Summary and Price Action Rundown
Global financial markets are struggling to extend their rebound into a second day even as Congress and the White House are set to agree on forceful fiscal measures to cushion the unprecedented economic impact from the pandemic and systemic stresses show signs of easing following aggressive Fed policy action. S&P 500 futures indicate a 0.7% loss at the open, which would partly retrace yesterday’s historic 9.4% rally that reduced the index’s year-to-date downside to 24.3% and its decline from mid-February’s record high to 27.7%. Traders suggest that investor sentiment is finding support from passage of the $2 trillion US fiscal stimulus, more aggressive Fed accommodation, and glimmers of hope from slightly decelerating Italian contagion figures. EU and Asian equities were mixed overnight. Amid continuing investor caution, Treasuries are bid again, with the 10-year yield at 0.82%, while EU sovereign bonds remain steady. Importantly, the dollar is continuing to retreat from multi-year highs. Oil prices are fluctuating above last week’s nearly multi-decade lows, with Brent crude around $26.
Major US Fiscal Support Bolsters Nascent Investor Optimism
Market sentiment remains fragile but incrementally more upbeat today after Congress and the White House agreed overnight on a third-phase $2 trillion US spending bill aimed at supporting households and businesses during the pandemic, though analysts fret that even this massive package may prove to be too little, too late. Overnight, the Senate and the White House reached agreement on the composition of the latest fiscal support bill, which totals around $2 trillion, as expected, and features direct support for households ($1,200 per adult/$500 per child, plus augmented unemployment insurance), credit support to companies ($500 billion), concessionary loans to small businesses ($350 billion), and money for hospitals and healthcare providers ($150 billion). House Democrats are expected to approve the bill, though they had crafted their own version featuring $2.5 trillion in government support for workers and businesses, featuring moratoriums for mortgage, car, and credit card payments, breaks for public housing rent, $10k in student loan forgiveness, and a freeze on foreclosures and evictions. Democrat House leaders have reportedly told their members that up to two more fiscal packages may be needed during the coming weeks of this pandemic. Meanwhile, President Trump’s latest remarks convey anxiousness to restart more normal economic activity, though most of the restrictions and lockdowns are mandated at the state level.
Data Reflects Unprecedented Economic Fallout from the Outbreak
Early readings of activity data for March reveal a dramatic deterioration of business conditions around the globe, with service industries understandably taking the brunt of the pandemic impact. Yesterday’s preliminary March readings of the IHS Markit Manufacturing and Services Purchasing Managers’ Indexes (PMIs) illustrated how the response to Covid-19 is having divergent effects on US business. For context, PMI readings below 50 denote contraction of activity in the sector. The Manufacturing PMI only declined slightly to 49.2 in March from 50.7 in February, which indicated moderate retrenchment but came in well above estimates of 42.8. However, steep rates of contraction were seen in production and new orders, both of which fell to the greatest extent since 2009. This likely foreshadows further declines in the overall index in April, as business confidence was at a record low level. The relative strength in manufacturing comes in stark contrast to the Services PMI, which plummeted to 39.1 from 49.4, and even undershot the pessimistic market consensus of 42. This is the most rapid contraction in business activity ever recorded and looking ahead, companies do not expect to see any improvement in business over the next 12 months due to Covid-19 uncertainty, representing the most pessimistic outlook ever recorded.
Signs of Easing Liquidity Strains Following Fed Firepower – The Fed’s aggressive policy measures over recent days and weeks to provide both unprecedented liquidity and direct monetary support for the economy have been yielding some encouraging results. Investment grade credit rallied for the second straight day yesterday, and traders have noted some signs of better market functioning, although high yield debt remains under extreme duress despite a degree of stabilization. Meanwhile, analysts are citing diminished evidence of stress in offshore dollar funding markets, while short-term funding (repo) and interbank markets similarly appear more orderly. Commercial paper spreads have narrowed to some degree as well.
Battle Begins Over Boeing Bailout – Boeing was downgraded yesterday by rating agency Fitch, while President Trump indicated that the White House was preparing to assist the troubled aerospace giant. Boeing CEO Calhoun, however, has indicated that a government equity stake would be unwelcome, preferring credit and liquidity support. Meanwhile, the latest fiscal bill has $50 billion earmarked for loans and loan guarantees to the airline industry.