Summary and Price Action Rundown
Global risk assets are extending yesterday’s rebound this morning despite mixed earnings as investors focus on efforts to restart economic and social activities in various locations globally. S&P 500 futures point to a 1.1% higher open, which would extend yesterday’s 0.4% gain that put year-to-date downside at 12.0% and the decline from February’s record high at 16.1%. US equities shook off early losses yesterday as rising oil prices and rallying tech stocks led to the upside. Some overseas equity markets remain closed for holidays but EU and Asian stocks were mostly higher overnight. Longer duration Treasury yields have edged above their recent lows, with the 10-year yield at 0.65%, while a broad dollar index is stable despite euro underperformance (more below). Crude oil prices are rising more steeply from 20-year lows.
Investors Focus on Easing Restrictions in Some Locations
Analysts are pointing to the loosening of social distancing guidelines in Hong Kong and encouraging signals from Dr. Fauci in the US as helping lift risk sentiment over the past day. Hong Kong’s local benchmark Hang Seng stock index rallied 1.1%, though it remains 15.3% lower on the year, after Chief Executive Lam announced earlier today that social distancing measures are being loosened in the territory. With a dwindling infection rate and the general lockdown expiring on Thursday, Hong Kong is preparing to reopen a broad array of businesses, including restaurants and gyms, but with continuing restrictions on proximity of patrons and mandated use of masks. Schools are set to reopen in phases beginning later this month. Regional examples suggest little clarity on the outcome, as South Korea has continued to keep the virus contained during its gradual reopening process, while Singapore was forced back into lockdown after a secondary spike in cases. Meanwhile, Dr. Fauci, the leading White House advisor on the pandemic, stated in an interview that certain regions and counties in the US should be able to “pull back” some of the restrictions meant to limit the spread. California will begin its reopening process on Friday.
Earnings Continue to Emphasize Stark Disparity of the Virus Impact
First quarter (Q1) earnings remain uneven, as investors ponder the ability of companies to adapt ongoing Covid-19 risks. After garnering some negative press last month by taking and then returning Payroll Protection Program money, Shake Shack released mixed Q1 results after yesterday’s market close, beating on earnings but missing on revenue. Still, its shares are trading higher as management guidance focused on reopening plans and emphasizing drive-thru options. The company reported a 12.8% drop in same-shack sales, attributable to a steep decline in dine-in areas due to the pandemic restrictions. CEO Randy Garutti stressed the company remains flexible and has started the rehiring process, but withdrew full-year guidance due to uncertainty around the pandemic. Shares are up 3.5% in pre-market trading, which would pare the year-to-date (ytd) decline of 11.4%. Meanwhile, Diamondback Energy also topped earnings estimates but undershot revenue projections in its report last evening. As a response to the oil price volatility and general uncertainty in the markets, Diamondback plans to “voluntarily curtail 10-15% of expected May 2020 oil production” where it deems efficient to do so, “reduced full year 2020 capital budget by over 40%”, and will reduce drilling rigs by half by Q4. Pre-market gains of 5.5% represent only a modest retracement of Diamondback shares’ -54.2% ytd performance. Lastly, AIG missed analysts’ projections for earnings and revenues and detailed significant investment losses, leaving its stock price unchanged in early trading against a ytd loss of -53.1%. With 299 of the S&P 500 companies having reported, 62% have surprised to the upside on sales and 67% have topped earnings expectations. Aggregate earnings have come in 0.3% below estimates thus far, while earnings growth is -8.9% y/y. This week features Disney and DuPont today, with Hilton, Prudential, CVS, GM, Uber, and PayPal later this week.
German Legal Challenge to ECB Program – One of the primary monetary support measures enacted by the European Central Bank (ECB) to counteract the impact from Covid-19 is under scrutiny by Germany’s Constitutional Court. The court’s ruling held that the ECB must provide justification of its regional sovereign bond purchases under the €750 billion Pandemic Emergency Purchase Program (PEPP). Although analysts are skeptical that this ruling will have any concrete impact on the program, the uncertainty is denting the euro, pushing it 0.6% lower versus the dollar this morning toward the lower end of its recent trading range, while peripheral EU bonds are selling off moderately, with Italy a notable underperformer.
Hardening US / China Rhetoric – Chinese official media outlets pushed back on US officials’ accusations that the Covid-19 virus emanated from a lab in Wuhan. But analysts note that singling out Secretary of State Pompeo rather than President Trump suggests restraint on the part of Beijing despite an intensifying war of words.