Morning Markets Brief 2-11-2020

Summary and Price Action Rundown

Global risk assets were broadly positive overnight as investors continue to discount the potential impact of the coronavirus outbreak and await testimony by Fed Chair Powell. S&P 500 futures point to a 0.2% gain at the open, which would send the index to another record high. Friday’s moderate selloff has proven to be a temporary lull in the rally, which has been fueled over the past week by optimism on apparently slowing infection rates and renewed production and other economic activity in China. Overnight, equities in Asia and the EU moved broadly higher. Treasuries are paring their recent gains as risk appetite builds, although moves are modest ahead of Chair Powell’s remarks today, with the 10-year yield at 1.59%, barely above multi-month lows. The dollar is pausing its recent uptrend. Crude oil prices are rebounding as virus-related growth fears ebb, with Brent crude back above $54 per barrel.

Fed Policy in Focus Ahead of Powell Testimony

Chair Powell is likely to sound incrementally more dovish when he testifies in front of both houses of Congress today and tomorrow for his semiannual Humphrey-Hawkins report. The Fed’s written statement preceding the testimony identified the coronavirus outbreak as a “new risk” and Chair Powell is likely to face extensive questioning on his assessment of the potential impact and the Fed’s expected policy response. For context, futures markets reflect over 50% odds that the Fed will restart rate cuts by the July meeting, and one full 25 basis point rate cut and meaningful likelihood of a second are being priced in before March 2021. Another line of inquiry will surely be the unsettled situation in short duration funding markets and the Fed’s choice of balance sheet expansion at a pace of $60 billion per month as a primary means of addressing this issue. These renewed asset purchases, which the Fed characterizes as a technical adjustment, are being taken by many in financial markets as a stealth easing program akin to quantitative easing (or QE). Chair Powell has warned that the asset purchases will not continue indefinitely but analysts question the Fed’s ability to taper the program without conveying the impression that they are tightening monetary policy. Meanwhile, overseas, European Central Bank President Lagarde and Bank of England Governor Carney are also speaking today, with the emphasis expected to be on downside risks due to the outbreak.

 Coronavirus Concerns Ebb

Optimism for containment and limited economic fallout is on the upswing again amid reopening of various factories and declining numbers of recorded infections in China. To better understand the key risk factors of the coronavirus, please listen to the podcast we produced in conjunction with our friends at RenMac, featuring virologist Dr. Christopher Mores.

Click here for RenMac Off-Script: Coronavirus Thru Dr. Chris Mores’ Eyes:

 Analysts are attuned to the phased resumption of production at key IT component maker Foxconn, which is incrementally restarting a number of its previously closed mainland facilities. With over one million employees in China, Foxconn has been viewed as a bellwether for the private sector response to the outbreak. This comes amid reports that President Xi criticized the heavy-handedness of the initial government response to the outbreak, and is pushing for a more balanced approach to lessen the economic impact. Also, the arrival in China of a Western-led medical team from the World Health Organization has been taken as an indication of progress and Chinese confidence, and projections of a partial reopening of GM plants and Apple stores by February 15th is also encouraging. Daily increases in infections have declined over the past week, according to official figures, with the total rising to 43,138 while fatalities have reached 1,018. A top Chinese medical advisor was quoted overnight indicating that the outbreak is set to peak mid-month and level off thereafter. The Shanghai Composite rallied for a sixth straight session, advancing 0.4% to further reduce post-Lunar New Year losses to 2.5%. Official and unofficial state support is being credited with helping the index rebound from last Monday’s plunge of nearly 8% upon reopening from the extended holiday closure. The renminbi also gained versus the dollar overnight. Equities in Hong Kong also rallied, gaining 1.3%, and copper futures jumped 1.2%, suggesting broadening investor optimism.

          Additional Themes

UK GDP Stalls – The pound is steady and UK bond yields are higher as investors discount the importance of fourth quarter GDP growth stagnating to zero. Analysts are projecting a post-election/post-Brexit rebound in activity in the first quarter, but evidence remains spotty.

T-Mobile/Sprint Deal Set for Approval – Reports indicate that the judge in the state-led antitrust case will approve the $26.5 billion takeover, which will put T-Mobile at a comparable level of subscribers as rivals AT&T and Verizon. Shares of Sprint are up 66.3% in pre-market trading while T-Mobile stock is up 8.9%.