Summary and Price Action Rundown
Global risk assets are sharply higher this morning as encouraging news on a potential treatment for Covid-19 is underpinning hopes for a more rapid recovery, while investors continue to monitor mixed corporate earnings and deeply depressed economic data. S&P 500 futures indicate a 3.2% higher open, which would extend yesterday’s rally that put year-to-date downside at 13.4% and the decline from February’s record high at 17.3%. Risk assets surged higher last evening following reports that remdesivir, the anti-viral drug produced by Gilead, may be showing promising results in some patients, though the company stressed that trials have not been finalized. EU and Asian equities posted robust gains overnight. Longer duration Treasury yields, however, remain unmoved, with the 10-year yield at 0.64%, while a broad dollar index is hovering above one-month lows. Lastly, oil is mixed as international benchmark Brent crude rallies but US benchmark WTI sinks as traders parse divergent supply outlooks.
Investors Focus on Recovery Prospects Despite Dire Economic Data
US jobless data was worse than expected but still better than the prior week, while Chinese economic data revealed a steep first quarter (Q1) contraction. Overnight, China released its Q1 GDP figures, which showed a stunning degree of retrenchment, as the -6.8% y/y rate significantly undershot estimates of -6.0%. China’s March retail sales and industrial production contracted 15.8% y/y and 1.1% y/y, respectively, with the latter outpacing estimates but the former a notable disappointment. US data was similarly dismal. In the week ending on April 11th, 5.245 million Americans filled for unemployment benefits, down from the previous week’s 6.615 million and above market expectations of 5.105 million. The brings the total number of new filings over the last four weeks to 22 million. The four-week moving average jumped to an all-time high of 5.509 million, while continuing jobless claims hit a record 11.976 million in the week ended April 4th. US housing data also evidenced weakness, as housing starts plunged 22.3% month-over-month (m/m) to a seasonally adjusted annual rate (SAAR) of 1.216 million in March and below market expectations of 1.3 million. Meanwhile, building permits fell 6.8% (m/m) to a SAAR of 1.353 million, slightly above market expectations of 1.3 million.
Corporate Earnings Continue to Convey Mixed Signals
Results from this week’s start of first quarter (Q1) corporate earnings season highlight the starkly divergent impact of the pandemic on various sectors and companies. Yesterday, Morgan Stanley’s shares closed flat after reporting Q1 earnings per share (EPS) at $1.01, missing expectations of $1.14 and down 27% year-on-year (y/y). However, investors focused on strong trading revenues, up 30% on a yearly basis, with increased activity due to market volatility. In contrast to Morgan Stanley, shares of Keycorp fell 5.5% as earnings plunged 69% compared to a year ago. Q1 EPS was disappointingly low at $0.12, well below estimates of $0.28. Losses deepened during the earnings call, as management detailed the dim credit outlook, risk that the bank will have to significantly increase their reserves in coming quarters, and concern that its net interest margin will be hurt more than competitors. Contrasting the earnings of Keycorp and Morgan Stanley shows the difference between being a bank that makes its earnings on net interest margin and one that has investment banking. Meanwhile, Costco is raising its quarterly dividend by 7.7% to 70 cents per share, in contrast to much of the major global companies which have suspended cash returns to shareholders to shore up liquidity. In the face of stay-at-home orders, grocery retailers and some packaged-food companies have seen sales surge in recent weeks. Last week Costco reported a 9.6% jump in March comparable sales and joins Procter & Gamble and Johnson & Johnson which also raised their dividends earlier this week. Schlumberger and State Street report today, while next week features Netflix, Coca Cola, Intel, American Express, IBM, and some major US airlines.
Reopening the Country – Yesterday, the White House released guidelines for restarting some activities around the country as infect rates level off, which feature a gradual three-phase and state-by-state approach. Public health officials continue to stress that wider testing and other data, like contact tracing and symptom tracking, are crucial for guiding policymakers’ efforts to restart portions of the economy and society but are currently lacking in much of the US.
PPP Out of Money – The Small Business Administration’s pandemic relief loan facility, the Paycheck Protection Program (PPP), hit its $349 billion limit yesterday and is now out of money as Republican and Democrat leadership struggle to agree on how to top up its funds. Republicans want to pass a stand-alone bill that would include $250 billion in additional money for the PPP while Democrats want to add in $100 billion for hospitals, $150 billion for states and a boost in food assistance funding. The impasse will last until at least Monday, when the Senate is next expected to convene for another “pro forma” session.