill for roughly $500 billion that will provide an additional $250 billion for the Small Business Administration’s pandemic relief loan facility, the PPP, as well as funding for hospitals and states. For context, the PPP hit its $349 billion limit last week and is now out of money. Meanwhile, analysts are pondering President Trump’s tweet last evening announcing an Executive Order to temporarily suspend all immigration to the US. This comes amid reports that the White House is preparing to slash federal regulation of business activities.

North Korea Headlines Noted – The South Korean won lagged regional peers overnight, but declines were still modest at 0.7% versus the dollar, amid reports claiming that North Korean leader Kim Jong Un is critically ill and incapacitated. If the reports prove true, the question of succession in the repressive regime greatly increases regional geostrategic uncertainty.

Summary and Price Action Rundown

Global risk assets are retracing a portion of last week’s upside this morning as investors continue to monitor mixed corporate earnings and renewed downside for oil prices. S&P 500 futures point to a 1.8% lower open, which would pare last week’s 3.0% rally that put year-to-date downside for the index at 11.0% and the decline from February’s record high at 15.1%. Global equities had extended their rebound from mid-March lows last week as investors focused on the potential for economic recovery amid improving coronavirus containment data and hopes for an effective treatment, alongside massive fiscal and monetary stimulus. However, other asset classes, such as crude oil, failed to follow equities’ lead, and a more cautious tone is returning to markets this morning. EU stocks are more than 1% lower this morning and Asian were mixed overnight. Longer duration Treasury yields remain near historic lows, with the 10-year yield at 0.63%, while a broad dollar index is rising above one-month lows. Oil is conspicuously weak as international benchmark Brent crude is sliding and US benchmark WTI has crashed lower to $12 per barrel.

Oil Prices Extend Dispiriting Post-OPEC+ Agreement Declines

Détente between Russia and Saudi and a renewed OPEC+ output cut agreement appears to have provided modest support for international oil prices, but US benchmark WTI remains under significant pressure as traders focus on persistent oversupply and dwindling storage. After revisiting nearly two-decade lows in late March, international benchmark Brent crude and US benchmark WTI prices rebounded in early April as traders weighed production cuts versus crashing demand, but they have since relapsed to the downside, with WTI now at its lowest level since the late 1990’s. For context, OPEC, Russia, and other major producers (collectively known as OPEC+) cut a deal to reduce supply by 10 million barrels per day over the next two months (Mexico has held out), with Russia and Saudi agreeing to match each other’s reduced production levels. Various G-20 energy ministers’ have detailed their less expressly voluntary supply reductions. Analysts had questioned whether even these significant production cuts can balance the dramatically oversupplied oil market, which has seen demand collapse amid the coronavirus pandemic. The discouraging rollover in oil prices after the agreement validated the pessimistic view. Meanwhile, Texas regulators have not been able to find consensus on output curbs. The White House is exploring options for supporting the industry (paying producers not to pump oil, investing in additional storage solutions, filling the Strategic Petroleum Reserve) but Congress would have to approve the bulk of these appropriations.

Corporate Earnings Reporting Continues Amid High Uncertainty

This second week of first quarter (Q1) corporate earnings season is set to feature a more diverse group of companies than last week, which was dominated by financial giants, thus offering insight on the divergent impact of the pandemic among various sectors and companies. With 50 of the S&P 500 companies having reported, 69% have surprised to the upside on sales and 67% have topped earnings expectations. Major US banks dominated the earnings calendar last week, and reporting from the financial sector continues this week, featuring a heavy dose of regional bank including M&T Bank, Zions, Comerica, and Fifth Third. Credit card and Payments companies, including Discover, Capital One, American Express, PayPal and Synchrony, will provide a look into the state of the consumer. The insurance sector also begins reporting with Chubb, Travelers, and Aon. Asset managers on the calendar include T. Rowe Price and Franklin. Among the non-financial companies reporting are Haliburton, Coca-Cola, Netflix, Biogen, CSX, Quest Diagnostics, AT&T, Amazon, Intel, and T-Mobile. Finally, with billions approved by Congress for an airline bailout, there will be a heightened focus on earnings reporting from American Airlines, United Airlines, Southwest.

Additional Themes

Topping Up the PPP – Commentary over the weekend from the White House and Capitol Hill suggested that a deal may be imminent for additional funding for the Small Business Administration’s pandemic relief loan facility, the Paycheck Protection Program (PPP). For context, the PPP hit its $349 billion limit last week and is now out of money as Republican and Democrat leadership in Congress struggle to agree on how to top up its funds. Republicans have pushed for a stand-alone bill that would include $250 billion in additional money for the PPP while Democrats are seeking $100 billion for hospitals, $150 billion for states, and a boost in food assistance funding. Reports suggest that the deal is closer to the latter at $500 billion.

Reopening the Country – Last week, debate began to intensify in the US and EU about the roadmap for restarting certain activities and easing lockdown restrictions, and investors continue to ponder the outlook for this process. Some US governors took early initiative, while analysts warily note the experience of Singapore, where a secondary outbreak has occurred.

Summary and Price Action Rundown

Global risk assets are sharply higher this morning as encouraging news on a potential treatment for Covid-19 is underpinning hopes for a more rapid recovery, while investors continue to monitor mixed corporate earnings and deeply depressed economic data. S&P 500 futures indicate a 3.2% higher open, which would extend yesterday’s rally that put year-to-date downside at 13.4% and the decline from February’s record high at 17.3%. Risk assets surged higher last evening following reports that remdesivir, the anti-viral drug produced by Gilead, may be showing promising results in some patients, though the company stressed that trials have not been finalized. EU and Asian equities posted robust gains overnight. Longer duration Treasury yields, however, remain unmoved, with the 10-year yield at 0.64%, while a broad dollar index is hovering above one-month lows. Lastly, oil is mixed as international benchmark Brent crude rallies but US benchmark WTI sinks as traders parse divergent supply outlooks.

Investors Focus on Recovery Prospects Despite Dire Economic Data

US jobless data was worse than expected but still better than the prior week, while Chinese economic data revealed a steep first quarter (Q1) contraction. Overnight, China released its Q1 GDP figures, which showed a stunning degree of retrenchment, as the -6.8% y/y rate significantly undershot estimates of -6.0%. China’s March retail sales and industrial production contracted 15.8% y/y and 1.1% y/y, respectively, with the latter outpacing estimates but the former a notable disappointment. US data was similarly dismal. In the week ending on April 11^th, 5.245 million Americans filled for unemployment benefits, down from the previous week’s 6.615 million and above market expectations of 5.105 million. The brings the total number of new filings over the last four weeks to 22 million. The four-week moving average jumped to an all-time high of 5.509 million, while continuing jobless claims hit a record 11.976 million in the week ended April 4^th. US housing data also evidenced weakness, as housing starts plunged 22.3% month-over-month (m/m) to a seasonally adjusted annual rate (SAAR) of 1.216 million in March and below market expectations of 1.3 million. Meanwhile, building permits fell 6.8% (m/m) to a SAAR of 1.353 million, slightly above market expectations of 1.3 million.

Corporate Earnings Continue to Convey Mixed Signals

Results from this week’s start of first quarter (Q1) corporate earnings season highlight the starkly divergent impact of the pandemic on various sectors and companies. Yesterday, Morgan Stanley’s shares closed flat after reporting Q1 earnings per share (EPS) at $1.01, missing expectations of $1.14 and down 27% year-on-year (y/y). However, investors focused on strong trading revenues, up 30% on a yearly basis, with increased activity due to market volatility. In contrast to Morgan Stanley, shares of Keycorp fell 5.5% as earnings plunged 69% compared to a year ago. Q1 EPS was disappointingly low at $0.12, well below estimates of $0.28. Losses deepened during the earnings call, as management detailed the dim credit outlook, risk that the bank will have to significantly increase their reserves in coming quarters, and concern that its net interest margin will be hurt more than competitors. Contrasting the earnings of Keycorp and Morgan Stanley shows the difference between being a bank that makes its earnings on net interest margin and one that has investment banking. Meanwhile, Costco is raising its quarterly dividend by 7.7% to 70 cents per share, in contrast to much of the major global companies which have suspended cash returns to shareholders to shore up liquidity. In the face of stay-at-home orders, grocery retailers and some packaged-food companies have seen sales surge in recent weeks. Last week Costco reported a 9.6% jump in March comparable sales and joins Procter & Gamble and Johnson & Johnson which also raised their dividends earlier this week. Schlumberger and State Street report today, while next week features Netflix, Coca Cola, Intel, American Express, IBM, and some major US airlines.

Additional Themes

Reopening the Country – Yesterday, the White House released guidelines for restarting some activities around the country as infect rates level off, which feature a gradual three-phase and state-by-state approach. Public health officials continue to stress that wider testing and other data, like contact tracing and symptom tracking, are crucial for guiding policymakers’ efforts to restart portions of the economy and society but are currently lacking in much of the US.

PPP Out of Money – The Small Business Administration’s pandemic relief loan facility, the Paycheck Protection Program (PPP), hit its $349 billion limit yesterday and is now out of money as Republican and Democrat leadership struggle to agree on how to top up its funds. Republicans want to pass a stand-alone bill that would include $250 billion in additional money for the PPP while Democrats want to add in $100 billion for hospitals, $150 billion for states and a boost in food assistance funding. The impasse will last until at least Monday, when the Senate is next expected to convene for another “pro forma” session.

Summary and Price Action Rundown

Global risk assets are rallying this morning in a continuation of their back-and-forth price action this week, as investors weigh the prospects for economic recovery amid grim April growth figures, mixed corporate earnings reports, continued government support efforts, and modestly encouraging public health data. S&P 500 futures indicate a 0.4% higher open, which would put the index roughly flat for the week after yesterday’s 2.2% decline took year-to-date downside to 13.9% and the decline from February’s record high to 17.8%. Though a leveling off in Covid-19 infection curves, along with aggressive monetary and fiscal support measures, have calmed global financial markets, the outlook for an economic rebound remains shrouded in dismal data, uneven corporate earnings, and uncertainty over government plans to restart business activity. EU stocks are moderately higher, while Asian equities were mixed overnight. Longer duration Treasury yields have returned to nearly historic lows, with the 10-year yield at 0.63%, while a broad dollar index is extending gains above its lowest level in a month. Meanwhile, oil prices are rebounding from yesterday’s dispiriting decline.

Dismal Economic Data Continues but Investors Attempt to Focus on Recovery

Optimism for an impending rebound in growth was shaken after yesterday’s US economic figures proved even worse than the dismal projections, and more grim jobless data is expected this morning. This morning’s release of initial jobless claims for the week ending April 11 is forecast to show 5.5 million new filings after 6.6 million the prior week and roughly 17 million since mid-March. Meanwhile, efforts on Capitol Hill to top up the small business lending program, which is designed to alleviate layoffs, are continuing. Yesterday, the March reading of US retail sales plunged 8.7% month-over-month (m/m), undershooting expectations of an 8% drop. This is the largest decline on record, with purchases of clothing down 50.5%, food services and drinking places down 26.5%, motor vehicles down 25.6% and gasoline stations down 17.2%. However, sales of food and beverages increased 25.6% and health and personal care rose 4.3%. Year-on-year, retail sales fell 6.2%. Industrial production (IP) fell 5.4% m/m in March, the largest drop since January 1946 and below market expectations of a 4.0% drop. Year-over-year IP is down 5.5%, the largest decline since 2009. Pain in the factory sector was also seen in the New York Empire State Manufacturing Index, which tumbled 56.7 points to -78.2 in April, the lowest level on record and well below market expectations of -35.0. Lastly, the NAHB Housing Market Index plunged to 30 in April, the lowest since June 2012 and well below market forecasts of 55. The current single-family index sank to 36 from 79 in March, home sales for the next six months dropped to 36 from 75, and prospective buyers also fell to 13 from 56.

Corporate Earnings Remain Mixed

First quarter (Q1) corporate results continue to highlight the solidity of major US bank balance sheets but suggest a dim profitability outlook. Through the second day of Q1 earnings reporting season, major US banks remain in the spotlight and have provided insights into the economic damage inflicted by the coronavirus. Thus far, the leading US banks have all reported 40%-plus declines in earnings, and have generally seen resulting downside in their stock prices, as they have added billions in reserves to cover their projections for defaults on loans, credit cards and mortgages. Bank of America (BoA) reported Q1 earnings per share (EPS) of 40 cents, missing consensus estimates of 60 cents as the bank added $3.6 billion to its loan loss reserves. However, BoA noted that they ended the quarter with almost $700 billion in global liquidity sources. BoA shares closed 6.4% lower yesterday. Goldman Sachs (GS) stock, however, retraced early losses to end the day nearly flat after the bank reported EPS of $3.11 a share, missing estimates of $3.35, but losses in its debt and equity holdings were balanced by a surge in trading division revenue amid the extreme market volatility in the quarter. GS also set aside $937 in loan loss reserves. Citigroup also saw Q1 revenue fall 46%, with EPS of $1.05 versus $1.87 expected, as they added $4.9 billion in loan loss reserves and the consumer banking division posted a net loss of $754 million for the quarter. Citi shares fell 5.6% yesterday. Morgan Stanley and BlackRock are among the companies reporting today.

Additional Themes

Airlines Mostly Rally on Government Support – Secretary Mnuchin and US airline heads are said to have agreed over federal funding support of $25 billion, lifting industry share prices yesterday, though year-to-date losses remain around 60%. The terms stipulate that 30% of the money must be paid back to the Treasury over five years and give warrants for equity purchases by the government, which airline execs had argued against.

Economic Reopening Plans in Focus – Today, President Trump is expected to detail federal government plans for restarting certain activities as infection rates level off. State governors and consortia of state governors in various regions, are preparing to set their own parameters.