Summary and Price Action Rundown
Global risk assets are attempting to rebound this morning, as investors continue to weigh unprecedented fiscal and monetary support against the prospects for the pandemic to induce a deeper and longer economic trough than previously anticipated. S&P 500 futures indicate a 1.5% gain at the open, which would partially retrace yesterday’s steep 4.4% loss that brought year-to-date downside for the index to 23.5% and the decline from February’s record high to 27.0%. The extreme market stress of the past month has eased somewhat due to supportive monetary and fiscal policy measures. But President Trump’s warning of a “painful two weeks” to come and dimming hopes of a swift economic rebound even as the infection curve flattens have led to a re-intensification of risk aversion. EU and Asian equities were mixed overnight. Treasury yields are steadying, with the 10-year yield at 0.60%, while price action in EU sovereign bonds is mixed but moderate. The dollar is pausing after rebounding earlier this week and remains well below its mid-March multi-year peak. Meanwhile, oil prices are bouncing above recent lows as official support efforts begin to intensify (more below).
Investors Ponder the Outlook for the Global Economy as Data Worsens
Growth and jobs figures in the US and EU are beginning to show severe deterioration, and market participants increasingly fear not only that the worst is yet to come but that some damage will be long-lasting. Analysts are bracing this morning for another exceptionally grim tally of US initial unemployment claims data, with a consensus estimate of 3.7 million new filings last week, which would outpace the 3.3 million the prior week. For context, this weekly figure is providing a preview of the magnitude of deterioration that has yet to be captured in the monthly economic readings. For instance, yesterday’s ADP Employment Report estimated that private businesses in the US laid off only 27K workers in March, which bettered expectations of 150K job losses. However, this report fails to capture the full extent of the layoffs since its survey period is the middle of the month, which was before the bulk of the state quarantines took effect. The data showed the service-providing sector shedding only 18K jobs when the layoffs are obviously much higher. Tomorrow, March nonfarm payroll data is expected reflect 100K job losses, which analysts realize is a dramatic understatement. Other data is similarly uneven. Yesterday’s March ISM manufacturing purchasing managers’ index (PMI) declined to 49.1 from 50.1 but beat market expectations of 45 (PMI readings above 50 denote expansion). Declines were seen in new orders, production, employment, inventories and new export orders. Comments from the panel were negative regarding the near-term outlook, with sentiment clearly impacted by the coronavirus and energy market volatility.
Oil Prices Stage a Rebound Amid Mounting Support Efforts
Global leaders are beginning to respond to the crude price crash, after the oil price war between Russia and Saudi which erupted last month deepened already intense pressure on energy markets from a pandemic-related demand collapse. After revisiting nearly two-decade lows earlier this week, international benchmark Brent crude and US benchmark WTI prices are rallying this morning as government officials and industry leaders ponder strategies to ease the supply glut. Traders are noting reports that China will boost its crude reserves, though no details have been officially disclosed. This follows yesterday’s headlines that Russia will refrain from increasing supply, raising hopes of détente with OPEC. President Putin made conciliatory remarks and media suggested that he had been in touch with Saudi leaders. The Kingdom, however, remains apparently undeterred in their efforts to maximize production in an attempt to bring Russia in line with the cartel’s objectives. President Trump phoned Russian President Putin earlier this week regarding oil prices, and energy officials on both sides are set to engage on the issue. Reports indicate that oil executives have been summoned to the White House to discuss plans for supporting their industry, with options on the table said to include tariffs on Saudi oil and facilitating domestic US crude shipments. Also, the Texas oil regulator has called a meeting on April 14 to discuss production cuts in the state in an effort to support prices.
Stimulus Efforts Continue – Each day seems to bring news of more fiscal or monetary measures being deployed. After markets closed yesterday, the Fed announced a relaxation of its leverage limit on large banks, freeing up additional space on their balance sheets to support their customers’ financial activities. Analysts will monitor commercial paper and other essential short-term funding markets for an impact, as systemic risk gauges continue to show less stress.
China Criticized Over Coronavirus – Chinese officials are pushing back on a US intelligence report criticizing Beijing’s lack of transparency on the outbreak. Although China’s infection statistics and economic data have shown improvement in recent weeks, Chinese equities and the renminbi have not rebounded accordingly, with lackluster gains from recent lows.