Summary and Price Action Rundown
Global risk assets are moderately lower this morning following last week’s steep rally, as investors pause to digest the most recent Fed action and the OPEC deal, while awaiting corporate earnings reports. S&P 500 futures indicate a 0.7% lower open after rebounding 12.1% last week, which put year-to-date downside for the index at 13.7% and the decline from February’s record high at 17.6%. Last month’s acute volatility has subsided somewhat amid supportive monetary and fiscal policy measures, with stabilizing oil prices also lifting sentiment, although uncertainty over pandemic containment and economic recovery prospects persist. EU stock markets remain closed for a holiday and Asian equities were mixed overnight. Treasury yields are flat, with the 10-year yield at 0.72%. The dollar is continuing to slide below its mid-March multi-year peak. Meanwhile, oil prices are fluctuating moderately after their steep rally as traders parse the impact of the OPEC+ decision (more below).
Dramatic Fed Action Keeps Investors Focused on Support Measures
Last week, the Federal Reserve announced muscular new aid programs and augmentations to other facilities to support the US economy during the depression-level contraction of business activity mandated by pandemic containment. Ahead of a scheduled online webinar by Chair Powell last Thursday, the Fed unveiled a large array of new programs, which total up to $2.3 trillion. Specifically, they include liquidity support for the ongoing Payroll Protection Program, a new Municipal Liquidity Facility that will offer up to $500 billion in lending to states and municipalities, augmentation of three existing credit facilities aimed at increasing credit to households and businesses, and expansion of the type of collateral they will accept through the Term Asset-backed Loan Facility. Furthermore, the Secondary Market Corporate Credit Facility will lend, on a recourse basis, to a special purpose vehicle (SPV) that will purchase corporate debt issued by eligible issuers, including individual corporate bonds as well as High Yield ETFs. Also, the details of the Fed’s $600 billion Main Street Business Lending Program show that the loans will be targeted toward businesses with up to 10K employees and less than $2.5 billion in revenues for 2019, while principal and interest payments will be deferred for a year. The Main Street loans will be a minimum of $1 mil and a maximum of either $25 million or an amount that “when added to the Eligible Borrower’s existing outstanding and committed but undrawn debt, does not exceed four times the Eligible Borrower’s 2019 earnings before interest, taxes, depreciation, and amortization,” whichever is less. Rates will be equal to the Fed’s Secure Overnight Financing Rate, currently 0.01%, plus 250-400 basis points with a four-year maturity. A special-purpose vehicle that Fed created jointly with the Treasury Department will purchase 95% of the loan while the financing institution would hold the other 5%.
Oil Steadies as Price War Ends and Further Output Cuts Begin
Brent crude is hovering at its highest level in nearly a month after OPEC, Russia, and other major oil producers agreed to historic production curbs over the weekend, but some analysts still forecast continued oversupply. After revisiting nearly two-decade lows in late March, international benchmark Brent crude and US benchmark WTI prices have climbed $9 per barrel and $3 per barrel, respectively, to $31.48 and $22.76, in a choppy uptrend over the past week as traders have weighed production cuts versus crashing demand. After Thursday’s virtual meeting, OPEC, Russia, and other major producers (collectively known as OPEC+) cut a deal to reduce supply by 9.7 million barrels per day over the next two months, with Russia and Saudi agreeing to match each other’s reduced production levels. Mexico held out but eventually agreed to a more modest supply cut than their peers. Saudi also hosted talks with G-20 energy ministers over the weekend, which resulted in the US, Brazil, and Canada acknowledging output declines, though these are characterized as distinct from OPEC’s voluntary reductions. Still, analysts question whether even these large production cuts can balance the dramatically oversupplied oil market, which has seen demand collapse amid the coronavirus pandemic.
Investors Brace for Earnings Reports – First quarter corporate earnings reporting season kicks off tomorrow in earnest with some major banks and corporate bellwethers reporting, including JPMorgan, Wells Fargo, Johnson & Johnson, and Fastenal. Analysts anticipate choppy figures and high uncertainty regarding managements’ outlook for coming quarters. As with economic data, the outlook for a rebound will likely be more impactful of stock prices than the depths of the second quarter trough.
Week Ahead – Initial jobless claims data for the week ending April 11 will be in the spotlight on Thursday after the prior week registered another grim tally of 6.6 million more filings, bringing the total reported in the last three weeks close to 17 million. US industrial production and retail sales data for March will also be in focus, along with first quarter Chinese GDP.