Category: Briefings

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.

Summary and Price Action Rundown

Global risk assets turned lower overnight, as investors monitor corporate earnings reports, government support efforts, and public health data for signals on the prospects for a global economic rebound. S&P 500 futures point to a 1.8% lower open, which would retrace a portion of yesterday’s sharp 3.1% rally that put year-to-date downside for the index at 11.9% and the decline from February’s record high at 16.0%. A leveling off in Covid-19 infection curves, along with aggressive monetary and fiscal support measures, have calmed global financial markets and allowed investors to focus on the tantalizing but uncertain prospects of an economic recovery. EU stocks are underperforming, while Asian equities declined moderately overnight. Treasury yields are turning ominously lower, with the 10-year yield at 0.69%, while a broad dollar index is bouncing from its lowest level in a month. Meanwhile, oil prices are failing to hold their recent gains amid concerns that new supply cuts cannot balance depressed demand.

Corporate Earnings Reporting Season Begins Amid High Uncertainty

First quarter (Q1) corporate results kicked off yesterday on a somewhat mixed note, as analysts lauded the solidity of major US bank balance sheets but registered disappointment on the profitability outlook. JPMorgan Chase reported first quarter earnings per share of 78 cents, compared with analysts’ expectations of $1.84. Profit of $2.87 billion plunged 69% from a year earlier, driven mostly by the provisions, while revenue proved to be more resilient, only declining 3% from a year earlier to $29.07 billion. The earnings drop was caused by a massive $6.8 billion addition to the bank’s credit reserves. The move signals that management expects a surge in defaults across the company’s lending businesses, from credit cards in its consumer division to energy, real estate and retail sector loans in its commercial operations, and that the coming quarters could see more significant reserve builds. JPMorgan shares fell 2.7% on the day. Wells Fargo reported a similar situation to JPMorgan, missing analyst expectations of 33 cents with a profit per share of just 1 cent with a $3.1 billion reserve build and a markdown of impaired securities, sending its shares 4.0% lower. Today, major US financial sector earnings will continue with Bank of America, Citigroup, Goldman Sachs, and PNC Bank. Also yesterday, Johnson & Johnson shares rose by 4.5% after the drugmaker raised its quarterly dividend, even as it cut full-year earnings guidance due to the coronavirus outbreak. Also, UnitedHealth Group shares are up over 1.0% in pre-market trading after solid results this morning.

Government Economic/Business Support Efforts Continue to Expand

The Paycheck Protection Program (PPP), which has been met with a rush of small businesses applying for loans, is set to be augmented and the Treasury Department has reportedly agreed with US airline companies on terms of government assistance. Treasury Secretary Mnuchin and Senate Democratic Leader Schumer are expected to reach a deal this week on an interim coronavirus relief bill that would add $250 billion to the PPP small business lending program. The PPP program is expected to run out of money as early as this week after making loans to a little over a million businesses. Mnuchin is working to focus this legislation on small-business programs, arguing that other issues such as funding for state governments and hospitals should be dealt with separately but has expressed a willingness to compromise. Meanwhile, Secretary Mnuchin and US airline heads are said to have agreed on requirements of federal funding support of $25 billion, lifting industry share prices in pre-market trading. 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.

Additional Themes

Oil Sinks Despite Support Efforts – International benchmark Brent crude prices are retracing a portion of their recent rally while US benchmark WTI prices have slumped back to nearly multi-decade lows under $20 per barrel as traders ponder the efficacy of supply cuts to offset the collapse of demand amid the pandemic. A report from the International Energy Agency (IEA) is estimating that the contraction in demand for this year will be over 9 million barrels per day (bpd), wiping out a decade of gains, with a -18% quarter-on-quarter plunge in Q2. It also forecasts that storage for the growing worldwide surplus might run out by mid-year. Yesterday, Texas regulators and industry leaders began a debate over potential output cuts in the state.

Grim Economic Data Continues – The Johnson Redbook Index, which represents over 80% of the Commerce Department’s official retail sales series but is released on a weekly basis, showed that sales dropped 8.3% month-on-month (m/m) and 2% year-on-year (y/y) in the week ending April 11. Sales had been up around 5.5% y/y in January and February and then surged to 9.1% y/y in early March as households stoked up for social distancing. Official March retail sales and industrial production are due today, with forecasts for contractions of 8.0% m/m and 4.0% m/m, respectively.

 

Summary and Price Action Rundown

Global risk assets rose overnight, as investors continue to weigh the prospects for a global economic recovery amid unprecedented fiscal and monetary support, an OPEC+ deal, and hopeful public health data, while awaiting corporate earnings reports. S&P 500 futures point to a 1.1% higher open, which would retrace yesterday’s loss that put year-to-date downside for the index at 14.5% and the decline from February’s record high at 18.4%. A leveling off in Covid-19 infection curves, along with aggressive monetary and fiscal support measures, have calmed global financial markets and allowed investors to focus on the tantalizing but uncertain prospects of an economic recovery. EU stocks are moderately higher after reopening from the extended holiday weekend, while Asian equities mostly posted solid gains overnight. Treasury yields are fluctuating mildly, with the 10-year yield at 0.75%. The dollar is continuing to edge below its mid-March multi-year peak. Meanwhile, oil prices are attempting to hold their recent gains as traders continue to parse the impact of the OPEC+ decision (more below).

Highly Uncertain Corporate Earnings Reporting Season Kicks Off

Investors are understandably wary over first quarter (Q1) corporate results as they await details from management on the depth of the current contraction and plans for navigating what is likely to be a tricky recovery. Earnings reporting season kicks off today in earnest with some major banks and corporate bellwethers reporting, including JPMorgan, Wells Fargo, Johnson & Johnson, and Fastenal. Most major US financials will report throughout the remainder of the week, including Bank of America, BlackRock, Goldman Sachs, and Citigroup. Analysts anticipate choppy figures and high uncertainty regarding managements’ outlook for coming quarters. Overall Q1 earnings growth for S&P 500 companies has been slashed from 4.4% coming into this year to -5.4% versus Q1 last year. Estimates for Q2 are worse, projecting a contraction of 10% year-on-year. Energy companies have seen the largest downgrades, along with industrials and consumer discretionary. As with economic data, the outlook for a rebound in earnings in Q3 and Q4 will likely be more impactful of stock prices than Q1 misses or the depths of the Q2 trough, though visibility on any forecasts will be low.

Policymakers Grapple with Questions Over Restarting Segments of the Economy

Investors are increasingly focused on the outlook for the economic recovery, as significant unknowns and weighty policy decisions loom. Highlighting how contentious this delicate process may become, President Trump asserted the right of the federal government to declare a reopening of businesses and schools across the US but state governors who responded tended to differ with this assessment. Governors of Washington, California, and Oregon announced that they would be teaming up to jointly strategize about restarting more normal levels of economic, educational, and social activities, as did the governors of New York, New Jersey, Pennsylvania, Delaware, Connecticut, Massachusetts, and Rhode Island. Frameworks for reopening will be rolled out over the coming days, but analysts note that the levels of testing, symptom tracking, and contact tracing that other countries have employed in their recovery efforts are not yet similarly available in the US. Meanwhile, in Europe, the EU Commission is said to be pushing for coordination across its member states on the timing and procedures for restarting the regional economy. At this point, projections for growth in the second half of this year are little more than speculation, though economists are continuing to estimate the depth of the Q2 trough. Goldman Sachs is now forecasting a 35% contraction across developed economies for this quarter and the IMF will release their World Economic Outlook later today.

Additional Themes

Oil Prices Under Pressure Despite Support Efforts – International benchmark Brent crude and US benchmark WTI prices are struggling to hold their recent gains this morning as traders ponder the efficacy of supply cuts to offset the collapse of demand amid the pandemic. WTI is underperforming, trading barely above its nearly 20-year low from March, as state industry regulators in Texas meet today to discuss the potential for output curbs, which would mirror efforts by overseas oil producers to support prices. Specifically, OPEC, Russia, and other major producers (collectively known as OPEC+) cut a deal to reduce supply by 9.7 million barrels per day over the next two months, while other G-20 energy ministers also acknowledged output declines. Yesterday, President Trump and Saudi officials suggested that the cuts, combined with filling petroleum reserves, will effectively reduce supply by nearly 20 million barrels per day.

Airline Stocks Relapse Amid Bailout Wrangle – As Treasury Secretary Mnuchin and US airline heads debate the requirements of federal funding support, investors sold the stocks of the carriers yesterday, imposing losses of 5-8%, reversing a modest rally in the sector. The Treasury is pushing for 30% repayment of the funds within five years, and stock warrants worth a percentage of the total support package, and Mnuchin has insisted that this is not a bailout.

Summary and Price Action Rundown

Global risk assets are moderately lower this morning following last week’s steep rally, as investors pause to digest the most recent Fed action and the OPEC deal, while awaiting corporate earnings reports. S&P 500 futures indicate a 0.7% lower open after rebounding 12.1% last week, which put year-to-date downside for the index at 13.7% and the decline from February’s record high at 17.6%. Last month’s acute volatility has subsided somewhat amid supportive monetary and fiscal policy measures, with stabilizing oil prices also lifting sentiment, although uncertainty over pandemic containment and economic recovery prospects persist. EU stock markets remain closed for a holiday and Asian equities were mixed overnight. Treasury yields are flat, with the 10-year yield at 0.72%. The dollar is continuing to slide below its mid-March multi-year peak. Meanwhile, oil prices are fluctuating moderately after their steep rally as traders parse the impact of the OPEC+ decision (more below).

Dramatic Fed Action Keeps Investors Focused on Support Measures

Last week, the Federal Reserve announced muscular new aid programs and augmentations to other facilities to support the US economy during the depression-level contraction of business activity mandated by pandemic containment. Ahead of a scheduled online webinar by Chair Powell last Thursday, the Fed unveiled a large array of new programs, which total up to $2.3 trillion. Specifically, they include liquidity support for the ongoing Payroll Protection Program, a new Municipal Liquidity Facility that will offer up to $500 billion in lending to states and municipalities, augmentation of three existing credit facilities aimed at increasing credit to households and businesses, and expansion of the type of collateral they will accept through the Term Asset-backed Loan Facility. Furthermore, the Secondary Market Corporate Credit Facility will lend, on a recourse basis, to a special purpose vehicle (SPV) that will purchase corporate debt issued by eligible issuers, including individual corporate bonds as well as High Yield ETFs. Also, the details of the Fed’s $600 billion Main Street Business Lending Program show that the loans will be targeted toward businesses with up to 10K employees and less than $2.5 billion in revenues for 2019, while principal and interest payments will be deferred for a year. The Main Street loans will be a minimum of $1 mil and a maximum of either $25 million or an amount that “when added to the Eligible Borrower’s existing outstanding and committed but undrawn debt, does not exceed four times the Eligible Borrower’s 2019 earnings before interest, taxes, depreciation, and amortization,” whichever is less. Rates will be equal to the Fed’s Secure Overnight Financing Rate, currently 0.01%, plus 250-400 basis points with a four-year maturity. A special-purpose vehicle that Fed created jointly with the Treasury Department will purchase 95% of the loan while the financing institution would hold the other 5%.

Oil Steadies as Price War Ends and Further Output Cuts Begin

Brent crude is hovering at its highest level in nearly a month after OPEC, Russia, and other major oil producers agreed to historic production curbs over the weekend, but some analysts still forecast continued oversupply. After revisiting nearly two-decade lows in late March, international benchmark Brent crude and US benchmark WTI prices have climbed $9 per barrel and $3 per barrel, respectively, to $31.48 and $22.76, in a choppy uptrend over the past week as traders have weighed production cuts versus crashing demand. After Thursday’s virtual meeting, OPEC, Russia, and other major producers (collectively known as OPEC+) cut a deal to reduce supply by 9.7 million barrels per day over the next two months, with Russia and Saudi agreeing to match each other’s reduced production levels. Mexico held out but eventually agreed to a more modest supply cut than their peers. Saudi also hosted talks with G-20 energy ministers over the weekend, which resulted in the US, Brazil, and Canada acknowledging output declines, though these are characterized as distinct from OPEC’s voluntary reductions. Still, analysts question whether even these large production cuts can balance the dramatically oversupplied oil market, which has seen demand collapse amid the coronavirus pandemic.

Additional Themes

Investors Brace for Earnings Reports – First quarter corporate earnings reporting season kicks off tomorrow in earnest with some major banks and corporate bellwethers reporting, including JPMorgan, Wells Fargo, Johnson & Johnson, and Fastenal. Analysts anticipate choppy figures and high uncertainty regarding managements’ outlook for coming quarters. As with economic data, the outlook for a rebound will likely be more impactful of stock prices than the depths of the second quarter trough.

Week Ahead – Initial jobless claims data for the week ending April 11 will be in the spotlight on Thursday after the prior week registered another grim tally of 6.6 million more filings, bringing the total reported in the last three weeks close to 17 million. US industrial production and retail sales data for March will also be in focus, along with first quarter Chinese GDP.

Summary and Price Action Rundown

Global risk assets are mixed this morning ahead of tomorrow’s US holiday, as investors await additional fiscal support from Congress, key jobs data, an OPEC decision, and statements from Fed Chair Powell. S&P 500 futures point to a slightly lower open after the index reaccelerated to the upside yesterday, putting week-to-date gains at 10.5%, which reduced year-to-date downside for the index to 14.9% and the decline from February’s record high to 18.8%. Last month’s acute volatility has subsided somewhat amid supportive monetary and fiscal policy measures, with bouncing oil prices also lifting sentiment, although uncertainty over pandemic containment and economic recovery prospects persist. Yesterday, traders also seized upon Dr. Fauci’s statement that the coming week could mark “the beginning of a turnaround” in the US outbreak, though he added that suppression measures should not be relaxed, while some analysts attributed a degree of yesterday’s market upside to Senator Sanders’ suspension of his presidential campaign. EU and Asian equities were mixed overnight. Treasury yields are edging lower, with the 10-year yield at 0.73%, while EU sovereign bond yields similarly dip. The dollar is continuing to fluctuate mildly below its mid-March multi-year peak. Meanwhile, oil prices are extending their steep rally ahead of today’s pivotal OPEC+ decision.

Economic Support Efforts Help Underpin Optimism on Recovery

Investors continue to pin hopes on the significant and swift deployment of US fiscal firepower to offset the economic impact of the pandemic. Only days after last Friday’s official launch of the $349 billion small business support facility, the Paycheck Protection Plan (PPP), which was established as part of the $2.2 trillion CARES Act, the Trump administration is working to augment the program with additional funds amid a flood of applications. Specifically, the Treasury Department is asking Congress to commit another $250 billion to replenish the PPP. Senate Majority Leader McConnell stated that he would work to “approve further funding for the Paycheck Protection Program by unanimous consent or voice vote” today given that most lawmakers are in home districts. However, Senate Minority Leader Schumer and House Speaker Pelosi are proposing inclusion of funds to provide additional relief to hospitals and state & local governments, potentially complicating an expedited top-up of the small business loan program.

Expectations of Deep and Coordinated Supply Curbs Extend Oil Rebound

Brent crude is at its highest level in nearly a month on signs that consensus on measures to support oil prices will be reached between OPEC, Russia, and other major oil producers at today’s virtual meeting. Reports yesterday eased concerns that the cartel may fail to secure cooperation from Russia and other key producers in a unified attempt to restrict oil production and rebalance the oversupplied market. Oil ministers from Kuwait and Algeria both cited the potential for output curbs of 10 million barrels per day or more, and Russia conveyed favorable signals as well. Saudi is also hosting a G-20 energy ministers’ conference call tomorrow. Although the US will not directly cooperate with OPEC production cuts, the US Energy Information Administration estimated that US shale oil production would fall by 1 million barrels per day as a consequence of pressures on the industry, which some analysts view as signaling de facto US participation. For context, Brent crude prices have rebounded more than 50% since last week, after revisiting a nearly two-decade low, amid signs that Saudi and Russia may be stepping back from their oil price war, with President Trump encouraging détente. Still, analysts question whether even significant production cuts can balance the dramatically oversupplied oil market, which has seen demand collapse amid the coronavirus pandemic.

Additional Themes

Fed Minutes Set the Table for Chair Powell – Yesterday, the Minutes of the Federal Reserve’s March 15^th meeting showed that the Fed expects the economic activity to decline in the coming quarter due to the coronavirus outbreak. They noted that the timing of the recovery will depend on the containment measures put in place, the success of those measures, and on the responses of fiscal policy. Policymakers also see an extremely large degree of uncertainty regarding how long and severe such a decline in activity would be. Fed Chair Powell will give an update on the economy today at 10am in a webcast sponsored by the Brookings Institution. He is also expected to detail Fed support programs, including the Main Street lending facility.

Jobless Claims in Focus – Initial jobless claims data for the week ending April 4 is due this morning and analysts are expecting another grim tally, with consensus at 5.5 million, though many estimates are closer to 7 million. Even if this morning’s reading registers a modest decline from the 6.6 million filings the prior week, it would put the total of new jobless claims since mid-March over 15 million and send the unemployment rate toward 15%. Markets, however, appear priced to receive this dire data, with only modest responses to the prior releases.

Summary and Price Action Rundown

Global risk assets are mixed and price action is moderate this morning as investors remain focused on the prospective transition from pandemic containment to economic recovery, while monitoring the ongoing impact of key stimulus programs. S&P 500 futures indicate a 0.5% gain at the open after the index struggled yesterday to maintain Monday’s upward momentum, surrendering gains of around 3.5% to close slightly lower. This put year-to-date downside for the index at 17.7% and the decline from February’s record high at 21.5%. Though last month’s acute volatility has subsided somewhat amid supportive monetary and fiscal policy measures, persistent uncertainty over pandemic containment and doubts over economic recovery prospects continue to hold back investor sentiment. EU and Asian equities posted divergent performance overnight. Treasury yields are edging higher, with the 10-year yield at 0.74%, while EU sovereign bond yields are mixed. The dollar is fluctuating mildly below its mid-March multi-year peak. Meanwhile, oil prices are steadying after yesterday’s sharp downside reversal as traders position ahead of tomorrow’s pivotal OPEC meeting.

Policymakers Rush to Re-Up Small Business Loan Program

Small business owners are seeking support in droves as conditions worsen, while questions reverberate over the size of the program and issues regarding access. Only days after last Friday’s official launch of the $349 billion small business support program, the Paycheck Protection Plan (PPP), which was established as part of the $2.2 trillion CARES Act, the Trump administration is working to augment the program with additional funds amid a flood of applications. Specifically, the Treasury Department is preparing to ask Congress to commit another $250 billion to replenish the PPP, with reports suggesting that the request could come as soon as today, not even a week into the program. Banks and the Small Business Administration have been overwhelmed by applications, which some analysts are estimating could need as much as $1 trillion to fulfil the demand. Senate Majority Leader McConnell stated that he would work with Treasury Secretary Mnuchin and Senate Minority Leader Schumer to “approve further funding for the Paycheck Protection Program by unanimous consent or voice vote during the next scheduled Senate session on Thursday.” Meanwhile, financial sector participation in the program is widening, as Secretary Mnuchin indicated that 3,000 banks and other lenders are accepting applications, up from 2,400 on Monday.

Economic Distress Intensifies as Containment Efforts Continue

The urgent need for support at the small business level and for workers suddenly out of a job could hardly be more obvious and is validated by incoming data. Yesterday’s reading of the NFIB Small Business Optimism gauge plummeted by an unprecedented degree in March. It is now at 96.4, almost a five-year low, while its collapse from 104.5 in February to 96.4 constituted the largest net change (8.1) on record. The small business outlook for six months from now fell 17 points from 22 to 5, the worst since November 2012. Sales expectations had the largest ever decrease, while uncertainty increased to three-year highs. In February, US job openings (JOLTS) fell 130k from 7.012m (4.4%) in January to 6.882m (4.3%). Expectations for job openings were as low as 6.50m, likely a forward projection as some participants over-anticipated early effects of the virus. Job openings contractions were focused in real estate and health services. Professional and business services constituted the largest contraction in hiring, followed by construction. Analysts agree that US job openings were elevated before the virus spurred layoffs. Given the rebound in January and general resiliency in February, the labor market was solid at the beginning of the year – before the coronavirus began to drag on the economy. President Trump and White House officials continue to reference ongoing plans to restart portions of the economy, although the data used to inform such decisions in various countries overseas, like symptom tracking and contact tracing, is not yet available in the US.

Additional Themes

EU Lacks Consensus on Broader Virus Response – A meeting of EU finance chiefs failed to settle on a unified €500 billion regional economic support package to offset the depression-like contraction induced by mass isolation and social distancing. The key sticking points were said to be aspects of the program that would force the various countries to accept a degree of fiscal burden sharing, including the potential issuance of pan-EU debt. Talks are continuing.

Fed Minutes Precede Chair Powell Tomorrow – Analysts are awaiting this afternoon’s release of the minutes from the emergency March 15 Fed meeting, at which the FOMC cut interest rates by 100 basis points to effectively zero and announced a $700 billion asset purchase program (quantitative easing), which was later upped to unlimited purchases, alongside an array of other facilities to support liquidity in domestic markets and dollar availability overseas. This will set the stage for Chair Powell’s webcast economic update at 10am tomorrow.

Summary and Price Action Rundown

Global risk assets are extending yesterday’s rally this morning as investors continue to focus on the prospective transition from pandemic containment to economic recovery, while monitoring the ongoing impact of key stimulus programs. S&P 500 futures point to a 3.3% gain at the open, which would build on yesterday’s 7.0% surge that brought year-to-date downside for the index to 17.6% and the decline from February’s record high to 21.3%. With the extreme market stress of the past few weeks easing amid a confluence of supportive monetary and fiscal policy measures, and the bounce in oil prices also helping improve the mood, market participants are shifting their focus to hopes of pandemic containment and gradual economic recovery. EU and Asian equities also advanced overnight. Treasury yields are moving upward amid the improved risk appetite, with the 10-year yield at 0.75%, while EU sovereign bond yields are also edging higher. The dollar is retreating further from its mid-March multi-year peak. Meanwhile, oil prices are resuming their sharp rally ahead of Thursday’s OPEC meeting.

 

Upbeat Tone Continues as Investors Pin Their Hopes on Containment and Stimulus

The ongoing rally in equities is being underpinned by optimism that pandemic containment efforts will facilitate a progressive reopening of the economy amid ever more muscular fiscal support. House Speaker Pelosi reportedly told fellow Democrats yesterday that another pandemic relief spending bill is in the works, worth at least $1 trillion, to top up existing programs from the $2.2 trillion CARES Act. Specifically, Speaker Pelosi said the funds would go to more direct payments to individuals and households, augmented unemployment benefits, and the small business loan program (more below). Speaker Pelosi’s priorities for this next round of spending represent a pivot from a prior blueprint, which featured infrastructure spending components rather than fully concentrating on direct pandemic relief. President Trump reiterated his support for additional fiscal spending to cushion the blow of the pandemic yesterday, though he continues to want “real infrastructure” spending to be featured. This comes as investors increasingly focus on the prospects for economic recovery following the seemingly impending peak of the infection curve, as the recent decline in fatality rates of Covid-19 in key hotspots, including Italy, Spain, France, New York, and New Jersey, spur hopes for a gradual resumption of more normal economic and societal activity by later April or early May.

Small Business Loan Program in Demand

Small business owners seek support as conditions worsen but questions reverberate over the size of the program and issues regarding access. Friday’s official launch of the $349 billion small business support program, the Paycheck Protection Plan (PPP), which was established as part of the $2.2 trillion CARES Act, has been met with a rush of applicants. National Economic Council Director Kudlow yesterday morning stated that $38 billion in loans had been made to 130,000 small businesses already. For context, banks are acting as intermediaries for the loans and existing lending clients are being given priority, which is being highlighted as a flaw in this system. Bank of America stated that it has received applications from 177K of its small business clients, totaling $33 billion in financing, pending approval by the Small Business Administration. Meanwhile, Wells Fargo announced that they are not accepting any new loan applications, as they have already reached their $10 billion target. Many banks have yet to begin taking applications due to uncertainty around the Treasury Department’s rules, though reports note that 2,400 lenders are currently involved. Also, the Federal Reserve announced yesterday that it will create a facility to purchase loans offered under the PPP with the intention to help banks continue lending to cash-strapped firms from their own balance sheets. Meanwhile, a gauge of US small business confidence registered the largest drop on record in March.

Additional Themes

Oil Prices Rise Ahead of OPEC – After revisiting nearly two-decade lows early last week, international benchmark Brent crude and US benchmark WTI are extending their rally amid favorable indications for a supportive deal at Thursdays meeting between OPEC, Russia, and other major producing nations. For context, oil prices have rebounded nearly 50% over the past week following signs that Saudi and Russia may be stepping back from their oil price war, with President Trump encouraging détente. The cartel is exploring the potential for a coordinated output cut of 10 million barrels per day among its members and other major producers.

Emerging Markets (EM) Rebound Amid IMF Action – Reports indicate that the IMF is set to launch a short-term dollar lending program to further address the issue of dollar liquidity scarcity that is particularly acute in some EM countries. This would be similar to the repo facility opened by the Federal Reserve last week through which a broad swath of foreign central banks can post their Treasury holdings as collateral against short-term dollar loans. A broad index of EM currencies is up 0.7% today after hitting a cycle low on Friday.