Summary and Price Action Rundown
Global risk assets extended yesterday’s declines overnight, as investors brace for a deeper and longer economic trough amid the pandemic despite massive fiscal and monetary stimulus being deployed around the world. S&P 500 futures point to a 3.5% decline at the open, which would deepen yesterday’s loss of 1.6% that brought year-to-date downside for the index to 20.0% and its decline from February’s record high to 23.7%. The extreme market volatility of the past few weeks has eased somewhat amid a confluence of supportive monetary and fiscal policy measures. But President Trump’s warning of a “painful two weeks” to come and dimming hopes of a swift economic rebound even as the infection curve flattens are weighing on investor sentiment. EU and Asian equities posted meaningful losses overnight. Treasury yields are continuing lower, with the 10-year yield at 0.61%, while price action in EU sovereign bonds is mixed but moderate. Worryingly, the dollar is turning higher again after Fed action had appeared to reverse the appreciation trend last week. Meanwhile, oil prices are holding above recent lows amid reports that Russia may be blinking in its ongoing oil price war with Saudi.
Optimism for a Swift Rebound Wanes as the Pandemic Batters the Global Economy
As growth and jobs figures in the US, EU, and elsewhere begin to show severe deterioration, investors expect worse to come and ponder the risk of lingering economic effects. Overseas, the Bank of Japan’s Tankan Index for large manufacturers’ sentiment fell to a 7-year low of -8 in the first quarter (1Q) from 0 in 4Q19. However, this beat consensus expectations of -10. Large companies plan to raise their capital spending by 1.8%, down from 6.8%, but above the 1.1% forecast. Amongst large non-manufacturing firms, sentiment also fell sharply, to 8 from 20 in Q4, but also topped estimates of 6. Similarly, yesterday’s US data came in better than the dour consensus expectations, but economists warn that worse is yet to come. In March, the Chicago Business Barometer decreased by 1.2 points from February to 47.8 but outpaced market expectations of 40.0. However, the survey ran from March 2nd to 16th, so it did not capture the full extent of the US social distancing measures. The Conference Board Consumer Confidence Index declined sharply in March but remained well above consensus expectations. Still, the accompanying statement noted that “March’s decline in confidence is more in line with a severe contraction, rather than a temporary shock, and further declines are sure to follow.” Today, a privately-compiled US jobs figure and the ISM manufacturing purchasing managers’ index (PMI) are both projected to show significant deterioration last month. On Friday, March nonfarm payroll data is expected to mirror the dramatic job cuts previewed by last Thursday’s stunning rise in weekly unemployment claims to 3.28 million.
Policymakers Ready More Stimulus but Executing on Existing Measures is Key
Each day brings news of more fiscal or monetary measures being deployed, providing some support to investor sentiment and easing systemic strains in global financial markets, but uncertainty continues as economies remain paralyzed and solvency pressures mount. House Democrats are already preparing a fourth round of stimulus, just days after finalization of the US $2.2 trillion phase three relief bill (CARES Act), which is said to total roughly $600 billion and encompass additional aid for states and municipalities, support for the housing and leisure industries, and augmented payments to individuals. For its part, the White House has been discussing additional tax breaks and further support for healthcare workers. President Trump yesterday also advocated a $2 trillion spending package to upgrade the country’s aging infrastructure and provide much needed jobs as the pandemic batters the labor market. Analysts note that execution and disbursement of the mammoth funds made available by the CARES Act still needs to be the primary focus, which the White House has acknowledged.
Oil Prices Fluctuate as Russia Softens Stance – After revisiting nearly two-decade lows earlier this week, international benchmark Brent crude and US benchmark WTI prices are attempting to steady this morning amid reports that Russia will refrain from increasing supply, raising hopes of détente with OPEC. For context, the oil price war between Russia and Saudi which erupted last month deepened already intense pressure on energy markets from a pandemic-related demand collapse. President Trump phoned Russian President Putin earlier this week regarding oil prices, and energy officials on both sides are set to engage on the issue.
Dollar Turns Higher Despite Fed Action – While the extensive accommodation measures that it unveiled last week continue to have encouraging effects in dampening systemic pressures, the Fed announced yesterday new dollar liquidity facilities for foreign central banks to mitigate the need to sell Treasuries for cash. These combined with the augmented and expanded overseas dollar swap lines that the Fed activated last month. Despite indications that overseas dollar liquidity is much improved, the greenback is again turning higher as safe haven demand rises.