Morning Markets Brief 4-16-2020

Summary and Price Action Rundown

Global risk assets are rallying this morning in a continuation of their back-and-forth price action this week, as investors weigh the prospects for economic recovery amid grim April growth figures, mixed corporate earnings reports, continued government support efforts, and modestly encouraging public health data. S&P 500 futures indicate a 0.4% higher open, which would put the index roughly flat for the week after yesterday’s 2.2% decline took year-to-date downside to 13.9% and the decline from February’s record high to 17.8%. Though a leveling off in Covid-19 infection curves, along with aggressive monetary and fiscal support measures, have calmed global financial markets, the outlook for an economic rebound remains shrouded in dismal data, uneven corporate earnings, and uncertainty over government plans to restart business activity. EU stocks are moderately higher, while Asian equities were mixed overnight. Longer duration Treasury yields have returned to nearly historic lows, with the 10-year yield at 0.63%, while a broad dollar index is extending gains above its lowest level in a month. Meanwhile, oil prices are rebounding from yesterday’s dispiriting decline.

Dismal Economic Data Continues but Investors Attempt to Focus on Recovery

Optimism for an impending rebound in growth was shaken after yesterday’s US economic figures proved even worse than the dismal projections, and more grim jobless data is expected this morning. This morning’s release of initial jobless claims for the week ending April 11 is forecast to show 5.5 million new filings after 6.6 million the prior week and roughly 17 million since mid-March. Meanwhile, efforts on Capitol Hill to top up the small business lending program, which is designed to alleviate layoffs, are continuing. Yesterday, the March reading of US retail sales plunged 8.7% month-over-month (m/m), undershooting expectations of an 8% drop. This is the largest decline on record, with purchases of clothing down 50.5%, food services and drinking places down 26.5%, motor vehicles down 25.6% and gasoline stations down 17.2%. However, sales of food and beverages increased 25.6% and health and personal care rose 4.3%. Year-on-year, retail sales fell 6.2%. Industrial production (IP) fell 5.4% m/m in March, the largest drop since January 1946 and below market expectations of a 4.0% drop. Year-over-year IP is down 5.5%, the largest decline since 2009. Pain in the factory sector was also seen in the New York Empire State Manufacturing Index, which tumbled 56.7 points to -78.2 in April, the lowest level on record and well below market expectations of -35.0. Lastly, the NAHB Housing Market Index plunged to 30 in April, the lowest since June 2012 and well below market forecasts of 55. The current single-family index sank to 36 from 79 in March, home sales for the next six months dropped to 36 from 75, and prospective buyers also fell to 13 from 56.

Corporate Earnings Remain Mixed

First quarter (Q1) corporate results continue to highlight the solidity of major US bank balance sheets but suggest a dim profitability outlook. Through the second day of Q1 earnings reporting season, major US banks remain in the spotlight and have provided insights into the economic damage inflicted by the coronavirus. Thus far, the leading US banks have all reported 40%-plus declines in earnings, and have generally seen resulting downside in their stock prices, as they have added billions in reserves to cover their projections for defaults on loans, credit cards and mortgages. Bank of America (BoA) reported Q1 earnings per share (EPS) of 40 cents, missing consensus estimates of 60 cents as the bank added $3.6 billion to its loan loss reserves. However, BoA noted that they ended the quarter with almost $700 billion in global liquidity sources. BoA shares closed 6.4% lower yesterday. Goldman Sachs (GS) stock, however, retraced early losses to end the day nearly flat after the bank reported EPS of $3.11 a share, missing estimates of $3.35, but losses in its debt and equity holdings were balanced by a surge in trading division revenue amid the extreme market volatility in the quarter. GS also set aside $937 in loan loss reserves. Citigroup also saw Q1 revenue fall 46%, with EPS of $1.05 versus $1.87 expected, as they added $4.9 billion in loan loss reserves and the consumer banking division posted a net loss of $754 million for the quarter. Citi shares fell 5.6% yesterday. Morgan Stanley and BlackRock are among the companies reporting today.

Additional Themes

Airlines Mostly Rally on Government Support – Secretary Mnuchin and US airline heads are said to have agreed over federal funding support of $25 billion, lifting industry share prices yesterday, though year-to-date losses remain around 60%. 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.

Economic Reopening Plans in Focus – Today, President Trump is expected to detail federal government plans for restarting certain activities as infection rates level off. State governors and consortia of state governors in various regions, are preparing to set their own parameters.