Morning Markets Brief 3-26-2020

Summary and Price Action Rundown

Global risk assets are retracing a portion of their two-day rally even as Congress is set to pass forceful fiscal measures and the European Central Bank announced an upgrade to its forceful easing program, as investors brace for historically dire US economic data this morning. S&P 500 futures point to a 0.9% decline at the open, which would partly retrace its rally of 10.6% over the past two sessions that reduced year-to-date downside to 23.4% and the decline from mid-February’s record high to 26.9%. The acute market volatility of the past few weeks has eased somewhat amid a confluence of supportive factors, including more aggressive Fed accommodation, glimmers of hope from slightly decelerating contagion figures in Italy and New York, and expectations of massive US fiscal stimulus. EU and Asian equities were mostly lower overnight. In sympathy with EU sovereign bonds, which are rallying after the European Central Bank’s announcement overnight (more below), Treasury yields continue head lower, with the 10-year yield at 0.80%. Importantly, the dollar is extending it retreat from multi-year highs. Oil prices are fluctuating above last week’s nearly multi-decade lows, with Brent crude around $27.

Questions Turn to Efficacy and Sufficiency as Congress Lines Up Massive US Fiscal Support

Market sentiment remains cautious, even with bipartisan agreement in the Senate over the phase three coronavirus relief bill setting up passage in the House, as analysts ponder the degree to which even this major fiscal firepower can cushion the impact of the pandemic. Overnight, the Senate managed to pass the phase three relief bill (CARES Act) with unanimous consent. The bill totals $2.2 trillion and includes direct support for households ($301 billion), expanded unemployment insurance ($250 billion), credit support to companies to backstop lending facilities by the Federal Reserve ($500 billion), concessionary loans to small businesses ($367 billion), money for hospitals and healthcare providers ($130 billion), emergency education and infrastructure finance ($55 billion), and agriculture assistance ($48 billion). House Democrats are expected to approve the bill Friday, though Democrat leaders indicate they do not expect the vote to pass with unanimous consent and encourage debate. The bill grants greater flexibility to banks in lending to small businesses as well as forbearance for holders of federally-backed mortgages through year-end in cases of pandemic-related financial hardship. The timeline of the relief assistance varies. On one hand, Secretary Mnuchin indicated that immediate direct deposits can be implemented for most individuals, whereas some businesses will not receive relief for months until they adjust for reduced payroll taxes. Congressional leadership on both sides have informed their members that up to two more fiscal packages may be needed during the coming weeks of this pandemic.

Investors Brace for an Unprecedented Rise in US Unemployment Claims

Early data for March is revealing a dramatic economic deterioration around the globe, with this morning’s release of last week’s new filings for unemployment in the US expected to shatter the previous record high. Today’s initial jobless claims report for the week ending March 21 is projected to show a massive spike in filings to 1.64 million, following the 281k reported last week, though some estimates run as high as 3 million. California alone indicated that unemployment claims have risen by 1 million in recent days. For context, the previous peak was 695k in 1982. Analysts are concerned that the second quarter will feature a depression-level contraction, even with fiscal support. This comes after preliminary March readings of US manufacturing and service sector Purchasing Managers’ Indexes (PMIs) illustrated a moderate retrenchment in the former and a severe contraction of the latter.

Additional Themes

The European Central Bank (ECB) Greatly Enhances Its Monetary Support – Late yesterday, the ECB issued a document indicating that limitations on sovereign bond purchases that threatened to hamper efforts to steady regional markets would not apply to the €750 billion Pandemic Emergency Purchase Program. For context, the ECB’s previous and ongoing quantitative easing (QE) programs restricted sovereign bond purchases by the central bank to no more than one-third of a single country’s debt. When announcing the program last week, ECB President Lagarde pledged that there was “no limit” to her institution’s commitment to preserving the euro, and yesterday’s release indicated that this move was intended to facilitate “smooth transmission of its monetary policy in all jurisdictions of the euro area.” Sovereign bonds across the EU are rallying this morning, with more stressed peripheral countries like Italy and Greece outperforming, and encouragingly, the euro is rallying versus the dollar.

Daily Dose of Credit Rating Downgrades – Each day brings another set of high-profile cuts to the credit ratings of major companies. Earlier this week, Fitch downgraded Boeing, while S&P relegated Delta Airlines to speculative grade, or “junk,” and cut Ford’s credit rating to junk yesterday. Reports today suggested that Moody’s might cut General Motors to junk as well.