Market Reports

Summary and Price Action Rundown

Global financial markets are experiencing significant turmoil this morning as plummeting oil prices compound already heightened fears over the economic toll of the coronavirus outbreak, adding to the potential for systemic market stresses. S&P 500 futures point to a 4.9% plunge at the open, which would greatly extend the index’s year-to-date losses of 10%. Last week featured dramatic price swings driven by the waxing and waning of investor optimism over prospects for synchronized stimulus from global central banks and governments to counteract the economic costs of the coronavirus epidemic. But the start of an oil price war between Saudi and Russia over the weekend (more below), alongside a continued barrage of worrisome news from the expanding coronavirus epidemic, intensified risk aversion from the outset of trading last evening. Oil prices have crashed over 20% this morning, the worst decline in decades, with Brent crude below $36 per barrel. Equities in Asia and the EU are down between 3% and 6%. Treasuries are extending their torrid rally, driven by safe haven demand, a grim economic outlook, and rising expectations of Fed easing, with the 10-year yield plunging to a new record low 0.44%. Meanwhile, the dollar is steady below recent multi-year highs.

Saudi Targets Russia in an Oil Price War  

Saudi responded aggressively to Russia’s refusal last week to join OPEC’s efforts to support the oil market, upping production and slamming global crude prices. Last week’s OPEC summit ended in acrimony as the cartel failed to secure cooperation from Russia for a 500k barrels per day (bpd) reduction from non-OPEC producers to augment their additional 1 million bpd output curb. Saudi upped the ante on Saturday, as it signaled a dramatic increase in output above 10 million barrels per day (bpd), with sources suggesting that production could rise to a record 12 million bpd. Reports indicate that Saudi Aramco is offering significant discounts to buyers, undercutting Russia. Oil markets are under severe duress this morning, with international benchmark Brent crude trading around $36 per barrel, after tanking to nearly $31 earlier in the session, while US benchmark WTI is around $32 per barrel, with these levels being roughly four-year lows for both. Shares of US energy companies are posting deep losses in pre-market trading, while analysts will monitor indications of credit stress among US shale producers, who represent a significant segment of US high yield debt. For context, the traditional benefits of lower oil prices to the US economy now are counterbalanced by the damage inflicted upon the shale oil industry and the regions dependent on it, as well as the attendant stress on producer creditworthiness, which in turn pressures the high yield debt market, leveraged loans, and regional banks in particular.   

Global Markets Gripped by Fears of a Coronavirus Pandemic and Global Recession 

Investors are looking to additional coordinated government efforts to stem the market rout, despite uncertainty over the efficacy of even well-synchronized economic support measures, as extreme market price action threatens to become self-reinforcing, disorderly, and systemic. While investor sentiment had found some support last week from the improving coordination of increasingly robust action by central banks and governments, the focus has now shifted back to the grim news of the spreading epidemic. Rising numbers of infections in the US, resulting in a declaration of emergency in California and New York, alongside a massive lockdown of northern Italy and other widening outbreaks around the world, are dominating the headlines. Tightening travel restrictions at the country and corporate level, cancelled conferences, and warnings from company heads about the intensifying fallout of the epidemic are driving fears of global recession. Though investors are cognizant that already-low interest rates render central bank cuts less impactful, and thus are highly attuned to the increasing emphasis on fiscal stimulus, futures markets are reflecting 75 basis point (bps) of cuts by the March 18 Fed meeting, with around 100bps of total additional easing reflected by July. Some analysts project that rate cuts will be enacted at another emergency meeting this week and will be accompanied by an increase in liquidity operations, including the transformation of the ongoing asset purchase program into official quantitative easing, amid increasing cash demand.

Additional Themes

Investors Monitor Growing Signs of Systemic Market Stress – With volatile equity markets, plunging oil prices, and historically depressed Treasury yields reflecting an increasingly grim economic outlook, analysts are wary of fundamental strains in global financial markets. Systemic risks, like those that manifested themselves in the global financial crisis in 2008, involve threats to the functionality of markets and availability of liquidity, as opposed to standard market stress, which results in adverse but orderly price action. Specifically, analysts are monitoring possible early signals of pressure in short-term funding markets (which first emerged in September), overseas dollar liquidity, credit market metrics, and interbank funding.

Summary and Price Action Rundown

Global risk assets are extending this week’s sharp back-and-forth price action as investors ponder whether incoming policy support will provide a counterbalance to the human and economic toll of the outbreak, while noting the decline in US political uncertainty. S&P 500 futures indicate a 1.9% lower open as the index continues to struggle for directionality amid the significant macro crosscurrents. For context, the US equity benchmark soared 4.2% yesterday, nearly matching Monday’s 4.6% rebound and negating Tuesday’s 2.8% loss, putting the downside from mid-February’s record high at 7.6%. This week’s dramatic swings in global equities have been driven by the waxing and waning of investor optimism over prospects for synchronized stimulus from global central banks and governments to counteract the economic costs of the coronavirus epidemic. Equities in Asia gained in sympathy with yesterday’s rally in the US, but sentiment has proven fragile again this morning and EU stocks are 1.8% lower. Treasuries are extending their historic rally, driven by heightened safe haven demand, a darkening economic outlook, and rising expectations of Fed easing, with the 10-year yield at 0.97%, which is barely above Tuesday’s record lows. Meanwhile, the dollar is continuing to settle further below recent multi-year highs. Brent crude prices are holding above $51 per barrel as OPEC aims for deeper-than-expected cuts. – MPP note: Please listen to a special edition of our podcast, A Conversation on Coronavirus, featuring noted epidemiologist Dr. Christopher Mores. Links available on our website: https://marketspolicy.com/podcast-2/

Effectiveness of Global Stimulus Questioned Despite Increasing Signs of Coordination  

After Tuesday’s lukewarm G-7 statement and isolated emergency Fed rate cut, global central banks and governments started to get their act together yesterday, but investors remain highly uncertain over the efficacy of even well-synchronized economic support measures. With analaysts focused on prospects for robust and unified action by central banks and governments to mitigate downside risks to the global economy and financial markets from the epidemic, messaging improved yesterday. French President Macron tweeted that he had engaged in a productive discussion with President Trump and that the G-7 leaders were preparing to “coordinate our scientific, health, and economic response” to the virus. This contrasted with Tuesday’s bland G-7 statement, which provided scant reference to any actual coordination, indicating only that each member country would employ “all appropriate policy tools,” including fiscal stimulus “where appropriate” while central banks “will continue to fulfill their mandates.” Investors are cognizant that already-low interest rates render central bank cuts less impactful, and thus are highly attuned to the increasing emphasis on fiscal stimulus. French Finance Minister Le Maire indicated that EU governments must be ready to deploy fiscal stimulus, which will be “more effective” than monetary easing, a view echoed by the Eurogroup President Centeno. In the US, Congress is set to approve an $8 billion spending package aimed at countering the outbreak today. This more synchronized and energetic response underpinned a sharp rally in risk assets yesterday, although investor sentiment is relapsing again today.

Central Banks Expected to Keep Easing

After the Fed’s emergency rate cut on Tuesday, alongside accommodation from other global central banks, markets continue to reflect expectations of even more aggressive monetary stimulus. Following the Fed’s first intra-meeting rate cut since the global financial crisis, futures markets shifted the goalposts to price in yet another cut at the March 18 meeting, with around a 75% chance that the FOMC opts for another 50 basis point (bps) reduction at that meeting. At least 75bps of total additional easing is reflected by July. Some analysts project that rate cuts will be accompanied by an increase in liquidity operations, including the transformation of the ongoing asset purchase program into official quantitative easing. Yesterday’s Fed injection of liquidity into funding markets to meet banks’ outsized demand for cash has raised speculation that the FOMC will need to augment its asset purchase efforts. Meanwhile, Australia’s central bank cut rates this week, as did Bank Negara Malaysia, and the Bank of Canada reduced rates by 50bps at its meeting yesterday. The Bank of Japan has been injecting additional liquidity into its markets, the European Central Bank is expected to cut rates at their meeting next week, and analysts are attuned to the possibility of an emergency Bank of England rate cut.

Additional Themes

US Political Uncertainty Eases – Analysts debated whether Joe Biden’s strong showing on Super Tuesday, which has dramatically upped his delegate count and vaulted him back into front-runner status, was a key factor in yesterday’s rally in US equities. The impact of US politics is much clearer in certain sectors, like policy-sensitive healthcare stocks, which soared yesterday.

OPEC Pushes for Major Output Cut – Crude futures are fluctuating this morning amid reports that OPEC is attempting to secure output curbs from non-cartel members (mainly Russia) of 500k barrels per day (bpd) to augment their additional 1 million bpd output cut commitment.

Summary and Price Action Rundown

Global risk assets are slipping lower this morning as pledges of policy support provide only a limited counterbalance to rising concerns over the human and economic toll of the outbreak. S&P 500 futures point to a 1.1% lower open as the index is set to extend its streak of seven straight sessions of declines, which has put losses from mid-February’s record high at 12.8%. The first reported US fatalities from the coronavirus over the weekend, alongside widening outbreak figures, principally in South Korea, Japan, Italy, and Iran, have raised the risk that the virus will significantly hamper economic activity worldwide. Overnight, equities in Asia were initially led higher by Chinese stocks but the rally flagged in South and Southeast Asian markets, while the Euro Stoxx index has also surrendered early gains. Treasuries are extending their historical rally, driven by heightened safe haven demand, a darkening economic outlook, and rising expectations of Fed easing, with the 10-year yield trading at a record low of 1.07%. Meanwhile, the dollar is continuing to hover below recent multi-year highs. Brent crude prices are falling toward $50 per barrel amid a worsening demand outlook.

Widening Coronavirus Epidemic & Early Signs of Economic Fallout  

Fears of a global pandemic continue to rise while some initial February data confirms a severe economic impact. Developments over the past week have forced investors to confront the likelihood of a wider, lengthier, and deeper impact of the epidemic, or even its expansion into a global pandemic. Friday’s reports of the first case of suspected “community spread” near San Francisco were followed over the weekend by increasing US infections in various states, currently totaling 80 individuals, as well as the first two US fatalities from the virus. Japan and South Korean have closed schools nationwide, travel restrictions continue to proliferate, and more countries are announcing cases. Now, total infections are reported to be 89,197 while fatalities have reached 3,048. Regarding the economic costs, the OECD cut its global growth forecast from 2.9% to 2.4%, to the lowest in a decade, and warned of a possible contraction in activity this quarter. It added that “coordinated policy actions across all the major economies” may be needed if the outbreak continues to widen. Incoming data is increasingly reflecting a severe impact from the outbreak. China’s manufacturing purchasing managers’ indexes for February printed record lows, with the official gauge at 35.7 and the Caixin-compiled version at 40.3. For context, PMI readings above 50 denote expansion. Manufacturing PMIs in Japan and South Korea also registered contractions last month at 47.8 and 48.7, respectively. The EU PMI for February, however, was relatively stable at 49.2 as the impact of the virus remained minimal through much of the month, though respondents flagged delays in some input deliveries. – MPP note: We are arranging a call tomorrow for our clients with noted epidemiologist Dr. Christopher Mores. Please stand by for details of the call.

Officials Set to Ramp Up Stimulus Measures

Central banks and governments are aligning policy efforts in an attempt to mitigate downside risks to the global economy and prevent excessive, self-perpetuating market volatility. Mid-afternoon on Friday, with US markets continuing to reflect rising stress, Fed Chair Powell issued a statement indicating that the Fed would “act as appropriate to support the economy” in the face of “evolving” coronavirus risks. This matches the language that Chair Powell employed last spring to signal impending rate cuts and apparently contradicts an array of Fed speakers earlier in the week who had uniformly indicated a wait-and-see approach. Futures markets are pricing in two full Fed rate cuts by April and 100% odds that the Fed starts lowering rates again at the March 18 meeting, with around a 50% chance that the FOMC opts to go big with a 50 basis point (bps) cut at that meeting. Nearly 100bps of easing is reflected over the next year. Meanwhile, the Bank of Japan issued a special communication overnight pledging to “provide ample liquidity and ensure stability in financial markets.” The Bank of England issued a similar statement. The central banks of Australia and Canada are both expected to cut rates at least 25bps at their scheduled meetings this week, and the European Central Bank is likely to take rates a further 10bps negative to -0.60% at its meeting next week. French officials have confirmed that G-7 governments will be taking steps this week to coordinate their policy responses, while the OECD suggested that fiscal policies may be needed in conjunction with monetary easing to cushion the economic impact of the epidemic.

Additional Themes

OPEC Prepares to Support Oil Prices – Crude futures have steadied somewhat amid reports that Russia is set to cooperate with additional OPEC supply cuts designed to stem oil price downside. The cartel meets in Vienna this week on Thursday and Friday.

US Economic Data in Focus – US PMIs for February will be scrutinized for any early impact from the epidemic, while January spending, income, and price data on Friday was steady but stale.

Summary and Price Action Rundown

Global risk assets remain under pressure this morning as investors continue to grapple with fears of a global pandemic and the potentially severe economic fallout thereof. S&P 500 futures indicate a 0.9% lower open to extend its four-session loss of 10.8% this week, which has put the index 12.0% below last Wednesday’s latest record high. The first suspected case of “community spread” coronavirus in California, alongside rapidly expanding outbreaks around the world, principally in South Korea, Japan, Italy, and Iran, have raised the risk that the virus will significantly hamper economic activity worldwide. Overnight, equities in Asia again fell sharply, with the Shanghai Composite joining the rout. Treasuries are extending their historical rally, driven by heightened safe haven demand and a darkening economic outlook, with the 10-year yield trading near a record low at 1.19%. The dollar, however, is continuing to hover below recent multi-year highs. Brent crude prices are falling toward $51 per barrel.

Coronavirus Fears Continue to Roil Global Markets

News of the first likely case of community spread of the coronavirus in the US, alongside widening outbreaks in numerous other countries, have greatly darkened market sentiment this week. The latest developments are forcing investors to confront the likelihood of a wider, lengthier, and deeper impact of the epidemic, or even its expansion into a global pandemic. CDC officials are counseling preparedness for a pandemic, meaning “community spread” of the coronavirus and a “significant disruption to our lives” in the US, but note that the trajectory of the outbreak remains “very uncertain.” The first case of suspected “community spread” near San Francisco is raising concerns, alongside the increasing numbers of individuals being monitored for the disease in California, New York, and Boston. Rising infection figures and expanding quarantines in Italy, Germany, Japan, South Korea, and other countries have dispelled prior optimism over the prospects for quick containment, which had lifted global equity markets over the past few weeks. Analysts are noting that the northern Japanese island of Hokkaido has declared a state of emergency and Nigeria has identified its first case. Now, total infections are reported to be 83,704 while fatalities have reached 2,859. Regarding the economic costs, rating agency Moody’s has noted that a worldwide recession is likely in the event of a pandemic, prominent economists are slashing their growth figures for the coming quarters, and the list of companies downgrading their 2020 profit forecasts due the epidemic continues to grow. – MPP note: We are arranging a call for our clients with noted epidemiologist Dr. Christopher Mores on Tuesday next week. Please send any advance questions in a reply to john.fagan@marketspolicy.com and stand by for details of the call.

Global Equities Fall Sharply but Remain Orderly

Heavy losses for stock prices worldwide this week are realigning those markets with the grim outlook that had already been reflected in tumbling Treasury yields and depressed commodity prices, though there are currently no serious indications of systemic stress or market malfunctioning. Investors are pondering what will stem the ongoing rout in global equities, which is reportedly the fastest “correction” in history and the steepest losses for US equities since 2008. For context, a “correction” is traditionally considered to be a stock market loss of over 10% from recent highs, a threshold the S&P 500 crossed in yesterday’s trading, while a “bear market” is generally associated with sustained losses of 20%. Though the selloff has been significant, there have been no reports of difficulties in trading or “flash crash” conditions, which might suggest any systemic malfunctioning. Meanwhile, the VIX, a US equity volatility gauge, is reflecting turbulence on par with the 2015 global deflation scare but still less acute than the EU debt crisis phase of 2011. Although some analysts are suggesting that the stock market selloff has gone too far, too fast this week, it may be particularly challenging for a meaningful rebound to materialize on a Friday. Generally, global equities have struggled to post gains on Fridays during the duration of this outbreak as investors are particularly wary of adding risk to their portfolios going into the weekend on concerns that adverse developments when markets are closed could lead to unavoidable losses on Monday.

Additional Themes

Futures Reflect More/Faster Fed Rate Cuts – The 10-year Treasury yield is now trading at 1.19% after earlier this week breaking below the prior all-time intraday low of 1.32% registered during the global deflation scare of 2016. Treasury yield curves (the yield spread between Treasuries of differing maturities) remain flat, and in some cases inverted, which is considered a warning of impending recession. Meanwhile, futures markets are pricing in nearly two full Fed rate cuts by April and 100% odds that the Fed starts lowering rates again at the March 18 meeting.

US Economic Figures Due – Although data for January is stale, investors will parse personal income, spending, and inflation data to gauge US economic vitality ahead of the epidemic.

Summary and Price Action Rundown

Global risk assets are retreating again this morning after yesterday’s brief pause as investors continue to grapple with concerns that the coronavirus is developing into a global pandemic. S&P 500 futures point to a 1.0% lower open to extend its three-session loss of 6.6% this week, which has put the index 8.0% below last Wednesday’s latest record high. Rapidly expanding outbreaks outside of China, principally in South Korea, Japan, Italy, and Iran, have raised the risk that the virus will significantly hamper economic activity worldwide. Overnight, equities in Asia were mostly down again, with the Shanghai Composite outperforming. Treasuries are continuing their rally, driven by heightened safe haven demand and a darkening economic outlook, with the 10-year yield trading near a record low at 1.29%. The dollar is continuing to fluctuate below recent multi-year highs. Brent crude prices are falling toward $52 per barrel.

Coronavirus Fears Continue to Drive Market Volatility

News of the first likely case of community spread of the coronavirus in the US, alongside widening outbreaks in numerous other countries, are weighing further on market sentiment. The latest developments are forcing investors to confront the likelihood of a wider, lengthier, and deeper impact of the epidemic, or even its expansion into a global pandemic. CDC officials are counseling preparedness for a pandemic, meaning “community spread” of the coronavirus and a “significant disruption to our lives” in the US, but note that the trajectory of the outbreak remains “very uncertain.” Last evening, President Trump gave a press conference focusing on the coronavirus and placing Vice President Pence in charge of the response. Rising infection figures and expanding quarantines in Italy, Japan, South Korea, and other countries have dispelled prior optimism over the prospects for quick containment, which had lifted global equity markets over the past few weeks. News out of China, however, has taken a more positive tone, with various provinces reducing their threat levels and reports of increasing factory activity. Now, total infections are reported to be 82,446 while fatalities have reached 2,808. Regarding the economic costs, rating agency Moody’s has noted that a worldwide recession is likely in the event of a pandemic and some prominent Wall Street strategists are calling for more downside for US equity markets in the near-term. Meanwhile, the list of companies downgrading their 2020 profit forecasts due the epidemic continues to grow.

Investors Monitor Overseas Stimulus Efforts and Fed Easing Prospects

Recent Fed communications have conveyed a steady policy stance despite concerns about the impact of the outbreak, while markets see rate cuts restarting in the coming months as stimulus measures also ramp up overseas. Analysts are noting a Wall Street Journal op-ed this morning from former Fed Board Member Kevin Warsh advocating for front-loaded Fed easing in coordination with other major central banks to cushion the economic impact of the outbreak. However, Vice Chair Clarida’s remarks earlier this week gave little indication that the bias of the FOMC is shifting toward more easing in the coming weeks and months, noting that it is “too soon” to estimate the possible fallout. A number of regional Fed Presidents have echoed that position this week. Price action in Treasury markets is aligned with Warsh’s viewpoint, reflecting a prompt return to easing by the Fed. The 10-year Treasury yield is now trading at 1.29% after yesterday breaking below the prior all-time intraday low of 1.32% registered during the global deflation scare of 2016. Treasury yield curves (the yield spread between Treasuries of differing maturities) remain flat, and in some cases inverted, which is considered a warning of impending recession. Meanwhile, futures markets are pricing in more than two Fed rate cuts by July and nearly 50% odds that the Fed starts lowering rates again at the March 18 meeting. Overseas, stimulus measures are being marshalled but the responses remain disparate. Germany is set to loosen its self-imposed fiscal straightjacket, China’s central bank is adding accommodation, and Hong Kong’s government is giving cash directly to its citizens in an attempt to cushion the economic impact of the virus. However, the Bank of Korea held rates steady overnight at 1.25% and a European Central Bank official stated that “more clarity” is needed before policymakers can confront “hard to understand implications” of the outbreak.

Additional Themes

UK Government Ups Ante with EU on Trade – The pound is slightly weaker versus the dollar this morning following news that Prime Minister Johnson’s government is demanding that EU negotiators demonstrate a path to a post-Brexit trade deal by June or the UK will suspend negotiations. Previously, Johnson has stated that year-end is the hard deadline for a UK-EU trade deal, with EU officials and many analysts characterizing the timetable as wildly ambitious.

US Economic Data in Focus – The second revision of fourth quarter (Q4) GDP will be released this morning after the initial estimate showed that the US economy grew 2.1% to close out the year, the same as in Q3 and in-line with forecasts. January’s durable goods orders are also due.