Europe rebounded from yesterday's slump, reversing earlier weakness in Asia, pushing global stock markets higher on Thursday as tentative moves to reopen parts of the some of its larger coronavirus-hit economies offset some truly stinking global economic numbers. U.S. stock index futures edged higher on Thursday, with investors weighing the prospects of the economy re-opening against worsening macroeconomic data, dour first-quarter earnings reports and a 4th consecutive jobless claims report that will print in the millions. Oil rebounded from yesterday's plunge, while Treasury yields dropped and greenback continued its surge from a day earlier.
On Thursday, BlackRock, the world’s largest asset manager, reported a drop in quarterly profit as investors pulled money out of its marquee funds and preferred cash management services. But that's ok, now that the fund is frontrunning the Fed - and getting paid for it - earnings should rebound promptly with the blessing for Jerome Powell. Medical equipment maker Abbott Laboratories is scheduled to report quarterly results later in the day, while Morgan Stanley reported Q1 earnings that missed on the top and bottom line.
On Wednesday the S&P 500 sank from a four-week high on Wednesday as the big U.S. banks braced for a wave of potential loan defaults as the coronavirus crushed business activity, while economic data was catastrophic with American retail sales and factory output posting historic declines in March, and surveys in April looked even worse. Manufacturing in New York state and sentiment among the nation’s homebuilders plunged.
The pan-European STOXX 600 index rose over 1% in early trade, spurred by a drop in the virus death tolls in both Spain and Italy and reassuring statements from two of the continent’s big budget airlines about their survival prospects.
“We have had this big wave of big announcements by governments and central banks and now we need to get into the nitty gritty of how it all works,” said AXA Investment Managers chief economist Gilles Moec. “We need to see if it is working, how it is working and if we need to do more.”
Earlier in the session Asia had had a difficult day as a result. Tokyo’s Nikkei dropped 1.3% and MSCI’s broadest index of Asia-Pacific shares outside Japan lost almost 1%, wiping out early week gains that had taken it to a one-month high. Markets in the region were mixed, with Jakarta Composite and Thailand's SET falling, and India's S&P BSE Sensex Index and Shanghai Composite rising. The Topix declined 0.8%, with and Factory and Pipedo falling the most. The Shanghai Composite Index rose 0.3%, with Datang Huayin Electric Power and Pinggao Electric posting the biggest advances. Benchmark indexes in Australia and Hong Kong also posted falls between 0.4% and 1.3% and some emerging markets fell harder.
“A recovery timeline...remains impossible to predict,” said Ronald Lam, chief customer officer at airline Cathay Pacific, which has slashed nearly all its passenger capacity and lost a fifth of its value this year.
In rates, the 10Y yield was trading at session lows of 0.60%, down 15bps in two days. Given the rebound in EU equities, Eurozone periphery paper added to recovery gains.
In FX, the dollar climbed against all its Group-of-10 peers, while the Aussie dollar led declines. The Aussie slid to a one-week low even as a report showed Australian employers unexpectedly added jobs in March. The Kiwi dollar fell after Reserve Bank of New Zealand Governor Adrian Orr said the central bank hasn’t ruled out negative interest rates. The pound fell as the U.K. is expected to extend its coronavirus lockdown Thursday, while the Bank of England’s Tenreyro will speak. The Canadian dollar was supported as oil prices bounced from recent lows.
In commodities, crude sat at $20.22 per barrel, just over $1 above an 18-year low hit on Wednesday, and Brent crude rose 37 cents or 1.3% in European trade to $28.02 per barrel.
The International Monetary Fund is predicting zero growth in Asia this year for the first time in 60 years, as exporters are pounded by slumping demand and anti-virus measures force consumers to stay home and shops to shut down.
Today's focus will be on the weekly jobless claims, which are likely to have surged past 5 million last week, taking total unemployment claims to an astounding 20 million in the past month as both corporate results and economic data highlight the severe hit from the shutdown of industry and commerce needed to combat the spread of the coronavirus. Ever more astounding - the market has surged the past three weeks when claims printed in depression territory, almost as if the market is cheering China's destruction of the US economy with the help of a virus.
“The economic reality and corporate earnings reality, at some stage, needs to reconcile with the markets,” Tai Hui, Asia-Pacific chief market strategist at JPMorgan Asset Management, said in a phone interview. “The market hasn’t fully factored in the uncertainties or potential risks in terms of earnings downgrades.”
“We don’t know what the economy is going to look like over the next year - there is a lot of uncertainty with the virus,” said PIMCO's Mark Kiesel on Bloomberg TV. “We are not through the woods yet -- there could be a second wave.”
Meanwhile, President Donald Trump is expected to announce “new guidelines” for re-opening the economy as he said data suggested the United States had passed the peak on new coronavirus infections. Markets also seized on the fact that policymakers, however reluctantly, are starting to allow stringent lockdowns to ease. Germany is proposing to reopen schools and some retailers starting May 4, while around 20 U.S. states spared the worst of the coronavirus pandemic may start reopening their economies by President Donald Trump’s May 1 target date. Firms are looking to restart as well. Volkswagen has said its factories in Germany and Slovakia will resume some production from April 20 with others following a week later.
But the economic figures are dire. After the IMF’s forecasts for this year, markets are expecting China to report on Friday that Q1 GDP contracted for the first time on record, and hopes for a quick rebound are fading fast. A Reuters survey showed that most Japanese firms feel stimulus announced so far are insufficient and Wednesday’s U.S. data also showed manufacturing output there dropping the most in over 74 years.
Expected data include jobless claims and housing starts. Abbott, BlackRock, and Morgan Stanley are among companies reporting earnings
- S&P 500 futures up 0.8% to 2,795.75
- STOXX Europe 600 up 1.2% to 326.82
- MXAP down 0.9% to 142.00
- MXAPJ down 0.6% to 458.18
- Nikkei down 1.3% to 19,290.20
- Topix down 0.8% to 1,422.24
- Hang Seng Index down 0.6% to 24,006.45
- Shanghai Composite up 0.3% to 2,819.94
- Sensex up 1% to 30,669.94
- Australia S&P/ASX 200 down 0.9% to 5,416.28
- Kospi unchanged at 1,857.07
- German 10Y yield rose 2.8 bps to -0.437%
- Euro down 0.2% to $1.0887
- Italian 10Y yield rose 9.8 bps to 1.709%
- Spanish 10Y yield rose 0.6 bps to 0.869%
- Brent futures up 1.6% to $28.14/bbl
- Gold spot up 0.4% to $1,723.74
- U.S. Dollar Index up 0.3% to 99.75
Top Overnight News
- U.S. President Donald Trump said he will unveil guidelines to relax stay-at-home rules on Thursday, citing signs that the outbreak is plateauing in parts of the country. Britain is expected to extend its lockdown
- The coronavirus marked another grim milestone, reaching 2 million cases around the world. It took about four months for the virus to infect 1 million people and only 12 days for that number to double
- The U.S. economy went into a defensive crouch as the coronavirus swept through the country, according to a new report from the Federal Reserve
- Australian employers unexpectedly added jobs likely bolstered by hiring at supermarkets and associated supply chains to assist with the spending surge ahead of the lockdown and confounding the expectations of most economists
- The U.K. coronavirus lockdown’s chilling effect on the economy was laid bare in data Thursday. Total retail sales slumped 27% in the two weeks following the government’s order to stay at home according to the British Retail Consortium. That compares to a 12% increase in the first three weeks of March as households stocked up on goods
- Oil was anchored near $20 a barrel after closing at an 18-year low as concerns over virus-led demand destruction outweigh an agreement by the world’s biggest producers to curb supply
- President Donald Trump said he will unveil guidelines to relax stay-at-home rules on Thursday, citing signs that the coronavirus outbreak is plateauing in parts of the country
- The median estimate of economists surveyed by Bloomberg sees China’s gross domestic product contracting 6% in the three months to March, though forecasts range from -16% to growth of 3.6%
- Germany agreed to backstop losses of 30 billion euros ($33 billion) for commercial credit insurers this year to keep trade flowing and prevent bankruptcies as the coronavirus crisis causes widespread disruption
Asian equity markets remained subdued amid the headwinds from Wall St where risk sentiment was dampened by the ongoing oil market rout, weak earnings from the large banks and poor data releases, with comments from President Trump not helping to brighten the mood as he threatened to adjourn Congress if administration nominations are not confirmed. ASX 200 (-0.9%) was dragged by broad weakness across its sectors aside from some resilient patches among defensives and with corporate updates also providing a catalyst for individual stock moves, while Nikkei 225 (-1.3%) was dampened as coronavirus-related disruptions and shutdown extensions hampered Tokyo blue-chip manufacturers. Hang Seng (-0.6%) and Shanghai Comp. (+0.3%) traded subdued as sentiment in Hong Kong was dampened amid the weakening economic climate with Hong Kong Financial Secretary Chan suggesting the government will likely downgrade its outlook, although losses in the mainland were limited as markets await tomorrow’s slew of tier 1 Chinese data including Q1 GDP which People’s Daily noted will remain positive despite the current expectations for a contraction of 6.5% Y/Y. Finally, 10yr JGBs were higher amid the weakness seen across stocks and with prices underpinned following firmer demand at the enhanced liquidity auction in the long to super-long end.
Top Asian News
- China Says Factories May Halt Output Again on Costs, Weak Demand
- Deadline Expires for Israel Power-Sharing Talks Without Deal
European equities hold onto most of their gains (Euro Stoxx 50 +1.0%) as prices were lifted around the entrance of European players following a less optimistic, more-so mixed, APAC lead. News-flow has been light thus far, although the price action seems to be more consolidation from yesterday’s moves. Late yesterday, France, Spain, Austria, Belgium, and Greece extended their short-selling ban on stocks to May 18th (originally set to expire in the coming days), albeit the respective bouses do not see significantly disproportionate price action vs. the region. Sectors are mostly in the green (ex-energy) but do not reflect a clear risk-tone. The IT sector outperforms as chip names see tailwinds from strong TSMC earnings, after the world’s largest contract chipmaker’s Q1 profit almost doubled on chip demand; albeit, H2 revenue is seen “flattish or may decline slightly”, the group also maintained its Capex guidance. Thus, the likes of STMicroelectronics (+3.0%), Infineon (+2.7%) and Dialog Semiconductor (+4.1%) remain underpinned. The sector breakdown sees Travel & Leisure towards the top of the pack amid tailwinds from easyJet’s (+3.0%) trading update in which it announced further steps to strengthen liquidity, which will be sufficient for a lengthy period of fleet grounding. Other individual movers include EDF (-5.9%) as shares feel the brunt of demand potentially falling to 20% of normal levels amid the virus outbreak
Top European News
- Italian Bonds Extend Gains Across Curve Amid Hope of ESM Support
- Germany to Provide 30 Billion-Euro Backstop for Credit Insurers
- Merkel Moves Ahead With Gradual Return to Normality in Germany
- Russia’s Oil Pain Deepens as OPEC+ Prepares to Cut Output
In FX, the Antipodean Dollars have both extended losses vs their US rival in wake of comments from RBNZ Governor Orr overnight reiterating that negative interest rates remain an option along with direct financing in response to the coronavirus, while a considerably better than expected Australian employment report was swiftly dismissed due to the early data reference period that preceded the closure of non-essential businesses due to COVID-19. The Kiwi is trying to hold above 0.5945 lows and Aussie reclaim 0.6300 vs 0.6266 or so at one stage as Aud/Nzd straddles 1.0550 ahead of key Chinese releases early on Friday, headlined by Q1 GDP, but also including March ip and retail sales.
- JPY/EUR/GBP/CHF - All weaker against the Greenback as the DXY remains elevated within a 99.615-100.000 range, but with the Yen off worst levels and perhaps cushioned by decent option expiry interest at the 108.00 strike (1.8 bn) even though Japan is reportedly on the brink of extending its partial state of emergency from 7 prefectures to the whole country through to May 6. Similarly, the Euro could derive traction from multi-billion expiries under 1.0900 (1.0840-50 in 1.5bn, 1.0875 in 1.5bn, 1.0880-85 in 1.1bn) having derived very little if any support from not quite as bad as forecast Eurozone ip or ECB’s Schnabel ramming home the message that more conventional easing is counterproductive. However, the single currency did get some transitory momentum from Eur/Gbp cross flows as the pair bounced towards 0.8730 and Cable tripped some stops at 1.2460 awaiting official confirmation that UK lockdown will be prolonged until May 7 at least. Elsewhere, the Franc is still mixed just above 0.9700, but edging closer to 1.0500 vs the Euro following deeper Swiss producer and import price deflation (in y/y terms).
- CAD/NOK/SEK - Relative G10 outperformers as some buoyancy in oil prices underpins the Loonie and Norwegian Crown after the former extended post-BoC losses, while the Swedish Krona has shrugged off softer Prospera money market inflation expectations and Riksbank-Riksdag wrangling over policy mandates amidst a modest upturn in broad risk sentiment.
- EM - Although crude markets seem calmer to the benefit of the Rub, no such comfort for the Mxn in wake of Fitch downgrading Mexico to BBB from BBB-, as the Peso languishes under 24.4000 vs the Buck and not far from earlier April lows.
In commodities, Choppy trade in the complex as WTI and Brent front-month futures nursed earlier losses and extend on gains throughout the European session thus far, with the former initially faring slightly better than the latter heading into the OPEC+ monthly oil market report, albeit this has now reversed and the difference between the contracts widens. WTI potentially saw some support from reports that the US will be paying drillers to leave the oil in the ground amid the supply glut. Traders will now be eyeing the report for the group’s 2020 outlook, especially after producers hammered out a deal over the weekend. For reference, IEA predicts 2020 global oil demand to slump 9.3mln BPD whilst EIA downgraded its forecast by 5.6mln BPD. IEA report also stated that no feasible agreement could cut supply by enough to offset near-term demand losses, so it will be interesting to see OPEC’s take on the market balance. WTI trades on either side of USD 20/bbl after printing an ~18yr base yesterday at USD 19.20/bbl. Brent prices meanwhile gain ground above 28/bbl with its respective YTD base around USD 21.70/bbl. Elsewhere, spot gold is back on a firmer footing and remains comfortably above USD 1700/oz. Some note that the rally in the yellow metal has been underpinned by significant inflows into ETFs. Spot gold sees its recent high at 1747.75/oz. Copper meanwhile, mirrors the gains in stocks, albeit price action in the red metal remains muted/contained. Finally, aluminium prices continued to rise with desks citing rising expectations of supply cuts driving the market alongside modest improvement in the Chinese markets.
US Event Calendar
- 8:30am: Housing Starts, est. 1.3m, prior 1.6m; 8:30am: Housing Starts MoM, est. -18.7%, prior -1.5%
- 8:30am: Building Permits, est. 1.3m, prior 1.46m; Building Permits MoM, est. -10.47%, prior -5.5%
- 8:30am: Philadelphia Fed Business Outlook, est. -32, prior -12.7
- 8:30am: Initial Jobless Claims, est. 5.5m, prior 6.61m; Continuing Claims, est. 13.3m, prior 7.46m
- 9:45am: Bloomberg Consumer Comfort, prior 49.9
DB's Jim Reid concludes the overnight wrap
One of the strange things about this lockdown in the U.K. is that after months of constant rain, since the lockdown commenced we’ve had almost wall to wall unseasonably hot weather. One silver lining has been that I’ve managed to fulfill a lifelong ambition during this episode and that is to wear shorts every day to work.
Indeed the shorts were out at home and in charge in the market yesterday as it was a rare risk off day yesterday in terms of the bull market of the last three weeks. Don’t fear though as we have initial jobless claims today to maybe help us change course? Over the last three weeks where we’ve seen a stunning 16.8 million people file, the S&P 500 has been up +6.24%, +2.28%, +3.41% in each of these sessions. For the record an extra 5.5 million are expected today. As our economists have detailed we are on track for a 17% unemployment rate in the US in April, which would be a new post-WWII high.
Global equities sold off as data releases for March along with company earnings showed that we are now going to enter the peak of the bad data/earnings news even if we may be past the peak of the epidemic for now. In fact equities were off the lows of the session just after Europe closed as Germany announced a cautious but planned exit strategy starting from May 3rd. Their plan is to open secondary schools, hairdressers and smaller shops with strict hygiene measures. Bars, restaurants, and hotels will remain closed until further notice, and large gatherings will remain forbidden until at least September.
On the virus development, global cases have climbed above 2 million in the last 24 hours. Worldwide cases passed 1 million on April 2, so we have doubled over the last 13 days, whereas it took 8 days previously to double from 500,000. The pace of new case growth is slowing along with fatalities virtually everywhere in the developed world. For more on this and all the latest virus news see our Corona Crisis Daily.
Back to markets and by the end of the session, the S&P 500 was down -2.20% (off session lows of -2.97% ), its largest move lower in 2 weeks, while in Europe the STOXX 600 was down -3.25%. As noted above, US equities recovered shortly after Chancellor Merkel’s press conference, where she outlined the initial exit strategy for the largest economy in Europe, before fading again into the close. Energy stocks led the declines thanks to oil’s move lower (more below), but every sector in both the S&P 500 and the STOXX 600 ended up lower on the day. The Energy sector was down -5.42% and -6.30% in the US and in Europe. Banks weren’t much better and were down -5.93% and -6.20% respectively as loan loss provisions in US results season so far has spooked investors a bit. Furthermore, and in a sign of investor jitters, the VIX index of volatility actually rose for the first time in over a week, moving up by +3.1pts, which is its biggest daily percentage move higher since March 16th when the VIX reached its highest closing level of the coronavirus pandemic. Another notable sign of the deterioration was in financial conditions, with the Bloomberg US financial conditions index snapping a run of 12 successive daily improvements to tighten for the first time since late March.
Overnight, markets in Asia have taken their cue from Wall Street with the Nikkei (-1.37%), Hang Seng (-0.79%), Shanghai Comp (-0.17%), ASX (-1.05%) and Kospi (-0.37%) all down. In FX, the New Zealand dollar is down -0.65% after the country’s central bank governor indicated that the option of negative rates are “not off the table” while the Mexican peso has weakened -1.70% after Mexico’s sovereign rating was downgraded to BBB- by Fitch. Elsewhere, futures on the S&P 500 are trading down -0.58% while yields on 10yr USTS are up +1.2bps to 0.644%.
In terms of overnight newsflow, President Trump has indicated that he will unveil guidelines today on how the US plans to relax stay-at-home rules. Meanwhile, Singapore has reported its highest daily increase of coronavirus cases with 447 new cases. Most of these cases (c. 90%) are tied to facilities that house migrant workers in close quarters. In South Korea, the government has unveiled a second extra budget this morning of KRW 7.6tn ($6.2bn) to pay for emergency cash handouts. Sticking with South Korea, in yesterday’s election President Moon’s Democratic Party of Korea and its satellite party are projected to win at least 180 seats in the 300-seat National Assembly, according to election results and projections compiled by Yonhap News Agency. The report further added that if projections indeed transpire to reality then it would amount to the biggest win since democratic elections began in 1987.
Moving on. Company earnings releases haven’t helped markets much so far. The US banks reporting yesterday painted a picture of lower profits and increased provisions for loan losses, with only the more markets oriented GS higher on the day. Goldman Sachs’ (shares +0.16%) net earnings of $1.21bn were down -46% on the previous year, and they put aside $937m in provision for credit losses in Q1. Bank of America’s (-6.41%) net income was down -45% on the previous year at $4.0bn in Q1, and they similarly made a $4.8bn provision for credit losses. Finally, Citigroup’s (-5.61%) net income of $2.52bn in Q1 was down 46%. Meanwhile ASML (-2.23%) didn’t even issue guidance for Q2 or full-year 2020 because of the increased uncertainty from the coronavirus.
Oil prices also continued to decline, with Brent Crude (-6.45% yesterday) and WTI (-1.19%) lower, even as oil prices rallied near the US close on news that the US may pay drillers not to produce, though it is not clear yet in what way. The earlier weaker moves came as the International Energy Agency said yesterday that they expected global oil demand to fall by a record -9.3m barrels per day in 2020 compared with last year. And for April, demand would be down by -29m b/d compared with a year ago, reaching levels not seen since 1995. Notably, they said that the implied stock build-up from the first half of the year “still threatens to overwhelm the logistics of the oil industry – ships, pipelines and storage tanks – in the coming weeks.” Oil-producing currencies suffered, with the Norwegian krone (-1.94%) and the Canadian dollar (-1.67%) both losing ground against the US dollar, although it should be said that much of that was as a result of dollar strength as investors sought out safe havens, with the dollar index up +0.58% yesterday in its largest daily appreciation since March 30.
Over in fixed income, there was yet another widening of sovereign bond spreads in southern Europe yesterday, with the spread of Italian (+18.7bps), Spanish (+10.8bps), Greek (+23.5bps) and Portuguese (+12.9bps) 10yr debt all widening over German bunds. Italian BTPs saw some sizeable intraday swings in particular, with the spread being up +28.8bps at the high, which would have been the largest single-day widening since March 16th. They closed at 235bps - the highest since March 18th. So investor concern over the debt piles in southern Europe haven’t gone away, in spite of the ECB’s Pandemic Emergency Purchase Programme and the Eurogroup meeting last week. The domestic debate over whether the ESM should be accessed in Italy rolls on. Europe will still need to pull off a diplomatic coup this time next week at the next Eurogroup meeting to flesh out the details of the recovery fund in a way acceptable to all.
Staying with spreads credit also had a set back after a good run. US cash HY and IG widened +29bps and +3bps with the equivalent in Europe +1bp and +6bps wider.
The flight to safety helped support core countries’ debt, with 10yr Treasury yields down by -12.0bps to 0.632%. Bunds also rallied strongly yesterday, with the entire yield curve out to 30 years negative-yielding once again. 10yr yields were down by -8.8bps.
The risk-off mood for markets came against the backdrop of hard data from the US coming in even worse than had already been anticipated by economists, which added to the already negative tone of yesterday’s session. Retail sales in March fell by -8.7% (vs. -8.0% expected) on a month-on-month basis, far exceeding the worst monthly performance in the financial crisis, which was “only” a -3.9% decline in November 2008. That said, there were some notable divergences between sectors, with food and beverage stores showing a +25.6% monthly increase as increasing numbers of people have been told to stay home, while clothing and clothing accessories stores were down by -50.5%. The picture wasn’t any brighter in the other releases however, with March’s industrial production falling by -5.4% (vs. -4.0% expected) month-on-month, which was the worst monthly performance since January 1946, less than a year after WWII had ended. And the April releases didn’t provide any respite either, with the Empire State manufacturing survey’s general business conditions index falling to a record low of -78.2 (vs. -35.0 expected), while the NAHB housing market index fell to 30 (vs. 55 expected).
Later, the Fed’s Beige Book showed economic activity contracted sharply and abruptly across all regions in the US as a result of the virus. As expected, the hardest-hit industries were leisure and hospitality, as well as retail outside of essential goods. Loan demand was high, both from companies accessing credit lines and from households refinancing mortgages. The near-term outlook was for more job cuts in coming months.
Elsewhere the Bank of Canada left its policy rate unchanged at 0.25% but announced new measures to buy both provincial and corporate debt. The bank will buy up to CAD50 billion of provincial debt in a new Provincial Bond Purchase Program as well as buy up to CAD10 billion of IG bonds in the secondary market as part of its new Corporate Bond Purchase Program.
To the day ahead now, and there are a number of key data releases out. From the US, there’ll be March’s housing starts and building permits, the Philadelphia Fed business outlook for April, along with weekly initial jobless claims. Elsewhere, we’ll also get the final German CPI reading for March, Euro Area industrial production for February and Canadian manufacturing sales for February. From central banks there’ll be a number of speakers, including the BoE’s Tenreyro, as well as the Fed’s Bostic, Williams and Daly. Finally, there’ll be earnings releases from Abbott Laboratories, BlackRock and BNY Mellon.