Summary and Price Action Rundown
Global risk assets are extending this week’s rally this morning despite mixed earnings as efforts around the world to restart economic and social activities, alongside rising oil prices, undergird recovery optimism. S&P 500 futures indicate a 0.7% higher open, which would extend the index’s two-day gain of 1.3% that put year-to-date downside at 11.2% and the decline from February’s record high at 15.3%. EU and Asian stocks were mixed. The oil price rebound has taken center stage this week, with its conspicuous surge from recent multi-decade lows lifting energy sector stocks, nudging longer duration Treasury yields higher, with the 10-year yield at 0.68%, and spilling over into broader risk sentiment. The dollar is extending gains.
Investors Focus on Recovery Amid Grim Economic Signals
Despite the ongoing drumbeat of dismal growth figures, loosening social distancing guidelines in the US and around the globe have supported risk sentiment this week, with rising oil prices playing a key role in stoking optimism. Vice President Pence confirmed that the White House was discussing the dissolution of the coronavirus task force, though Dr. Fauci, the leading White House advisor on the pandemic, disputed this claim. Nevertheless, the task force is clearly directing its attention toward the process of loosening restrictions and California will begin its reopening process on Friday. Contemporaneous economic figures remain dire, with today’s reading of ADP private US payrolls for April expected to show the US economy shedding 21 million jobs and Friday’s nonfarm payrolls expected to show similar losses. EU data overnight was deeply depressed with the regional service sector purchasing managers’ index at 12.0 for April, rendering a composite reading of 13.6 when combined with the manufacturing PMI. March readings of German factory orders and EU retail sales sank 16.0% and 9.2% year-on-year (y/y), respectively. The European Commission downgraded their economic outlook for the year, slashing the EU’s 2020 GDP projection to -7.7%, with Italy, Spain, and Greece suffering contractions of over 9%, and warned of risks to the stability of the bloc. Nevertheless, with investors firmly focused on the prospects for recovery and groping for clues on its trajectory, the sharp rise in oil prices this week has been a frequently-cited factor in kindling hope for a decent rebound (more below).
Equities Remain Buoyant Amid Mixed Earnings
As first quarter (Q1) earnings season entering its later stages, the S&P 500 has remained supported despite decidedly uneven results, a number of high-profile misses, and low visibility into the coming quarters. Last evening, Disney released its Q1 figures, which missed consensus earnings but handily outpaced revenue projections. The pandemic hit many of Disney’s key business branches quite hard, including theme parks, cruises, and movie studios, with management estimating $1.4 billion in lost revenue, though the sharp rise in Disney+ subscriber growth provided some offset. Shares are 2.1% lower in pre-market trading, which would deepen year-to-date (ytd) losses of 30.1%. Allstate issued spotty results as well, topping earnings forecasts but missing on revenue. Earlier this quarter Allstate announced that it would issue a payback program sending money back to auto insurance payers of over $600 million and has paid $210 million. Shares are 1.8% higher in early trading, set to pare ytd downside of 9.2%. Meanwhile, the energy sector has been among the top performing segments of the S&P 500, though that has more to do with the sharp rebound in oil prices than stellar earnings from industry leaders. Still, Occidental Petroleum topped estimates for both earnings and revenue in Q1, sending its stock 6.0% higher in pre-market trading after falling 62.8% ytd. With 347 of the S&P 500 companies having reported, 61% 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 -8.5% y/y. Today, GM, PayPal, and Lyft report.
Additional Themes
Oil Prices Extend Rally – After plumbing two-decade lows over the past month, crude oil prices have staged a sharp rebound this week as traders focus on the prospects for rising demand due to economic reopening alongside contracting supply, with falling output figures for key producers. For context, crude prices had struggled to find a floor despite the cessation of the price war between Saudi and Russia and deepening output curb commitments by OPEC and its allies, with traders focused on depressed demand and dwindling storage for the growing glut.
Partisan Divisions Deepen Ahead of CARES 2.0 – Yesterday, Senate Leader McConnell reiterated his advocacy of a “pause” in fiscal support efforts while President Trump is pushing for a payroll tax cut, and reports indicate that capital gains tax cuts as well as corporate liability limitations for operations during the pandemic are also on the White House wish-list. Meanwhile, Speaker Pelosi is working to finalize the House Democrats blueprint for the CARES Act 2.0 in an effort to focus this next round of stimulus on aid for states and localities.