Summary and Price Action Rundown
Global risk assets staging a rebound that is set to retrace a portion of yesterday’s major downside, as investors grapple with the risk that a secondary spike in US Covid-19 infections will impede economic reopening. S&P 500 futures point to a 1.6% higher open after the index suffering its worst single-session loss since March, plummeting 5.9% yesterday. This brought total losses over the past three sessions to 7.1% after Monday’s gain erased all of the S&P 500’s year-to-date downside. The Nasdaq sank 5.3% yesterday after registering a new record high the day before. Equities in the EU are similarly rebounding while Asian stocks posted moderate declines overnight. Longer-dated Treasury yields have stabilized after a round-trip over the past week, with the 10-year yield climbing back to 0.71% this morning, while the dollar is also steadying after yesterday’s burst of appreciation. Crude oil is flat, with Brent below $39.
Market Volatility Re-Intensifies Abruptly
After weeks of unrelenting equity upside premised on hopes of a swift recovery in economic activity, with tailwinds from vaccine hopes and magnanimous Federal Reserve liquidity, the upbeat trends reversed sharply yesterday amid resurgent doubts over the outlook for reopening. Analysts are pointing to various downside catalysts for yesterday’s dramatic return of volatility in stocks and global risk assets generally, chief among them the troubling data on re-intensifying Covid-19 infections in various US regions and cities that have been in the process of reopening for economic activity. Amid a resurgence of coronavirus infections, reports indicated that Houston may reopen its emergency medical facilities housed at NRG Stadium while Nashville announced a delay in its reopening plans. The downbeat tone and grim outlook communicated by the Federal Reserve at their June meeting earlier this week has also been cited as weighing on sentiment. However, this cautious messaging from Chair Powell and his FOMC colleagues has been broadly consistent for months, with the updated forecasts only adding a degree of specificity to their concerns. Lastly, the astounding speed and magnitude of the runup in equities is another factor that market participants are noting, with a technical pullback long overdue after the dizzying climb from the low of March. For context, the Nasdaq broke to new record highs on Wednesday and the S&P 500 had erased all of its 2020 downside on Monday’s rally. These stunning rebounds have placed US stocks at significantly higher valuations than earlier in the year given the impaired earnings outlook.
Trump Administration Holds the Line on Reopening and Delayed Fiscal Stimulus
Treasury Secretary Mnuchin echoed President Trump’s various pronouncements on the shifting White House policy stance toward Covid-19 yesterday, indicating that the US should not resort to lockdowns again and that another pandemic relief bill will be delayed until later in the summer. In remarks on CNBC yesterday, Treasury Secretary Steven stated that the US should not shut down the economy again even if there is a resurgence in coronavirus cases. He defended this position, which President Trump has recently espoused, by expressing confidence in the nation’s Covid-19 testing abilities, improved contact tracing, and general knowledge on the virus. Thus, Mnuchin stated, “it will not be necessary to impose restrictions again…We’ve learned that if you shut down the economy, you’re going to create more damage.” Additionally, Mnuchin applauded the bipartisan efforts to bring $6 trillion in stimulus to the economy, but he reiterated the Trump administration’s resistance to expediting another stimulus bill, preferring instead to wait until after July to negotiate the finer details of the next package. Senate Republicans have been pushing firmly for this hiatus in relief spending. “One of the things we’re going to need to be focused on is how do we help the industries that are especially impacted: hotel, travel, entertainment, restaurants,” Mnuchin said.
Additional Themes
UK Economy Contracts Sharply in April – The monthly economic GDP reading for the UK posted a 20.4% retrenchment in April from March, which had also been in negative territory but to a shallower degree at -5.8% month-on-month (m/m). Reports indicated that not only was April the sharpest UK GDP decline on record but it erased 18 years of economic expansion, shrinking the economy back to the size it was in 2002. Still, this brutal statistic was only moderately worse than the consensus forecast of -18.7% m/m and took the three-month rate to -10.4%. Industrial and manufacturing production figures for April were similarly dire. For context, the UK has the highest Covid-19 mortality rate in Europe and is facing the prospect of a no-deal Brexit at year-end. Nevertheless, the pound is steady today, holding near its highest level versus the dollar since mid-March, indicating that market participants remain focused on the recovery.
Looking Ahead – The Bank of England meets next week amid the dismal UK data, with some analysts predicting a rate cut to 0%. The Bank of Japan also has a meeting. US retail sales and industrial production for May will be in focus along with more weekly jobless claims