The Market Today
Confluence of Concerns
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Monitoring the Virus Headlines: U.S. cases rose 0.7% Monday, in line with the past week’s average. The relative stability in the U.S. kept the focus on Europe’s accelerating outbreak that has led to expectations for new restrictions to be imposed. Scotland announced new restrictions to fight the virus spread and London’s mayor announced he was also planning new measures to slow the city’s outbreak. The U.K. raised its virus alert level from 3 to 4 and levied new restrictions for England overnight in response to a worrying rate of spread. Prime Minister Johnson announced a 10 p.m. curfew for pubs, made masks mandatory in key public spaces, and instructed non-essential workers to work from home if possible. He told parliament the country had reached a “perilous turning point” and “this is the moment when we must act” in order to avoid more draconian measures later.
Growing Risk of Government Shutdown: In the U.S., nervousness that a fight over a Supreme Court vacancy could thwart any chance of new stimulus also weighed on sentiment. House Speaker Pelosi urged lawmakers to continue to work towards a bill to provide more stimulus to the economy. However, Congress still needs to approve its funding by September 30 lest there be another government shutdown. This was expected to be a non-event but has become a potential risk given the developments with the Supreme Court.
Powell and Mnuchin to Congress: Fed Chair Powell and Treasury Secretary Mnuchin will appear before the House Financial Services panel today at 9:30 a.m. CT. They are likely to advocate for additional fiscal stimulus, given the slowing pace of economic recovery, and funding of the government. Also speaking today are Chicago Bank President Evans (9:00 a.m.), Richmond Bank President Barking (11:00 a.m.), and Atlanta Bank President Bostic (2:00 p.m.).
Existing Home Sales Expected to Slow from Big Pace: Existing Home Sales for the month of August are expected to have increased 2.4% in a report released at 9:00 a.m. CT. Existing sales are already well above their pre-virus levels after a 20% gain in June and a 245% jump in July. Also at 9:00 a.m., the Richmond Fed will release its regional manufacturing activity report.
Confluence of Factors Sent Equities Reeling to Start the Week: A confluence of factors fueled a European-led stock sell-off around the world Monday that pushed the S&P 500 down more than 2.7% at its worst tick of the session. September has been an uncertain, if not scary, month for equity investors as weakness in tech stocks, a stalwart of the surge from the coronavirus lows, precipitated a prolonged decline for the major averages. The three consecutive weekly declines to start September mark the longest losing streak for equities in a year. In addition to the tenuous technicals, concerns about the accelerating outbreak in Europe led to weekend chatter about new widespread restrictions to fight the virus spread. The likely contentious fight over filling the late Justice Ginsburg’s seat on the Supreme Court is seen as dimming the already-slight chances of any additional pre-election stimulus. And a report about major banks allowing potentially nefarious funds to be moved around for years only exacerbated the negative momentum.
Treasury Yields Ticked Lower but Held Ranges: Despite falling to its lowest level since late-July at one point, however, the S&P 500 rallied late as tech turned up, closing near its high of the day and paring its daily decline to 1.2%. The Nasdaq nearly turned positive before the close, ending down 0.1% after declining as much as 2.5% earlier in the day. The Dow fell more than both, tumbling 1.8%. Within the S&P 500, tech was the only sector to close in positive territory with the widespread losses led by cyclically sensitive industries. Materials and industrials both declined 3.4% to lead all losses while energy companies dropped 3.3% as U.S. WTI crude corrected more than 4%. Despite the weakness for equities, Treasury yields ended lower but up from their daily troughs. The 2-year yield closed the day down 0.2 bps at 0.14% while the 10-year yield fell 2.8 bps to 0.67%.
Global Sentiment Stabilizes after Asia Post Catch-Up Declines: Asian markets slumped Tuesday in response to large declines elsewhere to start the week, but sentiment began to stabilize with the open of European trading. Most risk assets have at least leveled off with some recovering a portion of the ground lost in Monday’s sell-off, alleviating the downward pressure on global sovereign yields. Europe’s Stoxx 600 was up 0.7% midway through the day after slumping more than 3.2% in the prior session, its steepest decline since early June. Markets were unnerved Monday by the pace of outbreaks across Europe and reports over the weekend that countries would take steps to slow the second wave. As expected, U.K. Prime Minister Johnson announced Tuesday new restrictions on activity in England.
Bank of England Attempts to Soften the Negative Rate Signal from Last Week’s Minutes: Despite those new restrictions, the British pound was steady and U.K. government bonds were out in front of the overnight recovery higher in yields. The short-end of the U.K. yield curve rallied sharply lower last week on news the central bank was formally discussing with banking regulators how to implement negative interest rates in the event that the policy was ever needed. Overnight, the short-end of the curve was leading the move higher after Bank of England Governor Bailey said that statement from the Minutes “doesn’t imply anything about the possibility of us using negative instruments.” He also noted mixed results from the small sample size of countries who have paved the way for the unconventional monetary policy and said the technical research and discussion will take some time. At 7:15 a.m. CT, U.S. futures were mixed after earlier gains and Treasury yields were essentially flat across the curve.
Households Saw Net Worth More than Recover in 3Q As Consumer Savings Rose and Stock Prices Soared: The net worth of U.S. households fully recovered from the first quarter’s pandemic plunge as they stowed away cash in deposit accounts and saw their stock portfolios recovery mightily from the March lows. After dropping $7.2 trillion dollars in 1Q, U.S. household net worth recovered $7.6 billion in the second quarter with most of the volatility between quarters caused by swings in financial assets. Deposits rose $1.3 trillion while equity-related investments (i.e. corporate equities, mutual funds, and pension fund reserves) surged more than $6 trillion. Real estate assets continued to appreciate as the housing sector remained nearly unscathed by the pandemic. Lower liabilities also provided a boost, with the biggest changes occurring as consumers paid down debt. Overall, the recovery marked a record jump in net worth after a record decline in the early months of the pandemic and the absolute level of $119 trillion set an all-time high.