Summary and Price Action Rundown
Global risk assets rose overnight, as investors continue to weigh the prospects for a global economic recovery amid unprecedented fiscal and monetary support, an OPEC+ deal, and hopeful public health data, while awaiting corporate earnings reports. S&P 500 futures point to a 1.1% higher open, which would retrace yesterday’s loss that put year-to-date downside for the index at 14.5% and the decline from February’s record high at 18.4%. A leveling off in Covid-19 infection curves, along with aggressive monetary and fiscal support measures, have calmed global financial markets and allowed investors to focus on the tantalizing but uncertain prospects of an economic recovery. EU stocks are moderately higher after reopening from the extended holiday weekend, while Asian equities mostly posted solid gains overnight. Treasury yields are fluctuating mildly, with the 10-year yield at 0.75%. The dollar is continuing to edge below its mid-March multi-year peak. Meanwhile, oil prices are attempting to hold their recent gains as traders continue to parse the impact of the OPEC+ decision (more below).
Highly Uncertain Corporate Earnings Reporting Season Kicks Off
Investors are understandably wary over first quarter (Q1) corporate results as they await details from management on the depth of the current contraction and plans for navigating what is likely to be a tricky recovery. Earnings reporting season kicks off today in earnest with some major banks and corporate bellwethers reporting, including JPMorgan, Wells Fargo, Johnson & Johnson, and Fastenal. Most major US financials will report throughout the remainder of the week, including Bank of America, BlackRock, Goldman Sachs, and Citigroup. Analysts anticipate choppy figures and high uncertainty regarding managements’ outlook for coming quarters. Overall Q1 earnings growth for S&P 500 companies has been slashed from 4.4% coming into this year to -5.4% versus Q1 last year. Estimates for Q2 are worse, projecting a contraction of 10% year-on-year. Energy companies have seen the largest downgrades, along with industrials and consumer discretionary. As with economic data, the outlook for a rebound in earnings in Q3 and Q4 will likely be more impactful of stock prices than Q1 misses or the depths of the Q2 trough, though visibility on any forecasts will be low.
Policymakers Grapple with Questions Over Restarting Segments of the Economy
Investors are increasingly focused on the outlook for the economic recovery, as significant unknowns and weighty policy decisions loom. Highlighting how contentious this delicate process may become, President Trump asserted the right of the federal government to declare a reopening of businesses and schools across the US but state governors who responded tended to differ with this assessment. Governors of Washington, California, and Oregon announced that they would be teaming up to jointly strategize about restarting more normal levels of economic, educational, and social activities, as did the governors of New York, New Jersey, Pennsylvania, Delaware, Connecticut, Massachusetts, and Rhode Island. Frameworks for reopening will be rolled out over the coming days, but analysts note that the levels of testing, symptom tracking, and contact tracing that other countries have employed in their recovery efforts are not yet similarly available in the US. Meanwhile, in Europe, the EU Commission is said to be pushing for coordination across its member states on the timing and procedures for restarting the regional economy. At this point, projections for growth in the second half of this year are little more than speculation, though economists are continuing to estimate the depth of the Q2 trough. Goldman Sachs is now forecasting a 35% contraction across developed economies for this quarter and the IMF will release their World Economic Outlook later today.
Oil Prices Under Pressure Despite Support Efforts – International benchmark Brent crude and US benchmark WTI prices are struggling to hold their recent gains this morning as traders ponder the efficacy of supply cuts to offset the collapse of demand amid the pandemic. WTI is underperforming, trading barely above its nearly 20-year low from March, as state industry regulators in Texas meet today to discuss the potential for output curbs, which would mirror efforts by overseas oil producers to support prices. Specifically, 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, while other G-20 energy ministers also acknowledged output declines. Yesterday, President Trump and Saudi officials suggested that the cuts, combined with filling petroleum reserves, will effectively reduce supply by nearly 20 million barrels per day.
Airline Stocks Relapse Amid Bailout Wrangle – As Treasury Secretary Mnuchin and US airline heads debate the requirements of federal funding support, investors sold the stocks of the carriers yesterday, imposing losses of 5-8%, reversing a modest rally in the sector. The Treasury is pushing for 30% repayment of the funds within five years, and stock warrants worth a percentage of the total support package, and Mnuchin has insisted that this is not a bailout.