The Market Today
Equities and Oil Recover on Lifting of Some Restrictions as Investors Await ISM’s April Services Survey
by Craig Dismuke, Dudley Carter
Coronavirus Chartbook (Click Here) – Updated by 9:00 a.m. CT
Monitoring the Headlines: The virus headlines remained fluid on Monday with continued focus on the brewing tensions between the U.S. and China (more below). In other news, the U.S. NIH announced that a study has started on how the virus affects children. The White House issued a statement in the afternoon refuting a morning report from the New York Times which indicated the White House was now projecting daily deaths to double by June. Treasury Secretary Mnuchin said the next aid bill must be carefully thought out considering the large sums of stimulus already passed. The House Majority leader said there is no timetable for members to return to Washington and a Republican Senator was reported to be drafting a bill to protect businesses who choose to reopen from litigation. On a more upbeat note, Italy and Spain both began to ease lockdowns, New York Governor Cuomo laid out criteria for parts of his state to begin reopening on May 15, and California Governor Newsom hinted at loosening some portions of his lockdown as soon as Friday with more details expected later in the week.
U.S.-China Tensions Heat Up: The U.S. has signaled in recent days and again over the weekend that China is to blame for the outbreak and should face some form of consequence. The WHO commented Monday it believes the virus occurred naturally and talks of it emerging from a lab are speculative. Treasury Secretary Mnuchin said President Trump is reviewing his options on China. The U.S. Secretary of Defense noted an increase in China’s activity in the South China Sea. The State Department pointed out that the U.S. has given 50 times the amount of aid as China in helping others fight the pandemic. A separate report said Republican House leaders were looking to probe Chinese propaganda in U.S. colleges.
March Trade Report Shows Impact of Virus on Global Supply Chain: The March trade balance was, including both goods and services, showed a $4.6 billion increase in the deficit. The result was in-line with expectations and is unlikely to result in a substantial revision to the 1Q GDP report, unlike yesterday factory orders report on inventories. Imports and exports both fell, continuing a recent theme which appears to have been exacerbated by the virus’s impact on the global supply chain. Exports dropped $13.0 billion (-9.6%) and imports dropped $15.4 billion (-6.2%). Also interesting, the bilateral trade deficit with China continues to shrink, down $26 billion (33%) year-to-date versus this time last year.
PMIs Set for Release, Expected to Continue Discouraging Run: The Markit Services and Composite PMIs for April are scheduled for release at 8:45 a.m. CT. The recently release PMIs from other countries have been quite disappointing. At 9:00 a.m., the more influential ISM non-manufacturing PMI is expected to fall from 52.5 to 38.0. The lowest reading from the Great Recession was 37.8.
Fedspeak: There are three Fed officials speaking publicly today: Chicago’s Evans (9:00 a.m. CT), Atlanta’s Bostic (1:00 p.m.), and St. Louis’s Bullard (1:00 p.m.).
Equities Recover with Energy and Tech: With assistance from strength in the energy and tech sectors, the major U.S. equity indexes overcame an early sell-off with a steady late-afternoon recovery into positive territory by the close. The opening sell-off was sparked by global weakness following weekend developments on multiple fronts. Warren Buffett announced his company had parted with its full lot of airline shares and posted a record cash balance because of a lack of attractive investment opportunities. Tensions between the U.S. and China heated up as the U.S. continued to blame China for the virus outbreak.
Energy and Tech Offset Drag from Airlines: Airlines never recovered, with the sector’s 6% daily drop extending the cumulative loss since the virus-induced market turmoil began in mid-February to 60%. Despite the drag from airlines, however, the indexes turned higher in the afternoon with oil prices rallying and tech shares gaining more than 1.4%. U.S. WTI gained 3.1% on a report that U.S. inventory growth may have slowed last week. Treasury yields had moved up early in U.S. trading and ended the day mixed but little changed. The 2-year Treasury yield fell 0.8 bps to 0.18% while the 10-year yield rose 2.2 bps to 0.63%. Markets barely budged on an afternoon headline that Treasury expects to issue a record $3 trillion into public markets this quarter (more below).
Equities Rise With Oil: Global participation has been light in May, with markets in China, Japan, and South Korea closed Tuesday for holidays. For those that were open, positive momentum that pushed U.S. equities higher late Monday carried over into Tuesday’s global session. Italy and Spain began to ease lockdowns on Monday and many U.S. states are in the early stages of or have begun discussing plans for lifting restrictions. The Asian markets that were open rose 0.9% despite more weak data and Europe’s Stoxx 600 was earlier up 1.4%. The indexes were being led by gains in energy companies as the overall optimism also lifted oil prices. U.S. WTI had gained 10%, marking its first five-day string of gains since July 2019. While equities and oil prices rose, a court ruling in Europe was the focus for sovereign debt markets.
German Court Ruling Makes Headlines: Germany’s top court ruled that the ECB’s quantitative easing program, excluding PEPP purchases in response to the virus, had flaws that could keep Germany’s Bundesbank from participating 90 days from now if not corrected. According to Bloomberg, “The court said the ECB should have discussed a number of factors on how QE may have affected a wide swath of the economy.” The court’s president said the ruling “only concerns the duty of the ECB to scrutiny its own action under a proportionality guideline and to document that. Thus, the ECB isn’t per se blocked in any way.” Nonetheless, the headlines led to a brief bounce in German yields and more sustained 10.4-bp rise in Italy. At 7:30 a.m. CT, S&P 500 futures were up 1.3% while the 10-year yield had added 2.7 bps to 0.66%.
Factory Orders Report Erased Resilient Rise in March Business Orders: Total factory orders fell 10.4% in March, a record back to 1956, but were down a more modest 3.7% when an already-announced 41% decline in transportation orders was adjusted out. Private aircraft orders plummeted nearly 300%, auto-related orders were down 18.8%, and boat building was down 65%. Initial estimates for business investment in equipment showed some resiliency when those estimates were released two weeks ago. That silver-lining was tarnished in revision, however, with orders marked down from +0.1% to -0.1% and shipments unchanged with a 0.2% drop.
Treasury Announced Record Quarterly Debt Issuance: The U.S. Treasury disclosed its plans for financing the trillions in stimulus announced in recent weeks as the government attempts to mitigate the economic catastrophe that has been caused by the coronavirus. With four separate stimulus bills already passed and a fifth in the works, the Treasury said Monday it plans to raise $4.5 trillion dollars this fiscal year, with $2.999 trillion slated for this quarter. According to the WSJ, the current-quarter borrowing needs are “more than five times as much as it borrowed at the height of the 2008 financial crisis.” More details will be released on Wednesday.
SLOOS Shows Virus Impact to Credit Standards, Demand: The Federal Reserve’s April 2020 Senior Loan Officer Opinion Survey, or SLOOS, showed banks tightened loan standards in the first quarter across almost every category to both businesses and households; residential real estate was the exception with “moderate fractions” of banks tightening standards on those loans. Residential mortgages and C&I loans to medium-to-large businesses showed stronger demand while every other category saw demand cool off. In written comments provided by the banks surveyed, “changes in standards and demand…occurred late in March as the economic outlook shifted when news emerged about the rapid global spread of COVID-19.”