The Market Today
Fed Moves to Boost Liquidity Amid Spiraling Markets
by Craig Dismuke, Dudley Carter
Coronavirus Update: The last 24 hours has seen the largest daily increase in coronavirus cases outside of China, up 7,432 to 54,315. In total there are now 135,318 confirmed cases according to the Johns Hopkins data. The number of total deaths is rapidly approaching 5,000. The situation is particularly grave in Italy and Iran while Germany, France, Spain, and the U.S. are quickly becoming problematic. After the NBA suspended its season for at least 30 days Wednesday night, other sporting entities followed yesterday. MLB delayed the start of its season by two weeks, MiLB suspended its season indefinitely, the NCAA canceled its men’s and women’s championship tournaments, the XFL canceled the remainder of its season, the NHL suspended its seasons indefinitely, the MLS suspended its season indefinitely, and NASCAR will be racing without fans for the next two weeks. All of these will have significant effects on economic activity. We now expect the economy to contract in the second and third quarters but expect a subsequent rebound. This projection presumes the virus is eventually contained and fiscal policymakers follow through with their pledges of action. To see the most updated COVID-19 Chartbook, please click here.
First Report on Consumer Sentiment to Cover Coronavirus Outbreak: The biggest economic report of the week is scheduled for 9:00 a.m. CT. The University of Michigan will report its preliminary March report on consumer confidence. Based on the survey dates, this report will be one of the first pieces of data showing the impact of the outbreak. Confidence is expected to decrease from 101.0 to 95.0. This would be a minor pullback in relation to the recent market action.
Another Historic Day on Wall Street: Thursday was another historic day on Wall Street that, almost unthinkably, one-upped any other day that had already unfolded over a nearly unprecedented run of volatility in recent weeks. Investors seemed unimpressed by President Trump’s announcement Wednesday evening from the Oval Office that he was shutting down travel with Europe, after he failed to firm up details of a loosely-proposed packaged of fiscal stimulus ideas. With U.S. equities falling into a bear market on Wednesday, stock futures limited down during a turbulent overnight global session and were halted before U.S. trading began. While the statistical data has showed COVID-19 and its negative economic effects have been spreading globally for weeks, the anecdotal evidence, more impactful to the average consumer, has finally begun to catch up. On Wednesday night, actor-icon Tom Hanks confirmed that he had been infected with the virus and the NBA announced it was suspending the remainder of the season after a player had tested positive.
Fed Shocked with Unprecedented Liquidity Offering: Even with the ECB announcing a significant amount of new liquidity injections just before U.S. trading, the major U.S. equity averages plunged at the open, almost immediately triggering circuit breakers at down 7% which halted trading for 15 minutes. Stocks reopened and drifted lower but, similar to a dynamic seen in recent days, Treasury yields actually climbed, reinforcing worries of market dislocations and liquidity issues. The two trends continued to diverge until just before noon, when the New York Fed shocked investors with an announcement that it will offer a monumental amount of liquidity to markets in the coming weeks. Combining yesterday and today, the Fed will offer through repo $1.5T of liquidity, $1T for three months and $0.5T for one month. Looking ahead, the Fed will offer an additional $1T, split evenly between one-month and three-month terms, each of the next five weeks. The operations are in addition to the $175B in overnight operations and $45B in 14-day term repos already scheduled. The shocking figures sent stocks surging, Treasury yields tumbling, and spread products tighter – but only briefly.
Markets Faded Fed Boost as Focus Returned to Virus Effects: While the action may help liquidity issues, it can’t slow the spread of the virus which is the ultimate uncertainty driving current fears and creating economic damage. The incessant flow of negative headlines continued to affect more events consumers are likely to notice. Additional primary and secondary schools announced they were extending spring break or closing down indefinitely. Popular college athletic events, listed above, suspended activities. Broadway and Disneyland announced they were closing. The uncertainty ultimately overwhelmed the Fed’s efforts, sending the Dow down 10.0% and S&P 500 9.5% lower, the worst single days since the 1987 market crash. Despite that weakness, Treasury yields fell only modestly. The 2-year yield dropped just 3.9 bps to 0.48%, well off the low of 0.35%. The 10-year yield fell only 6.5 bps to 0.80%, far from Thursday’s bottom of 0.63%.
Markets Snap Back After Historic Thursday on Wall Street: The direction of global markets changed Friday midway through Asian trading but the degree of the gyrations remain consistently volatile. All of Asia opened sharply lower following the historic plunge on Wall Street Thursday, with many triggering domestic circuit breakers that brought trading to a halt. However, most swung back higher midway through trading with some even turning positive on the day. South Korea’s KOSPI closed down 3.4% but had fallen as much as 8.4%. Japan’s Nikkei slumped 6.1% but had plunged as deep as down 10.1%. Most eye-catching was Australia’s ASX 200 which rallied back from down 8.1% to close up 4.4%. That momentum has also caused a surge in European equities and U.S. futures. After tumbling 11.5% Thursday, its worst day on record, Europe’s Stoxx has recoiled back 6.6% at Friday’s midpoint. Just after 7 a.m. CT, S&P 500 futures, earlier down as much as 3.1%, were halted for trading after snapping back to up more than 5% on the day.
Recoil Occurs with No Clear Catalyst, Speculation of Bottom Searching: In the absence of clear catalyst for the positive turnaround, analysts pointed to the growing list of world governments taking actions to shut down the virus’s spread and stimulus and liquidity efforts of central bankers to support their economies and markets. However, after such a violent sell-off in recent days, there are also suspicions that investors are tempted to step back in to take advantage of incredibly cheaper valuations. According to one analysis, the VIX index, a measure of equity volatility, has only been as high as it was yesterday a handful of times in history. In each case, stocks have rallied sharply in the days that followed.
Yields Reverse with Equities, Prospects of Increasing Fiscal Stimulus: The recovery has also turned core sovereign yields higher. Germany’s 10-year yield was 15.7 bps higher after the country’s finance minister said the government could implement a stimulus package if needed and may need to issue additional debt. Additionally, the EU said it may suspend a deficit limit rule to allow nations fiscal room to spend and offset a deeper downturn. After surging 59 bps Thursday following disappointment that the ECB’s new asset purchases (QE) would be more focused on the private sector, Italy’s 10-year yield fell 12.1 bps after an official offered a softer tone. A member of the governing council said “we can concentrate on particular jurisdictions according to the circumstances” if sovereign spreads threaten the spirit of the stimulus efforts. At 7:30, the 2-year Treasury yield rose 2.9 bps to 0.51% as the 10-year yield jumped 13.2 bps to 0.94%. The spread between the two widened to 42 bps, the largest premium since June 2018.