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.
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.