Morning Markets Brief 3-20-2020

Summary and Price Action Rundown

Global financial markets rebounded overnight as the historical volatility of earlier this week begins to ebb following bold moves by central banks in the US, EU, and elsewhere, though investors remain focused on the need for fiscal efforts to address the unprecedented economic fallout from the pandemic over the coming months. S&P 500 futures indicate a 3.2% rally at the open, which would build on yesterday’s choppy and hesitant gain. Heading into today’s opening bell, the index is suffering its worst week since 2008, with losses of 11.1% thus far, putting year-to-date downside at 25.4% the decline from mid-February’s record high at 28.9%. EU equities are rebounding 5.1% this morning while Asian stocks posted solid gains overnight. Despite the improving tone in equities, Treasury yields are continuing lower, with the 10-year yield at 0.98%, while EU sovereign bond markets are extending the rally ignited by the European Central Bank’s muscular actions on Wednesday night. Encouragingly, the dollar’s sharp appreciation trend is retracing from yesterday’s multi-year highs. Lastly, oil prices are recovering from their historical midweek swoon, with Brent crude back above $30 per barrel.

Global Central Banks Work Overtime to Calm Panicked Markets

Policymakers have been forced to take increasingly radical steps this week to confront the interlocking public health, economic, and financial crises brought on by the pandemic, with the European Central Bank (ECB) and Federal Reserve, among other central banks, stepping in to ease liquidity strains and address systemic risks. This morning, markets are displaying some tentative stabilization after a week of unprecedented central bank measures to quell the most acute stresses. After intervening in bond markets to stem the rout in Italian debt, the ECB announced a €750 billion Pandemic Emergency Purchase Program (PEPP) on Wednesday night, with ECB President Lagarde stating that there are “no limits” to their commitment to steady EU financial markets, echoing her predecessor Mario Draghi’s “whatever it takes” stance that helped quell the EU debt crisis in 2012. The PEPP greatly ups the ECB’s firepower and will not be bound by the same strictures as prior ECB quantitative easing programs, with Greek debt being eligible alongside other loosened constraints. The Fed had come in on Sunday night with its own “shock and awe” measures, cutting rates 100 basis point (bps) to the zero bound and announcing a $700 billion quantitative easing program, alongside other efforts to boost dollar liquidity in the US and overseas. Over subsequent days, the Fed announced liquidity support facilities for commercial paper markets, primary dealers, and money market mutual funds, while expanding its dollar swap lines with overseas central banks in an effort to address the offshore dollar liquidity crunch. Other global central banks engaged in extraordinary easing this week, including the Bank of England, Reserve Bank of Australia, and the Bank of Japan.

Investors Ponder Unprecedented Economic Damage from the Pandemic

The severe impact of the pandemic is unfolding in dramatically worsening growth, business confidence, and labor statistics from around the world, with yesterday’s deteriorating US unemployment data just the tip of the iceberg. The number of Americans filling for unemployment benefits, known as initial unemployment claims, spiked by 70K to 281K in the week ended March 14, with the tally well above consensus expectations of 220K and clearly attributable to the impact the outbreak. This was up from 211K in the previous week, which is the level where claims have stayed for much of the last three years. However, worse is still to come. By tracking initial claims being filed at the state level this week, economists are warning that the claims data released next Thursday could show that as many as 2 million Americans newly filed for unemployment insurance, a completely unprecedented rise in claims. This comes as economists continue to downgrade their growth outlooks, with a global recession now a “base case” for a number of them and others predicting that the recession has already arrived, while the second quarter is at risk of registering a “depression” level plunge in growth.

Additional Themes

Oil Prices Bounce from Nearly 20-Year Lows – Oil prices are jumping again today after plumbing roughly 18-year lows midweek, as traders noted President Trump’s remarks yesterday indicating that his administration is working to resolve the ongoing oil price war between Saudi and Russia, although reports this morning suggest that Russia is not ready to back down. For context, the precipitous sell-off has been driven by expectations that the pandemic will crush global demand for crude, with the price war that began late last month between Saudi Arabia and Russia compounding the pressure.

Longer Duration Treasuries Being Considered – Reports yesterday indicated that the Trump administration is again considering ultra-long Treasury bonds, at 25 and 50-year tenors. The cool reaction from market participants to similar proposals over recent years has been a key factor in the Treasury shelving them, but the current circumstances might see the stars aligning.