The Market Today
Push and Pull of Re-Opening, Optimism Over Remdesivir; Fed Tweaks Programs
by Craig Dismuke, Dudley Carter
Coronavirus Chartbook (Click Here) – Updated by 9:00 a.m. CT
Monitoring the Headlines – Economics and Stimulus: Data confirmed record economic contraction across Europe before the ECB enhanced its lending capacity to support the economy. In the U.S., the Fed said it was expanding its $600 billion Main Street Lending Program as well as its liquidity facility (PPPLF) to support the SBA’s PPP program. The SBA issued guidance limiting PPP loans to corporate groups to $20 million. Looking ahead, House Speaker Pelosi said lawmakers are discussing $1 trillion in funding for state and local governments in the next aid bill and President Trump separately indicated there are talks of possibly providing additional relief checks to Americans.
Virus and Lockdowns: U.S. intelligence said COVID-19 is not manmade but indicated it was still assessing if the outbreak was the result of a lab accident. A separate headline said the U.S. was considering retaliatory measures against China for not acting sooner to stop the outbreak. Following yesterday’s positive treatment reports on remdesivir, the head of the FDA said his team is moving at “lightning speed” to review the drug. Gilead’s CEO said the Company may spend $1 billion on the drug this year and is talking with other companies about producing it. Bill Gates said it could take anywhere between nine months to two years to develop a vaccine. New York’s statistics improved again, California’s Governor closed Orange County beaches because of crowds, and NASCAR waved the green flag for racing to resume May 11. The U.K. will release its reopen plan next week and Germany lifted more restrictions but said it would clamp down if the curve moves up.
ISM Manufacturing Index, Construction Spending, and Auto Sales Cap Off Busy Week: There are several important economic reports today, all being released later in the day. At 8:45 a.m. CT, Markit will release its final revision to its April Manufacturing report. At 9:00 a.m., the more influential ISM report on manufacturing activity is expected to fall to its second-lowest level since 1958 and the end of WWII. Also at 9:00 a.m., March’s Construction Spending report is expected to show a 3.5% plunge in construction activity. Throughout the day, auto companies will report on April sales which are expected to decline to 7 million units per month, annualized. The data series only goes back to 1976, but the previous record-low was 8.8 million back in December 1981.
Equities Spoiled Sharp April Recovery with Thursday Drop: U.S equities dropped Thursday to spoil the end of an extraordinary April recovery after a day and a half of global economic data reminded of the severe economic shock currently underway. The U.S. economy contracted more sharply than expected in the first quarter. France, Spain, and Italy posted record contractions and Germany saw a record rise in unemployment. Even China, which had recovered in March, saw manufacturing slow in April as global demand remained desolate. U.S. jobless claims slowed to 3.8 million but have totaled more than 30 million during the last six weeks. After the Fed signaled Wednesday that it could do more, the ECB enhanced its emergency lending capacity and sounded willing to buy bonds for as long as necessary; both signaled a tough road to recovery lies ahead.
S&P 500’s April Recovery Posts Best Months in Decades As Yields Remain Steady and Low: Against that backdrop, and with mixed results in corporate earnings from McDonald’s, American Airlines, and Facebook, the S&P 500 fell 0.9% on Thursday. However, the index posted a 12.7% recovery in April from a 12.5% drop in March, marking the best monthly gain since 1987. Treasury yields had moved lower with equities but snapped back higher after Boeing announced it would raise $25 billion by way of bond offerings, the largest deal of the year according to Bloomberg. After shedding nearly 5 bps, the 10-year yield rose 1.2 bps to close near its high of the day at 0.64%. The 2-year yield fell 0.6 bps to 0.20%, a low back to 2011. For the month of April, the 2-year yield fell 5.0 bps while the 10-year yield settled down 3.0 bps.
Most Markets Take a Holiday, Others Take a Turn Lower: Many major world markets were closed Friday for holidays, including China, Hong Kong, and South Korea as well as several smaller Asian countries and most of Europe. However, equity markets elsewhere that were open pulled back, a sign that investors’ end-of-April caution carried over into the first trading day of May. Australia’s ASX 200 tumbled 5.0%, Japan’s Nikkei fell 2.8%, and the U.K.’s FTSE 100 was 1.9% lower at 7 a.m. CT. Slight negative revisions to April PMIs for those countries reflected an even more dire economic situation. Also adding to the recent run of negative data ahead of this morning’s U.S. ISM report, South Korean exports fell at the fastest rate since 2009.
Tech and Talks of Tariffs Weigh: U.S. futures were sharply lower with tech leading the widespread losses. Despite positive effects of the virus on some company activities, Apple and Amazon were earlier down 2.9% and 5.6%, respectively, following yesterday’s afternoon earnings reports. Apple’s revenue, essentially flat, and earnings beat expectations but the company pulled its forward guidance. Amazon’s revenue gained but profits fell, a trend it expects to continue this quarter as it could spend up to $4 billion, as much as it expects to earn, to keep business moving during the pandemic. Away from earnings, yesterday’s reports that the U.S. was considering retaliation against China for the virus, including a hint from President Trump that tariffs could be used, was said to also be weighing on sentiment. Treasury yields were down but off their lows at 7:40, with the 2-year yield 1.0 bps lower at 0.19% and the 10-year yield 3.2 bps lower at 0.61%. The S&P 500 was down 2.0%
Fed Gives Broader Access to Main Street Lending Program, Larger Loans: Less than 24 hours after committing to modifying their funding facilities as-needed during this unprecedented economic event, the Fed modified the terms of its Main Street Lending Program. They expanded the program by allowing for a larger range of loan sizes and a wider pool of potential borrowers. The program now allows for loans up to six-times EBITDA, up from four-times EBITDA. However, lenders are required to take a 15% equity stake in those loans. As far as eligible borrowers, the maximum sized business eligible for the four-year, term loans was increased from 10,000 employees to 15,000 employees. Maximum annual revenues were increased from $2.5 billion to $5.0 billion. A start date for the program was not yet determined.
Fed Expands Access to PPP Loan Funding Program: Yesterday afternoon, the Fed expanded access to the PPP Lending Facility to non-depository institutions who are qualified to lend by the SBA. These non-depositories include Community Development Financial Institutions (CDFIs), small business lending companies, and certain fintech firms. Going forward, they will be eligible to use the PPP loans as collateral to receive matched-term funding at 0.35%.