Summary and Price Action Rundown
Global risk assets are mixed this morning, amid relatively calmer price action, as investors ponder the degree to which even the massive fiscal and monetary stimulus deployed around the world over the past month can cushion the impact of the pandemic. S&P 500 futures are fluctuating moderately after last week’s rally of 10.3% brought year-to-date downside for the index to 21.3% and its decline from February’s record high to 25.0%. The extreme market volatility of the past few weeks has eased somewhat amid a confluence of supportive policy measures, including more aggressive Fed/global central bank accommodation and massive US fiscal stimulus. Nevertheless, grim infection and mortality totals and an extending timeline for social distancing measures is continuing to weigh on investor sentiment. EU and Asian equities were mostly lower overnight. EU sovereign bonds are choppy after last week’s rally, while Treasury yields continue to head lower, with the 10-year yield at 0.65%. The dollar is pausing its retreat from multi-year highs, while oil prices remain under severe pressure (more below).
Stimulus Efforts Continue as the Covid-19 Pandemic Batters the Global Economy
The US and China deployed high-profile support for their respective economies over the past few days, with President Trump signing the phase three coronavirus relief bill on Friday and the People’s Bank of China (PBoC) adding liquidity on Sunday night, but uncertainty continues over the efficacy and sufficiency of the ongoing measures. The PBoC injected 50 billion renminbi into the banking system overnight at a rate of 2.2% versus the prior level of 2.4%, a larger reduction than the typical increment. The impact, however, was modest, with Chinese equities performing roughly in line with regional peers and the renminbi closing flat. This comes amid varied reports about secondary infection clusters in Asia weeks after the initial peak of contagion rates in some countries. The PBoC’s move followed last week’s finalization of the US $2.2 trillion phase three relief bill (CARES Act), which President Trump signed on Friday afternoon. The bill includes direct support for both households and companies, but the timeline for disbursement varies widely across the many segments and analysts are pondering the ability of different levels of government to translate the budget allocations into actual expenditures. 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. Speaker Pelosi said that she and her fellow members “know that we must do more.”
Systemic and Liquidity Strains Have Eased but Some Pockets of Stress Remain
Amid an interlocking liquidity crunch and a slower-moving but intensifying solvency crisis brought on by the pandemic, the Fed announced extensive new measures last week to provide both unprecedented liquidity and direct monetary support for the economy, with encouraging initial effects. The Fed is now buying Treasury securities and agency mortgage-backed securities in unlimited amounts in order to support smooth market functioning along with increasing purchases of agency commercial mortgage-backed securities. However, Friday’s late session announcement that the Fed’s current $75 billion per day pace of Treasury purchases would be pared to $60 billion by the end of next week coincided with a selloff in risk assets. Also last week, the Fed created two facilities to support credit to large employers and established a third facility to provide a flow of funds to consumers and businesses, along with offering credit for municipalities, and will provide up to $300 billion in new financing for employers, consumers, and businesses. Investment grade credit rallied steadily throughout the week, and traders have noted some signs of better market functioning, and high yield debt improved after Monday, although both remain at stressed levels. Meanwhile, analysts are citing diminished evidence of strains in offshore dollar funding markets, while short-term funding (repo) and interbank markets similarly appear more orderly. Commercial paper markets, however, have remained under pressure as the Fed readies its support program.
Oil Prices Sink Further – Even as US equities attempt to steady, Brent crude is extending last week’s steep losses to trade below $23 per barrel. Provisions for funding to top up the Strategic Petroleum Reserve never made it into the final pandemic relief bill, while the International Energy Agency described global oil demand as in “free fall” amid the pandemic. Reports show no end in sight for the Saudi versus Russia price war and suggest that President Trump is more focused on exceptionally low prices at the pump than the damage to the US shale patch.
EU Banks Hit by ECB Dividend Request – An index of EU bank stocks is down 5.0% this morning, dramatically underperforming the broader index, after the European Central Bank (ECB) asked the industry to withhold dividend payments and share buybacks until at least October. Meanwhile, market-based gauges of credit stress at EU banks are elevated but remain significantly below the crisis levels of 2011/12 amid aggressive ECB support.