The Market Today
Global Markets Stage Reflexive Rebound in Partial Recovery from Punishing Monday
by Craig Dismuke, Dudley Carter
Coronavirus Update: The number of coronavirus cases continues to grow with 115,829 cases reported by Johns Hopkins as of this morning. The daily rate of growth continues to be problematic in Iran, Italy, France, and now the U.S. Yesterday, the Italian government took the unprecedented step of cutting off travel across the entire country. There continue to be reports of school closings, cancellation of large events, and reduced travel. The U.S. now has 755 confirmed cases in 35 states according to the Johns Hopkins CSSE data. For link to full Coronavirus Chartbook, please click here.
Business Confidence Strong… Before Coronavirus: Small business optimism inched higher in February, rising 0.2 points to 104.5. While the confidence index is below the 2018 average, it remains near the high end of the 2019 range. Like the February labor reports, the is another confirmation that the economy was quite strong heading into the coronavirus outbreak. According to NFIB’s Chief Economist, “February was another historically strong month for the small business economy, but it’s worth noting that nearly all of the survey’s responses were collected prior to the recent escalation of the coronavirus outbreak and the Federal Reserve rate cut. Business is good, but the coronavirus outbreak remains the big unknown.”
Oil Crash Craters Investor Sentiment: Saudi Arabia set off a vicious string of market moves Monday after the country announced price cuts for crude exports and plans to ramp up production. The Saudi-led OPEC organization said last week it planned to cut production to shore up pricing, hurt by expectations for COVID-19 to crimp global demand, as long as Russia signed onto the agreement. Russia shunned the deal and said it would allow its producers to pump as much crude as desired. The unexpected price war sent crude prices plummeting as much as 30% overnight in its biggest decline since the Gulf War in 1991. In addition to the concerns the collapse creates for global inflation and oil-related economic activity, the world’s virus case count continued to grow as did the global response to stem its spread.
Equities Trigger Circuit Breaker in Worst Day Since 2008: Mirroring overnight shifts in futures markets, U.S. stocks plunged out of the gate and almost immediately triggered the first circuit breaker stop at down 7% for the day. After a 15-minute pause, equities reopened with a brief bounce that ultimately faded and left the S&P 500 with its largest single-day decline since December 2008. Not surprisingly, energy companies were bludgeoned, evidenced by the sector sliding 20% on Monday alone. Financial companies cratered 11% as yields spiraled lower and recession worries grew. All 11 S&P 500 sectors fell at least 4% to push the broader index to a 7.6% daily loss. The Dow posted a similar 7.8% decline and its transports sector sank 9.6, its worst day since September 2001. At their lows, both the Dow and S&P 500 flirted with falling into a bear market, down 20% from record highs from less than three weeks ago.
Treasury Yields Tank in Vicious Flight to Quality: Treasury yields snapped lower with the entire curve falling below 1.00% for the first time in history. After dropping as many as 26 bps to 0.25% ahead of U.S. trading, the 2-year yield closed down 12.5 bps at 0.38%. Fed funds futures finished with investors expecting the Fed’s target range will return to the zero lower bound in short order, potentially as soon as May. Before U.S. trading opened, the U.S. central bank upped the size limits on its temporary open market offerings. After falling as much as 45 bps overnight to as low as 0.31%, the 10-year yield closed down 22.2 bps at 0.54%. The 30-year bond tumbled 29.2 bps to 0.995%. Market-based inflation expectations, derived from separate Treasury securities, crumbled as well. Expectations for inflation over the next five years dropped 37 bps, the biggest daily decline since October 2008, to 0.81%, the lowest level since 2009.
Markets Bounced Back after Monday’s Beat Down: Global markets bounced back Tuesday after a historically bad showing on Monday sent U.S. equities on their steepest slide since the last recession and longer Treasury yields plunging to all-time low levels. The combination of supply and demand shocks from COVID-19 and collapsing oil prices sent investors running for the hills and analysts calling for cooperative stimulus from monetary and fiscal policy makers. The Fed announced increased limits for temporary open market operations early Monday and markets discounted 100 bps of rate cuts and a return to the zero lower bound by late spring. After markets closed, President Trump said he would meet with Congress Tuesday to discuss potential stimulus options – a possible payroll tax, assistance for hourly workers, and small business loans – to cushion the U.S. economy from disruptions caused by the virus.
Global Equities Lick their Wounds: Asian stocks rose 0.6% as a whole, although there were larger gains seen in Hong Kong and China. Chinese President Xi visited Wuhan on Tuesday, the epicenter of the global outbreak, as new cases in the country continue to slow. Japanese stocks were positive but lagged the broader momentum despite Japan’s government announcing roughly $14.6B of new stimulus measures in the form of fiscal spending and financial support to businesses and consumers. Europe’s Stoxx 600 was trading 2.8% higher with gains seen across every major country. Italian stocks trailed others with a 1.4% gain after the government expanded a mandatory quarantine from a handful of cities to the entire country to try and stem the accelerating virus spread. U.S. futures had rallied sharply and were approximately 4% higher at 7:15 a.m. CT.
Treasury Yields Rise to Modestly Trim Monday’s Tumble: Treasury yields moved modestly higher but had only partially recovered from yesterday’s tumble. The 2-year yield rose 4.4 bps to 0.43% and the 10-year yield had added 12.2 bps to 0.66%. Even after the increased size limit, the Fed’s 14-day term operation was two times oversubscribed. Fed funds futures reflected less pressure but were still signaling swift and steep action from the Fed. Oil prices also recovered Tuesday after the commodity sustained its worst losses in nearly thirty years amid the outbreak of a price war between Saudi Arabia and Russia. Both U.S. WTI and Brent remained deep in a bear market but were just shy of 9% stronger on the day at low $30-per-barrel levels.