Morning Markets Brief 4-24-2020

Summary and Price Action Rundown

Global risk assets are mixed this morning after struggling to find direction this week as investors continue to ponder reopening and recovery efforts amid a continuation of dire economic data and uneven corporate earnings reports. S&P 500 futures point to 0.8% higher open, which would pare the index’s week-to-date loss of 2.7% that put year-to-date downside at 13.4% and the decline from February’s record high at 17.4%. Equities in the EU and Asian, however, were mostly lower overnight. Earlier this week, crashing oil prices had spilled over into broader risk aversion, but the ensuing rally as crude markets stabilized was dampened yesterday by news that a potential treatment for Covid-19 had performed poorly in drug trials. Longer duration Treasury yields are hovering near recent lows, with the 10-year yield at 0.60%, while a broad dollar index is flat within its recent range after starting this week on an uptrend. Oil prices are continuing to rebound but remain at very depressed levels.

Markets Look Past Dismal Data to Focus on Possible Recovery

Although initial jobless claims data signals an unemployment rate over 20%, the shock value appears to have completely worn off as investors remain focused on the prospects for a rebound. Yesterday, financial markets remained steady once again in the face of a gauntlet of historically grim economic readings. Last week, 4.427 million Americans filled for unemployment benefits for the first time, down from the previous week’s revised level of 5.237 million and compared to market expectations of 4.2 million. The latest figure brought the total reported over the past five weeks to over 26 million. The largest increases were reported in California, Florida, Texas, Georgia, and New York. The real numbers are most likely higher as some states like Florida have large backlogs due to ineffective systems and the self-employed are not included in these statistics. To put in perspective the magnitude of these losses, the US economy had created 22 million jobs since the Great Recession, which have now been destroyed in a month. Meanwhile, the IHS Markit Manufacturing Purchasing Managers’ Index (PMI) for the US fell to 36.9 in April from 48.5 in March, below market expectations of 38. For context, PMIs above 50 denote expansion. The reading pointed to the sharpest contraction in factory activity in 11 years amid the cancellation or postponement of both domestic and foreign orders. The Services PMI fell to 27.0 from 39.8 and below market expectations of 31.5, the steepest fall since the series began in October 2009. Also, New Home Sales plunged 15.4% month-on-month and 9.5% year-on-year to a seasonally adjusted annual rate of 627K in March, below a downwardly revised 741K in February and below market forecasts of 645K.

Corporate Earnings Reveal Divergent Winners and Losers Amid the Pandemic

Amid this second week of first quarter (Q1) corporate earnings season, certain companies and sectors are displaying resilience and opportunity amid the pandemic while others are severely impacted. Shares of railroad giant CSX rose 1.0% after the company was able to cut expenses by 7% percent as operating income declined by 3% compared to the same period last year. Meanwhile, Gap stock price edged back toward multi-decade lows after the retailer warned it may not have enough cash flow to sufficiently fund its operations. This contrasts to the announcement from Target CEO Brian Cornell that the retailer has benefited from a surge in online shopping but warned it will have lower profits this quarter due to higher costs. Since Feb. 2, Target has seen same-store sales up more than 7% and so far in April, comparable digital sales have increased by more than 275% from a year ago. Shares closed lower but are down less than 20% year-to-date after finishing last year at all-time highs. With 121 of the S&P 500 companies having reported, 65% have surprised to the upside on sales and 67% have topped earnings expectations. Next week’s earnings calendar features household names including Amazon, Apple, Facebook, Google, Microsoft, Boeing, 3M, Ford, and McDonalds.

Additional Themes

Discouraging News on Covid-19 Treatment Dampens Sentiment – Share of drugmaker Gilead Sciences fell 4.3% yesterday following headlines that remdesivir, which had apparently shown some promise in treating severely ill Covid-19 patients “flopped” in its initial trials, according to the Financial Times. The company attempted to qualify this assessment, suggesting that it may have had some positive results but US equities failed to recapture the highs of the morning. After rising as much as 1.6% in early trading, the S&P 500 closed in slightly negative territory.

Looking Ahead – Next week, the Federal Reserve and the Bank of Japan both have meetings that are expected to feature more communications than policy action after weeks of emergency monetary maneuvers. US and EU Q1 GDP figures are due, as are more US and global purchasing managers’ indexes (PMIs). These will surely deliver uniformly awful news though markets are priced for it and investors are firmly focused on prospects for recovery rather then depths of the current trough, as evidenced by the lack of price action in response to dire data.