The Market Today

Stocks Sink as Rising European Infections Compound Broader Worries about the Recovery


by Craig Dismuke, Dudley Carter

CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)

Monitoring the Virus Headlines: Germany’s health minister said, “We are mobile in Europe, and we are in the middle of the continent. Sooner or later there will be spillover (of the continental case increases) into Germany.” In the U.K., the government’s chief scientific officer said, “Cases are increasing, hospitalizations are following. Deaths unfortunately will follow that, and there’s the potential for this to move very fast.” Reports have indicated the U.K. government will soon announce a new round of restrictions to try and tamp down the new outbreak. Some other European countries have already implemented new restrictions for various local regions, but have so far avoided new nationwide lockdowns.

Monitoring the Virus – Stimulus Efforts: There is some optimism that a fourth round of fiscal stimulus might emerge from government funding discussions on the House floor this week.  In addition, Treasury Secretary Mnuchin and Fed Chair Powell are set to testify before the Senate Banking Committee on Thursday, at which time they are expected to press for more stimulus.  However, the unfortunate passing of Supreme Court Justice Ruth Bader Ginsburg, and the efforts to appoint and approve a new Justice, may lower the likelihood of any bipartisan agreements over the next few weeks according to some politico. 


TODAY’S CALENDAR

Quiet Week Kicks Off with Quiet Monday: This week brings a more quiet economic calendar which kicks of today with just a few noteworthy events/releases.  The Chicago Fed’s National Activity Index (Aug.) was released this morning showing weaker economic activity than expected.  The index fell from +2.54 to +0.79.  The metric is a broad-based summation of economic variables covering 1) production and income, 2) the labor market, 3) personal consumption and housing, and 4) sales and inventories. It has been predictably volatile around the pandemic, but does give a bit of insight into the pace of recovery which appears to be slowing.

Household Net Worth; Fedspeak: At 11:00 a.m. CT, the Fed’s 2Q Flow of Funds report will show the impact of the pandemic on household net worth through the end of June.  Also at 11:00 a.m., Fed Governor Brainard will speak on the Community Reinvestment Act.


OVERNIGHT TRADING

Stocks Sink as Rising European Infections Compound Broader Worries about the Recovery: After notching its second narrowest trading range in over two decades last week (more below), the 10-year Treasury yield is more than 4 bps lower heading into U.S. trading as world shares sink to start the week. While Japanese markets were closed for a holiday, equities across the rest of Asia pulled back 1%. The sell-off deepened in Europe where most national indices had tumbled more than 3% and the Stoxx Europe 600 had declined by more than 2.8%. The moves were weighing heavily on U.S. futures, pointing to a continuation of the weakness that has so far defined September’s results. The S&P 500 has fallen in each of the first three weeks this month, marking the longest weekly losing streak in a year. While the virus situation in the U.S. has stabilized in recent weeks, angst about a second wave of infections across Europe has been building. That concern has helped push investors out of risk assets. At 7:30 a.m. CT, S&P 500 futures were down 1.7% while Dow futures had slumped more than 2%. The 2-year Treasury yield was 0.6 bps lower to 0.13% and the 10-year yield had declined around 4 bps to 0.65%.


NOTEWORTHY NEWS

ICYMI – September 18, 2020 Weekly Market Recap: Despite continued equity volatility, progress on the vaccine front, some positive economic indicators for the global economy, more signs of accelerating outbreaks in several European countries, and overhauled forward guidance from the Fed, yields barely budged last week. Retail sales were disappointing but a slowing pace of activity wasn’t surprising or alarming considering the strong gains in recent months that have pushed total sales back above their pre-pandemic levels. On balance, the rest of the economic data was largely in line with or exceeded expectations. However, the big news was the Fed overhauling its official statement to provide explicit forward guidance that it will keep rates at zero until inflation has touched 2% and evidence shows it will moderately exceed 2% for some time, offsetting prior periods of weakness so that inflation averages 2% over the longer run. In addition to the Fed’s decision, central banks in Japan and the U.K. struck a dovish tone, with the Bank of England continuing to discuss negative rates as a possible tool and formally kicking off discussions with regulators of how such a policy would be implemented. Still, those reports individually nor collectively could excite the Treasury market. With rates set to stay low for a long time, the 10-year yield traded within a 5.6-bps weekly range, its least volatile week since July 2018 and second quietest week since 1998. Click here to view the full recap.


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