Morning Markets Brief 4-15-2020

Summary and Price Action Rundown

Global risk assets turned lower overnight, as investors monitor corporate earnings reports, government support efforts, and public health data for signals on the prospects for a global economic rebound. S&P 500 futures point to a 1.8% lower open, which would retrace a portion of yesterday’s sharp 3.1% rally that put year-to-date downside for the index at 11.9% and the decline from February’s record high at 16.0%. 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 underperforming, while Asian equities declined moderately overnight. Treasury yields are turning ominously lower, with the 10-year yield at 0.69%, while a broad dollar index is bouncing from its lowest level in a month. Meanwhile, oil prices are failing to hold their recent gains amid concerns that new supply cuts cannot balance depressed demand.

Corporate Earnings Reporting Season Begins Amid High Uncertainty

First quarter (Q1) corporate results kicked off yesterday on a somewhat mixed note, as analysts lauded the solidity of major US bank balance sheets but registered disappointment on the profitability outlook. JPMorgan Chase reported first quarter earnings per share of 78 cents, compared with analysts’ expectations of $1.84. Profit of $2.87 billion plunged 69% from a year earlier, driven mostly by the provisions, while revenue proved to be more resilient, only declining 3% from a year earlier to $29.07 billion. The earnings drop was caused by a massive $6.8 billion addition to the bank’s credit reserves. The move signals that management expects a surge in defaults across the company’s lending businesses, from credit cards in its consumer division to energy, real estate and retail sector loans in its commercial operations, and that the coming quarters could see more significant reserve builds. JPMorgan shares fell 2.7% on the day. Wells Fargo reported a similar situation to JPMorgan, missing analyst expectations of 33 cents with a profit per share of just 1 cent with a $3.1 billion reserve build and a markdown of impaired securities, sending its shares 4.0% lower. Today, major US financial sector earnings will continue with Bank of America, Citigroup, Goldman Sachs, and PNC Bank. Also yesterday, Johnson & Johnson shares rose by 4.5% after the drugmaker raised its quarterly dividend, even as it cut full-year earnings guidance due to the coronavirus outbreak. Also, UnitedHealth Group shares are up over 1.0% in pre-market trading after solid results this morning.

Government Economic/Business Support Efforts Continue to Expand

The Paycheck Protection Program (PPP), which has been met with a rush of small businesses applying for loans, is set to be augmented and the Treasury Department has reportedly agreed with US airline companies on terms of government assistance. Treasury Secretary Mnuchin and Senate Democratic Leader Schumer are expected to reach a deal this week on an interim coronavirus relief bill that would add $250 billion to the PPP small business lending program. The PPP program is expected to run out of money as early as this week after making loans to a little over a million businesses. Mnuchin is working to focus this legislation on small-business programs, arguing that other issues such as funding for state governments and hospitals should be dealt with separately but has expressed a willingness to compromise. Meanwhile, Secretary Mnuchin and US airline heads are said to have agreed on requirements of federal funding support of $25 billion, lifting industry share prices in pre-market trading. The terms stipulate that 30% of the money must be paid back to the Treasury over five years and give warrants for equity purchases by the government, which airline execs had argued against.

Additional Themes

Oil Sinks Despite Support Efforts – International benchmark Brent crude prices are retracing a portion of their recent rally while US benchmark WTI prices have slumped back to nearly multi-decade lows under $20 per barrel as traders ponder the efficacy of supply cuts to offset the collapse of demand amid the pandemic. A report from the International Energy Agency (IEA) is estimating that the contraction in demand for this year will be over 9 million barrels per day (bpd), wiping out a decade of gains, with a -18% quarter-on-quarter plunge in Q2. It also forecasts that storage for the growing worldwide surplus might run out by mid-year. Yesterday, Texas regulators and industry leaders began a debate over potential output cuts in the state.

Grim Economic Data Continues – The Johnson Redbook Index, which represents over 80% of the Commerce Department’s official retail sales series but is released on a weekly basis, showed that sales dropped 8.3% month-on-month (m/m) and 2% year-on-year (y/y) in the week ending April 11. Sales had been up around 5.5% y/y in January and February and then surged to 9.1% y/y in early March as households stoked up for social distancing. Official March retail sales and industrial production are due today, with forecasts for contractions of 8.0% m/m and 4.0% m/m, respectively.