Morning Markets Brief 5-20-2020

Summary and Price Action Rundown

Global risk assets are uneven this morning investors grapple with uncertainty over the outlook for Covid-19 treatments and economic reopening while awaiting Fed meeting minutes from April. S&P 500 futures indicate a 1.1% higher open, which would retrace yesterday’s late session swoon for the index that followed publication of an article casting doubt on early progress toward a coronavirus vaccine. That setback put year-to-date downside at 9.5% and the decline from February’s record high at 13.7%. Equities in the EU are moderately higher while Asian stocks were mixed overnight. Longer-dated Treasury yields are steady below their recent peak, with the 10-year yield at 0.69%, while the dollar is continuing to edge back to the middle of its recent trading range. Crude oil is resuming its uptrend, with Brent topping $35.

Spotlight Remains on Fed Accommodation Ahead of Meeting Minutes

With Fed Chair Powell’s testimony in front of the Senate Banking Committee yesterday reemphasizing for the second time this week his intention to ease monetary policy further as needed, market participants will parse the minutes from April’s FOMC meeting for any further clues as to the outlook. The minutes are expected to again convey a bias toward further accommodation but also suggest that negative interest rate policy (NIRP) is not being considered. At the April Fed meeting, the FOMC voted unanimously to maintain the target range for the federal funds rate between 0 to 0.25% and held the interest on required and excess reserve balances at 0.10%. The accompanying statement reiterated that the Fed is committed “to using its full range of tools to support the economy” and “expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” Subsequent Fed communications have remained consistent with this formulation. In his post-decision press conference, Chair Powell opined that the Fed will likely have to do more to support the economy over the coming months and downplayed concerns that unprecedented monetary easing risks inflating an asset price bubble. For context, the Fed cut interest rates to near zero at two unscheduled meetings in mid-March and began purchasing massive quantities of bonds to repair financial markets, among other liquidity and economic support programs.

Questions on Vaccine Breakthrough Whipsaw Investor Sentiment

Monday’s optimism over apparent progress toward a Covid-19 vaccine by biotech company Moderna was shaken by a report pointing out the lack of data needed to accurately assess the results. Stocks faded in late trading yesterday after a Stat article highlighted the gaps in Moderna’s reporting of results, which expert sources said prevented any independent evaluation of the already narrow study. For context, the market mood turned euphoric on Monday on the announcement that Moderna’s phase 1 trial of a promising coronavirus vaccine yielded positive results and that the company is planning to begin phase 2 testing within the coming days. The results came 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. With its share price having quadrupled year-to-date, Moderna is readying a stock sale to raise $1.3 billion to fund development of the vaccine, though its shares sank 10.4% yesterday and are down another 3.7% in pre-market trading.

Additional Themes

PBoC Holds Steady as US-China Tensions Percolate – Overnight, the People’s Bank of China (PBoC) held its one-year Loan Prime Rate (LPR) steady as expected after lowering it by 20 basis points (bps) to a record low of 3.85% on April 20th. That was the second cut this year as policymakers sought to shore up the economy battling with the Covid-19 outbreak after it contracted by 6.8% year-on-year in Q1 2020, the first decline since 1992. The two cuts this year have lowered rates from 4.1% to 3.85%. Over that time, the five-year LPR was also shaved by 10bps to 4.65%, more than market consensus of a 5bps reduction. Estimates project the LPR to be 3.70% by July. This comes ahead of China’s annual National People’s Congress, which begins on Friday after a pandemic-induced delay. Analysts will parse official communications from the gathering for any significant policy signals. Meanwhile, tensions with the US and its allies continue to simmer, as Chinese officials reacted sharply to Secretary of State Pompeo’s recent statements on Taiwan, which Beijing are calling a violation of the “one-China” principle.

Retailer Earnings – Yesterday, Walmart and Home Depot reported their earnings with mostly positive results, particularly with Walmart’s e-commerce sales, which soared 74%. Walmart and Home Depot shares nevertheless closed lower yesterday, falling 2.1% and 3.0%, respectively, but retain year-to-date gains of 5.1% and 9.0%. Lowe’s and Target are in the spotlight today, with a preliminary assessment showing surprising upside for the former and tepid results for the latter. For context, April retail sales sank 16.4% month-on-month and 21.6% on the year.