Category: Morning Markets Brief

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.

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.

Summary and Price Action Rundown

Global financial markets are staging a rebound this morning after yesterday’s dramatic declines in equities, oil prices, and Treasury yields, with investors’ focus shifting back to government stimulus efforts to counteract the widening human and economic toll of the coronavirus outbreak. S&P 500 futures indicate a 4.0% rebound at the open, which would retrace a meaningful portion of yesterday’s 7.6% plunge and pare the index’s year-to-date losses of 15.0%. This sharp back-and-forth price action continues the pattern from last week, as price action was 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, though the start of an oil price war between Saudi and Russia over the weekend exacerbated yesterday’s volatility (more below). Equities in Asia and the EU posted gains overnight, while oil prices are partially retracing their crash of over 20% yesterday, with Brent crude bouncing above $37 per barrel. Meanwhile, Treasuries are giving back some of their torrid rally, with the 10-year yield recovering to 0.69%. Meanwhile, the dollar is rebounding amid expectations of fiscal stimulus.

Investor Focus Shifts Back to Stimulus After Market Swoon  

As markets attempt to stabilize following yesterday’s rout, investors are focusing on additional government stimulus measures to offset the economic impact of the virus and prevent disorderly price action. President Trump is preparing to announce “very dramatic” economic stimulus measures later today, with reports suggesting that the plan will feature payroll tax cuts, paid sick leave for hourly workers, and a concessionary small business loans program, but will not include specific support for airlines and other acutely impacted industries. Some top Republican Senators have expressed skepticism at the need to deploy more stimulus in the face of an uncertain economic impact of the virus, while key Democrats in the House are taking issue with the payroll tax cut. Though fiscal support is a key focus, given the expectation of diminished efficacy of monetary easing with rates already so low, the Fed is upping its liquidity injections into short-term funding markets and is reportedly set to announce an emergency lending facility to head off a potential credit crunch, while futures markets continue to price in steep interest rate cuts. Specifically, futures reflect 75 basis point (bps) of cuts by the March 18 Fed meeting, with around 100bps of total easing reflected by July. Some analysts project that rate cuts will be accompanied by the transformation of the ongoing asset purchase program into official quantitative easing.   

 Crude Supply Set to Surge Amid Saudi vs. Russia Oil Price War 

Saudi and Russia continue to up the ante in their oil price feud as oil prices struggle to find a new equilibrium. Crude oil prices are staging a partial recovery from yesterday’s dramatic swoon, which took Brent crude prices nearly 30% lower to $31 per barrel at yesterday’s trough. Brent is up over 8% this morning to around $37 per barrel, which remains close to four-year lows. Analysts suggest that prices will struggle to find upside, as Saudi Aramco overnight announced that it would target a record 12.3 million barrels per day (bpd) of production in April, which is even higher than the initial reports, representing a 25% increase from current levels following a 9.7 million bpd pace in February. Russia, for its part, has threatened an extra 500k bpd supply increase, which would put production at 11.8 million bpd, which is also a record. Nevertheless, Russia’s oil minister stated that another meeting with OPEC might be possible as early as May or June. The US Department of Energy decried the price war as an attempt to “manipulate and shock oil markets.” For context, last week’s OPEC summit ended in acrimony as the cartel failed to secure cooperation from Russia for a 500k barrels per day (bpd) reduction from non-OPEC producers to augment their additional 1 million bpd output curb.

Additional Themes

Stimulus Measures Ramp Up in EU and Asia – Italy is preparing a $10 billion spending package and will offer tax credits to hard-hit companies as the EU provides fiscal leeway to the indebted country. Also, the Bank of Japan is mulling expansion of its ETF buying program and the government is marshalling a $15.6 billion anti-virus budget. Lastly, the European Central Bank is expected to cut rates and augment its bond buying program at its meeting on Thursday.

Oil Price Shock Reverberates in US Equities and Credit – An ETF of US energy company stocks fell 20.1% in yesterday’s trading and spreads on high yield energy credits widened to a four-year peak but remain shy of the worst levels from the 2016 oil price crash. For context, the traditional benefits of lower oil prices to the US economy now are counterbalanced by the impact on the shale oil industry and the regions dependent on it, as well as the attendant stress on producer creditworthiness, which in turn pressures the high yield debt market, leveraged loans, and regional banks in particular.

Summary and Price Action Rundown

Global financial markets are experiencing significant turmoil this morning as plummeting oil prices compound already heightened fears over the economic toll of the coronavirus outbreak, adding to the potential for systemic market stresses. S&P 500 futures point to a 4.9% plunge at the open, which would greatly extend the index’s year-to-date losses of 10%. Last week featured dramatic price swings 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. But the start of an oil price war between Saudi and Russia over the weekend (more below), alongside a continued barrage of worrisome news from the expanding coronavirus epidemic, intensified risk aversion from the outset of trading last evening. Oil prices have crashed over 20% this morning, the worst decline in decades, with Brent crude below $36 per barrel. Equities in Asia and the EU are down between 3% and 6%. Treasuries are extending their torrid rally, driven by safe haven demand, a grim economic outlook, and rising expectations of Fed easing, with the 10-year yield plunging to a new record low 0.44%. Meanwhile, the dollar is steady below recent multi-year highs.

Saudi Targets Russia in an Oil Price War  

Saudi responded aggressively to Russia’s refusal last week to join OPEC’s efforts to support the oil market, upping production and slamming global crude prices. Last week’s OPEC summit ended in acrimony as the cartel failed to secure cooperation from Russia for a 500k barrels per day (bpd) reduction from non-OPEC producers to augment their additional 1 million bpd output curb. Saudi upped the ante on Saturday, as it signaled a dramatic increase in output above 10 million barrels per day (bpd), with sources suggesting that production could rise to a record 12 million bpd. Reports indicate that Saudi Aramco is offering significant discounts to buyers, undercutting Russia. Oil markets are under severe duress this morning, with international benchmark Brent crude trading around $36 per barrel, after tanking to nearly $31 earlier in the session, while US benchmark WTI is around $32 per barrel, with these levels being roughly four-year lows for both. Shares of US energy companies are posting deep losses in pre-market trading, while analysts will monitor indications of credit stress among US shale producers, who represent a significant segment of US high yield debt. For context, the traditional benefits of lower oil prices to the US economy now are counterbalanced by the damage inflicted upon the shale oil industry and the regions dependent on it, as well as the attendant stress on producer creditworthiness, which in turn pressures the high yield debt market, leveraged loans, and regional banks in particular.   

Global Markets Gripped by Fears of a Coronavirus Pandemic and Global Recession 

Investors are looking to additional coordinated government efforts to stem the market rout, despite uncertainty over the efficacy of even well-synchronized economic support measures, as extreme market price action threatens to become self-reinforcing, disorderly, and systemic. While investor sentiment had found some support last week from the improving coordination of increasingly robust action by central banks and governments, the focus has now shifted back to the grim news of the spreading epidemic. Rising numbers of infections in the US, resulting in a declaration of emergency in California and New York, alongside a massive lockdown of northern Italy and other widening outbreaks around the world, are dominating the headlines. Tightening travel restrictions at the country and corporate level, cancelled conferences, and warnings from company heads about the intensifying fallout of the epidemic are driving fears of global recession. Though investors are cognizant that already-low interest rates render central bank cuts less impactful, and thus are highly attuned to the increasing emphasis on fiscal stimulus, futures markets are reflecting 75 basis point (bps) of cuts by the March 18 Fed meeting, with around 100bps of total additional easing reflected by July. Some analysts project that rate cuts will be enacted at another emergency meeting this week and will be accompanied by an increase in liquidity operations, including the transformation of the ongoing asset purchase program into official quantitative easing, amid increasing cash demand.

Additional Themes

Investors Monitor Growing Signs of Systemic Market Stress – With volatile equity markets, plunging oil prices, and historically depressed Treasury yields reflecting an increasingly grim economic outlook, analysts are wary of fundamental strains in global financial markets. 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 adverse but orderly price action. Specifically, analysts are monitoring possible early signals of pressure in short-term funding markets (which first emerged in September), overseas dollar liquidity, credit market metrics, and interbank funding.

Summary and Price Action Rundown

Global risk assets are extending this week’s sharp back-and-forth price action as investors ponder whether incoming policy support will provide a counterbalance to the human and economic toll of the outbreak, while noting the decline in US political uncertainty. S&P 500 futures indicate a 1.9% lower open as the index continues to struggle for directionality amid the significant macro crosscurrents. For context, the US equity benchmark soared 4.2% yesterday, nearly matching Monday’s 4.6% rebound and negating Tuesday’s 2.8% loss, putting the downside from mid-February’s record high at 7.6%. This week’s dramatic swings in global equities have been 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. Equities in Asia gained in sympathy with yesterday’s rally in the US, but sentiment has proven fragile again this morning and EU stocks are 1.8% lower. Treasuries are extending their historic rally, driven by heightened safe haven demand, a darkening economic outlook, and rising expectations of Fed easing, with the 10-year yield at 0.97%, which is barely above Tuesday’s record lows. Meanwhile, the dollar is continuing to settle further below recent multi-year highs. Brent crude prices are holding above $51 per barrel as OPEC aims for deeper-than-expected cuts. – 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/

Effectiveness of Global Stimulus Questioned Despite Increasing Signs of Coordination  

After Tuesday’s lukewarm G-7 statement and isolated emergency Fed rate cut, global central banks and governments started to get their act together yesterday, but investors remain highly uncertain over the efficacy of even well-synchronized economic support measures. With analaysts 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 yesterday. 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 Tuesday’s bland G-7 statement, which provided scant reference to any actual coordination, indicating only that each member country would employ “all appropriate policy tools,” including fiscal stimulus “where appropriate” while central banks “will continue to fulfill their mandates.” Investors are cognizant that already-low interest rates render central bank cuts less impactful, and thus are highly attuned to the increasing emphasis on fiscal stimulus. 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 President Centeno. In the US, Congress is set to approve an $8 billion spending package aimed at countering the outbreak today. This more synchronized and energetic response underpinned a sharp rally in risk assets yesterday, although investor sentiment is relapsing again today.

Central Banks Expected to Keep Easing

After the Fed’s emergency rate cut on Tuesday, alongside accommodation from other global central banks, markets continue to reflect expectations of even more aggressive monetary stimulus. Following the Fed’s first intra-meeting rate cut since the global financial crisis, futures markets shifted the goalposts to price in yet another cut at the March 18 meeting, with around a 75% chance that the FOMC opts for another 50 basis point (bps) reduction at that meeting. At least 75bps of total additional easing is reflected by July. 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. Yesterday’s Fed injection of liquidity into funding markets to meet banks’ 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 this week, as did Bank Negara Malaysia, and the Bank of Canada reduced rates by 50bps at its meeting yesterday. 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 analysts are attuned to the possibility of an emergency Bank of England rate cut.

Additional Themes

US Political Uncertainty Eases – Analysts debated whether Joe Biden’s strong showing on Super Tuesday, which has dramatically upped his delegate count and vaulted him back into front-runner status, was a key factor in yesterday’s rally in US equities. The impact of US politics is much clearer in certain sectors, like policy-sensitive healthcare stocks, which soared yesterday.

OPEC Pushes for Major Output Cut – Crude futures are fluctuating this morning amid reports that OPEC is attempting to secure output curbs from non-cartel members (mainly Russia) of 500k barrels per day (bpd) to augment their additional 1 million bpd output cut commitment.

Summary and Price Action Rundown

Global risk assets are slipping lower this morning as pledges of policy support provide only a limited counterbalance to rising concerns over the human and economic toll of the outbreak. S&P 500 futures point to a 1.1% lower open as the index is set to extend its streak of seven straight sessions of declines, which has put losses from mid-February’s record high at 12.8%. The first reported US fatalities from the coronavirus over the weekend, alongside widening outbreak figures, principally in South Korea, Japan, Italy, and Iran, have raised the risk that the virus will significantly hamper economic activity worldwide. Overnight, equities in Asia were initially led higher by Chinese stocks but the rally flagged in South and Southeast Asian markets, while the Euro Stoxx index has also surrendered early gains. Treasuries are extending their historical rally, driven by heightened safe haven demand, a darkening economic outlook, and rising expectations of Fed easing, with the 10-year yield trading at a record low of 1.07%. Meanwhile, the dollar is continuing to hover below recent multi-year highs. Brent crude prices are falling toward $50 per barrel amid a worsening demand outlook.

Widening Coronavirus Epidemic & Early Signs of Economic Fallout  

Fears of a global pandemic continue to rise while some initial February data confirms a severe economic impact. Developments over the past week have forced investors to confront the likelihood of a wider, lengthier, and deeper impact of the epidemic, or even its expansion into a global pandemic. Friday’s reports of the first case of suspected “community spread” near San Francisco were followed over the weekend by increasing US infections in various states, currently totaling 80 individuals, as well as the first two US fatalities from the virus. Japan and South Korean have closed schools nationwide, travel restrictions continue to proliferate, and more countries are announcing cases. Now, total infections are reported to be 89,197 while fatalities have reached 3,048. Regarding the economic costs, the OECD cut its global growth forecast from 2.9% to 2.4%, to the lowest in a decade, and warned of a possible contraction in activity this quarter. It added that “coordinated policy actions across all the major economies” may be needed if the outbreak continues to widen. Incoming data is increasingly reflecting a severe impact from the outbreak. China’s manufacturing purchasing managers’ indexes for February printed record lows, with the official gauge at 35.7 and the Caixin-compiled version at 40.3. For context, PMI readings above 50 denote expansion. Manufacturing PMIs in Japan and South Korea also registered contractions last month at 47.8 and 48.7, respectively. The EU PMI for February, however, was relatively stable at 49.2 as the impact of the virus remained minimal through much of the month, though respondents flagged delays in some input deliveries. – MPP note: We are arranging a call tomorrow for our clients with noted epidemiologist Dr. Christopher Mores. Please stand by for details of the call.

Officials Set to Ramp Up Stimulus Measures

Central banks and governments are aligning policy efforts in an attempt to mitigate downside risks to the global economy and prevent excessive, self-perpetuating market volatility. Mid-afternoon on Friday, with US markets continuing to reflect rising stress, Fed Chair Powell issued a statement indicating that the Fed would “act as appropriate to support the economy” in the face of “evolving” coronavirus risks. This matches the language that Chair Powell employed last spring to signal impending rate cuts and apparently contradicts an array of Fed speakers earlier in the week who had uniformly indicated a wait-and-see approach. Futures markets are pricing in two full Fed rate cuts by April and 100% odds that the Fed starts lowering rates again at the March 18 meeting, with around a 50% chance that the FOMC opts to go big with a 50 basis point (bps) cut at that meeting. Nearly 100bps of easing is reflected over the next year. Meanwhile, the Bank of Japan issued a special communication overnight pledging to “provide ample liquidity and ensure stability in financial markets.” The Bank of England issued a similar statement. The central banks of Australia and Canada are both expected to cut rates at least 25bps at their scheduled meetings this week, and the European Central Bank is likely to take rates a further 10bps negative to -0.60% at its meeting next week. French officials have confirmed that G-7 governments will be taking steps this week to coordinate their policy responses, while the OECD suggested that fiscal policies may be needed in conjunction with monetary easing to cushion the economic impact of the epidemic.

Additional Themes

OPEC Prepares to Support Oil Prices – Crude futures have steadied somewhat amid reports that Russia is set to cooperate with additional OPEC supply cuts designed to stem oil price downside. The cartel meets in Vienna this week on Thursday and Friday.

US Economic Data in Focus – US PMIs for February will be scrutinized for any early impact from the epidemic, while January spending, income, and price data on Friday was steady but stale.

Summary and Price Action Rundown

Global risk assets remain under pressure this morning as investors continue to grapple with fears of a global pandemic and the potentially severe economic fallout thereof. S&P 500 futures indicate a 0.9% lower open to extend its four-session loss of 10.8% this week, which has put the index 12.0% below last Wednesday’s latest record high. The first suspected case of “community spread” coronavirus in California, alongside rapidly expanding outbreaks around the world, principally in South Korea, Japan, Italy, and Iran, have raised the risk that the virus will significantly hamper economic activity worldwide. Overnight, equities in Asia again fell sharply, with the Shanghai Composite joining the rout. Treasuries are extending their historical rally, driven by heightened safe haven demand and a darkening economic outlook, with the 10-year yield trading near a record low at 1.19%. The dollar, however, is continuing to hover below recent multi-year highs. Brent crude prices are falling toward $51 per barrel.

Coronavirus Fears Continue to Roil Global Markets

News of the first likely case of community spread of the coronavirus in the US, alongside widening outbreaks in numerous other countries, have greatly darkened market sentiment this week. The latest developments are forcing investors to confront the likelihood of a wider, lengthier, and deeper impact of the epidemic, or even its expansion into a global pandemic. CDC officials are counseling preparedness for a pandemic, meaning “community spread” of the coronavirus and a “significant disruption to our lives” in the US, but note that the trajectory of the outbreak remains “very uncertain.” The first case of suspected “community spread” near San Francisco is raising concerns, alongside the increasing numbers of individuals being monitored for the disease in California, New York, and Boston. Rising infection figures and expanding quarantines in Italy, Germany, Japan, South Korea, and other countries have dispelled prior optimism over the prospects for quick containment, which had lifted global equity markets over the past few weeks. Analysts are noting that the northern Japanese island of Hokkaido has declared a state of emergency and Nigeria has identified its first case. Now, total infections are reported to be 83,704 while fatalities have reached 2,859. Regarding the economic costs, rating agency Moody’s has noted that a worldwide recession is likely in the event of a pandemic, prominent economists are slashing their growth figures for the coming quarters, and the list of companies downgrading their 2020 profit forecasts due the epidemic continues to grow. – MPP note: We are arranging a call for our clients with noted epidemiologist Dr. Christopher Mores on Tuesday next week. Please send any advance questions in a reply to john.fagan@marketspolicy.com and stand by for details of the call.

Global Equities Fall Sharply but Remain Orderly

Heavy losses for stock prices worldwide this week are realigning those markets with the grim outlook that had already been reflected in tumbling Treasury yields and depressed commodity prices, though there are currently no serious indications of systemic stress or market malfunctioning. Investors are pondering what will stem the ongoing rout in global equities, which is reportedly the fastest “correction” in history and the steepest losses for US equities since 2008. For context, a “correction” is traditionally considered to be a stock market loss of over 10% from recent highs, a threshold the S&P 500 crossed in yesterday’s trading, while a “bear market” is generally associated with sustained losses of 20%. Though the selloff has been significant, there have been no reports of difficulties in trading or “flash crash” conditions, which might suggest any systemic malfunctioning. Meanwhile, the VIX, a US equity volatility gauge, is reflecting turbulence on par with the 2015 global deflation scare but still less acute than the EU debt crisis phase of 2011. Although some analysts are suggesting that the stock market selloff has gone too far, too fast this week, it may be particularly challenging for a meaningful rebound to materialize on a Friday. Generally, global equities have struggled to post gains on Fridays during the duration of this outbreak as investors are particularly wary of adding risk to their portfolios going into the weekend on concerns that adverse developments when markets are closed could lead to unavoidable losses on Monday.

Additional Themes

Futures Reflect More/Faster Fed Rate Cuts – The 10-year Treasury yield is now trading at 1.19% after earlier this week breaking below the prior all-time intraday low of 1.32% registered during the global deflation scare of 2016. Treasury yield curves (the yield spread between Treasuries of differing maturities) remain flat, and in some cases inverted, which is considered a warning of impending recession. Meanwhile, futures markets are pricing in nearly two full Fed rate cuts by April and 100% odds that the Fed starts lowering rates again at the March 18 meeting.

US Economic Figures Due – Although data for January is stale, investors will parse personal income, spending, and inflation data to gauge US economic vitality ahead of the epidemic.

Summary and Price Action Rundown

Global risk assets are retreating again this morning after yesterday’s brief pause as investors continue to grapple with concerns that the coronavirus is developing into a global pandemic. S&P 500 futures point to a 1.0% lower open to extend its three-session loss of 6.6% this week, which has put the index 8.0% below last Wednesday’s latest record high. Rapidly expanding outbreaks outside of China, principally in South Korea, Japan, Italy, and Iran, have raised the risk that the virus will significantly hamper economic activity worldwide. Overnight, equities in Asia were mostly down again, with the Shanghai Composite outperforming. Treasuries are continuing their rally, driven by heightened safe haven demand and a darkening economic outlook, with the 10-year yield trading near a record low at 1.29%. The dollar is continuing to fluctuate below recent multi-year highs. Brent crude prices are falling toward $52 per barrel.

Coronavirus Fears Continue to Drive Market Volatility

News of the first likely case of community spread of the coronavirus in the US, alongside widening outbreaks in numerous other countries, are weighing further on market sentiment. The latest developments are forcing investors to confront the likelihood of a wider, lengthier, and deeper impact of the epidemic, or even its expansion into a global pandemic. CDC officials are counseling preparedness for a pandemic, meaning “community spread” of the coronavirus and a “significant disruption to our lives” in the US, but note that the trajectory of the outbreak remains “very uncertain.” Last evening, President Trump gave a press conference focusing on the coronavirus and placing Vice President Pence in charge of the response. Rising infection figures and expanding quarantines in Italy, Japan, South Korea, and other countries have dispelled prior optimism over the prospects for quick containment, which had lifted global equity markets over the past few weeks. News out of China, however, has taken a more positive tone, with various provinces reducing their threat levels and reports of increasing factory activity. Now, total infections are reported to be 82,446 while fatalities have reached 2,808. Regarding the economic costs, rating agency Moody’s has noted that a worldwide recession is likely in the event of a pandemic and some prominent Wall Street strategists are calling for more downside for US equity markets in the near-term. Meanwhile, the list of companies downgrading their 2020 profit forecasts due the epidemic continues to grow.

Investors Monitor Overseas Stimulus Efforts and Fed Easing Prospects

Recent Fed communications have conveyed a steady policy stance despite concerns about the impact of the outbreak, while markets see rate cuts restarting in the coming months as stimulus measures also ramp up overseas. Analysts are noting a Wall Street Journal op-ed this morning from former Fed Board Member Kevin Warsh advocating for front-loaded Fed easing in coordination with other major central banks to cushion the economic impact of the outbreak. However, Vice Chair Clarida’s remarks earlier this week gave little indication that the bias of the FOMC is shifting toward more easing in the coming weeks and months, noting that it is “too soon” to estimate the possible fallout. A number of regional Fed Presidents have echoed that position this week. Price action in Treasury markets is aligned with Warsh’s viewpoint, reflecting a prompt return to easing by the Fed. The 10-year Treasury yield is now trading at 1.29% after yesterday breaking below the prior all-time intraday low of 1.32% registered during the global deflation scare of 2016. Treasury yield curves (the yield spread between Treasuries of differing maturities) remain flat, and in some cases inverted, which is considered a warning of impending recession. Meanwhile, futures markets are pricing in more than two Fed rate cuts by July and nearly 50% odds that the Fed starts lowering rates again at the March 18 meeting. Overseas, stimulus measures are being marshalled but the responses remain disparate. Germany is set to loosen its self-imposed fiscal straightjacket, China’s central bank is adding accommodation, and Hong Kong’s government is giving cash directly to its citizens in an attempt to cushion the economic impact of the virus. However, the Bank of Korea held rates steady overnight at 1.25% and a European Central Bank official stated that “more clarity” is needed before policymakers can confront “hard to understand implications” of the outbreak.

Additional Themes

UK Government Ups Ante with EU on Trade – The pound is slightly weaker versus the dollar this morning following news that Prime Minister Johnson’s government is demanding that EU negotiators demonstrate a path to a post-Brexit trade deal by June or the UK will suspend negotiations. Previously, Johnson has stated that year-end is the hard deadline for a UK-EU trade deal, with EU officials and many analysts characterizing the timetable as wildly ambitious.

US Economic Data in Focus – The second revision of fourth quarter (Q4) GDP will be released this morning after the initial estimate showed that the US economy grew 2.1% to close out the year, the same as in Q3 and in-line with forecasts. January’s durable goods orders are also due.

Summary and Price Action Rundown

Global risk assets are attempting to find their footing this morning as investors continue to grapple with concerns that the coronavirus is developing into a global pandemic. S&P 500 futures indicate a 0.1% higher open after a two-day plunge of 6.3% to start this week that has put the index 7.6% below last Wednesday’s latest record high. Rapidly expanding outbreaks outside of China, principally in South Korea, Japan, Italy, and Iran, have raised the risk that the virus will significantly hamper economic activity worldwide. Overnight, equities in Asia were broadly lower again, though losses were more moderate, while EU stocks are down less than 1%. Treasuries are steadying after their rally, driven by heightened safe haven demand and a darkening economic outlook, with the 10-year yield trading at 1.37% after briefly touching a record low yesterday. The dollar is resuming its uptrend, with a closely-followed dollar index turning back toward multi-year highs. Crude oil is down again, with Brent below $54 per barrel.

Investors Grapple with Rising Pandemic Risks

Health official predictions of an outbreak in the US deepened investor concerns yesterday, alongside rising infection totals in Italy, Japan, South Korea, Iran, and elsewhere. The latest developments are forcing investors to confront the likelihood of a wider, lengthier, and deeper impact of the epidemic, or even its expansion into a global pandemic. Rating agency Moody’s noted that a worldwide recession is likely in the event of a pandemic. Yesterday, the warning by the CDC that Americans should prepare for possible “community spread” of the coronavirus and the possibility of a “significant disruption to our lives” raised fears among investors, as did an apparently rising fatality rate among the infected outside China. Expanding quarantines and travel restricts for Italy, Japan, South Korea, and other countries have dispelled prior optimism over the prospects for quick containment, which had lifted global equity markets over the past few weeks. News out of China, however, has taken a more positive tone, with various provinces reducing their threat levels and reports of increasing manufacturing activity. Now, total infections are reported to be 81,172 while fatalities have reached 2,765.

Fed Messaging Remains Steady Though Markets Forecast Easing

Recent Fed communications have conveyed a steady policy stance but also registered concerns about the impact of the outbreak, while markets see rate cuts restarting in the coming months. Vice Chair Clarida’s remarks yesterday gave little indication that the bias of the FOMC is shifting toward more easing in the coming weeks and months, noting that it is “too soon” to estimate the possible fallout. Last night, Dallas Fed President Kaplan also suggested that it “pays to be patient” amid a high degree of uncertainty over the epidemic’s potential impact on growth. On Monday, Minneapolis Fed President Kashkari and Cleveland Fed President Mester both flagged economic risks associated with the outbreak but suggested that the FOMC should be patient with its policy response. Nevertheless, price action in Treasury markets is consistent with a dismal economic outlook and reflects a prompt return to easing by the Fed. The 10-year Treasury yield is now trading at 1.37% after yesterday briefly falling below the prior all-time intraday low of 1.32% registered during the global deflation scare of 2016. Treasury yield curves (the yield spread between Treasuries of differing maturities) remain flat, and in some cases inverted, which is considered a warning of impending recession. Meanwhile, futures markets are pricing in more than two Fed rate cuts over the coming year and nearly 70% odds that the Fed starts lowering rates again by the April meeting.

Additional Themes

Overseas Stimulus to Support Growth – Germany is loosening its self-imposed fiscal straightjacket, China’s central bank is adding accommodation, and Hong Kong’s government is giving cash directly to its citizens in an attempt to cushion the economic impact of the virus.

 Investors Ponder US Political Uncertainty – Against the disquieting backdrop of coronavirus outbreak news, US politics remains in focus. Some politically-minded market contacts have suggested that the recent sell-off in US equities may have an undertone of concern over the rise of Senator Sanders in the polls, given his relatively less market-friendly stance. However, shares of companies that have displayed political sensitivity in the past, such as managed care giant UnitedHealth Group, are not evidencing notably outsized losses in the most recent sell-off, suggesting that coronavirus concerns are the predominant downside catalyst this week.

US Housing Market Data Expected to Remain Robust – January new home sales figures, as well the last week’s mortgage applications data, are due today with both expected to reflect continued strength. This follows yesterday’s upside surprise in December home price gains. Analysts are citing the lack of supply on the market for rising prices and industry figures are blaming the lack of qualified workers as a bottleneck for homebuilding.