Morning Markets Brief 5-19-2020

Summary and Price Action Rundown

Global risk assets are consolidating after yesterday’s powerful rally, which was spurred by news of apparent progress toward a Covid-19 vaccine and redoubled pledges of monetary support from Fed Chair Powell. S&P 500 futures point to a 0.4% lower open, which would trim yesterday’s 3.2% surge for the index that put year-to-date downside at 8.6% and the decline from February’s record high at 12.8%. Equities in the EU are similarly retracing a portion of yesterday’s upside this morning while Asian stocks posted gains overnight. Longer-dated Treasury yields are settling lower after rising alongside equities to start the week, with the 10-year yield at 0.71%. Meanwhile, the dollar is continuing to slide back to the middle of its recent trading range. Crude oil is also pausing its recent upside run, with Brent fluctuating below $35.


Equities Pause for Breath After a Surge of Vaccine Optimism

Investors continue to digest yesterday’s tantalizing news of positive results in early vaccine trials, which bolstered hopes for a faster-than-expected economic recovery and propelled risk asset prices higher. The market mood turned euphoric yesterday on the announcement that Moderna’s phase 1 trial of a promising coronavirus vaccine yielded positive results and the company plans to begin phase 2 testing within the coming days. The trial of mRNA-1273 began in March as test subjects were given two doses of the vaccine. The phase 1 study showed that in the tested subjects, the vaccine effectively prevented the virus from replicating in the body. Dr. Tal Zaks, Moderna’s chief medical officer stated “[this] data substantiates our belief that mRNA-1273 has the potential to prevent COVID-19 disease and advance our ability to select a dose for pivotal trials.” While the data is uplifting in the race for a vaccine, this still only represents the first successful step in a long process to bring a vaccine to market. For context, these results come from an interim report on dozens of patients followed over weeks, whereas standard vaccine studies require broad testing in thousands of patients followed over many months or years. Given the elevated uncertainty and, even if this is a true breakthrough, a lengthy timeline for broad deployment, risk assets are retracing a portion of yesterday’s rally.

Powell and Mnuchin Senate Testimony in Focus

With Fed Chair Powell’s more balanced remarks over the weekend and pledges of more monetary support helping spur risk asset prices higher yesterday, investors will closely parse his remarks today, alongside those of Treasury Secretary Mnuchin, in front of the Senate Banking Committee. After stating in an interview aired over the weekend that “there’s a lot more” the Fed can do and that it is “not out of ammunition by a long shot,” Chair Powell is set to testify before the Senate Banking Committee today that he is prepared to utilize the Fed’s “full range of tools to support the economy,” according to his prepared statement. His prepared remarks also convey an expectation “to maintain interest rates at this level until we are confident that the economy has weathered recent events and is on track to achieve our maximum-employment and price-stability goals.” Meanwhile, Secretary Mnuchin’s statement conveys an expectation for a US economic rebound in the second half of the year. Mnuchin is likely to receive many questions on the Paycheck Protection Program (PPP), one of the key planks of the CARES Act relief bill. Last week, Mnuchin indicated that “technical fixes” would be made to address the concerns of some businesses with the PPP. Specifically, the Treasury is set to adjust the condition that for the loans to be forgiven, 75% of the funds had to be spent on employee salaries and the funds used within two months. The changes are underpinned by a notable cooling demand for loans, which may reflect companies’ inability to use the funds. For context, the initial installment of $350 billion in loans ran out after about two weeks, but three weeks after the second $310 billion tranche of funding was released, about 37% of the funds remained available, according to figures on the SBA website.

Additional Themes

Historic EU Stimulus Plan Revealed – Yesterday’s announcement of the €500 billion regional economic support fund was significantly more impactful than expected, as France and Germany agreed to raise the money for the spending on an EU-wide basis, tracking the standard budgetary contribution formula, but will be disbursed to the areas of greatest need. Importantly, the distributions are proposed to be primarily in grants rather than loans, with the European Commission to be responsible for directing the outlays. This potentially historic blueprint still requires approval by the 27 member states, and a final proposal is due by the May 27th European Summit. The euro is extending its rally versus the dollar this morning. – 

Retailer Earnings – Though first quarter earnings seasons is largely complete, retail giants Walmart and Target report today, alongside home improvement bellwethers Home Depot and Lowe’s. A preliminary read shows Walmart’s e-commerce strategy paying off.