Category: Briefings

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

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

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

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

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

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

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

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

US Economic Data: Focus on consumer sentiment for virus impact  

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

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

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

European Central Bank: No time to waste 

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

EU Economic Data: Feeling contractions 

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

Chinese Economic Data: Price check  

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

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

Afternoon Markets Brief 3-4-2020

Summary and Price Action Rundown

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

 

Investor Optimism Over Global Stimulus Rebounds Amid Increasing Signs of Coordination

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

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

Expectations for More Aggressive Policy Easing Overbalance Initial Disappointment

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

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

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

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

Additional Themes

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

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

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

Morning Markets Brief 3-13-2020

Summary and Price Action Rundown

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

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

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

 

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

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

 

Additional Themes

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

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

 

Morning Markets Brief 3-11-2020

Summary and Price Action Rundown

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

Global Central Banks Continue Enacting Proactive Stimulus  

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

 Prospects for Fiscal Stimulus Remain in Focus 

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

Additional Themes

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

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

 

Morning Markets Brief 3-10-2020

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.

 

Morning Markets Brief 3-9-2020

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.

Morning Markets Brief 3-5-2020

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.

Five Minute Macro 3-2-2020

Coronavirus fears continue to drive markets, while a coordinated Global Central Bank response to the outbreak moves into the 2nd spot, replacing Weakening Global Economic Data. Oil Multiyear Lows enters in the 4th spot, with US Political/Policy Uncertainty rounding out the top 5.

Morning Markets Brief 3-2-2020

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.