US equity futures reversed overnight gains, and traded near session lows, dipping below 2,900 alongside European shares on Monday as investors turned cautious about a second wave of coronavirus infections with several countries reopening economies. Crude oil slipped, while the dollar rebounded after three days of losses.
Emini S&P futures gave up an earlier gain, with airlines including United Airlines dropping in pre-market trading after the carrier unexpectedly canceled a bond sale on Friday. Exxon Mobil and Chevron also fell more than 1% in premarket trading, as oil prices tumbled after Germany and South Korea reported a surge in COVID-19 cases after easing lockdowns. Battered cruise operators and airlines including Carnival, Norwegian Cruise Line Holdings were also among the early decliners.
Hopes of a pickup in business activity powered a Wall Street rally last week, with the Nasdaq recouping all its losses for 2020 as investors looked past dire economic data, including a historic 20.5 million plunge in jobs in April. However, the S&P 500 is still more than 13% below its February record high and analysts have warned of another selloff as macroeconomic data gets worse, foreshadowing a deep and lasting global recession.
After financial markets began pricing in negative U.S. interest rates for the first time ever last week, all eyes will be on Federal Reserve Chair Jerome Powell’s outlook on the economy at a webcast event on Wednesday.
In Europe, the Stoxx Europe 600 Index also reversed an earlier advance, with mining shares leading decliners. Equities in Japan outperformed Korean shares dipped. The
Earlier in the session, Asian stocks gained, led by industrials and consumer discretionary, after rising in the last session. Most markets in the region were up, with Thailand's SET gaining 2% and Hong Kong's Hang Seng Index rising 1.5%, while South Korea's Kospi Index dropped 0.5% after a jump in new Koronavirus cases. The Topix gained 1.5% and the yen sank amid growing optimism over the country restarting parts of its economy, with NichiiGakkan and Wacom rising the most. The Shanghai Composite Index was little changed even after the PBOC's Q1 monetary policy report underscored a dovish policy stance , with Xinjiang Sailimu Modern Agriculture advancing and Kama declining the most.
Assessing investor psychology, Bloomberg notes that investors are starting the week more wary, as President Trump tries convincing Americans it’s safe to return to work and social life while he combats a coronavirus scare that’s moved closer to his own office. The U.K. will soon outline plans to ease its lockdown, which looks set to hurt airlines. Meanwhile in South Korea, a country praised for its measures to counter the pandemic, there’s a flare-up in cases tied to nightclubs in Seoul. The complex outlook is sparking questions about stock valuations after last week’s rally.
"Much of the eventual improved growth and virus news is already priced into markets," said Bob Baur, chief global economist at Principal Global Investors LLC. "Because so much future growth and uptrend potential is priced in, we expect a period of relapse and consolidation through June."
In rates, there was little action with U.S. Treasuries and European bonds little changed as governments took tentative steps toward easing coronavirus restrictions. Italian bonds are little changed after erasing their advance, even as peripheral debt outperforms most euro-area peers amid focus on debt sales. Italy’s 10-year yield is 1bp higher at 1.86%, leaving the spread over bunds steady at 238bps.
In FX, the dollar rose against most G-10 peers as investors worried that economic recovery might be slower than hoped and sought the safety of the U.S. currency even though more countries eased coronavirus lockdowns. The Bloomberg Dollar Spot Index reversed an earlier loss as an advance in European equities lost momentum; it gained against all G-10 currencies apart from Norway’s krone. The euro fell, bunds edged down and peripheral spreads tightened against core bonds. The pound fell as investors wait for evidence of progress in the U.K.’s lockdown easing plans and Brexit talks. PM Johnson will flesh out his plan for lifting the U.K. lockdown in Parliament as he seeks to get more people back to work, but faces resistance from politicians and unions.
In commodities, West Texas crude dropped after a 25% advance last week, when oil capped its first back-to-back gain since February. Bitcoin tumbled as much as 16% after rising above $10,000 on Friday.
There is nothing on the economic calendar, with Marriott International among companies reporting earnings. The Fed's Bostic speaks at 12pm ET.
- S&P 500 futures down 0.3% to 2,920.00
- STOXX Europe 600 up 0.05% to 341.23
- MXAP up 0.8% to 147.66
- MXAPJ up 0.8% to 475.41
- Nikkei up 1.1% to 20,390.66
- Topix up 1.5% to 1,480.62
- Hang Seng Index up 1.5% to 24,602.06
- Shanghai Composite down 0.02% to 2,894.80
- Sensex up 0.7% to 31,863.46
- Australia S&P/ASX 200 up 1.3% to 5,461.22
- Kospi down 0.5% to 1,935.40
- Brent futures down 3.3% to $29.95/bbl
- Gold spot little changed at $1,703.48
- U.S. Dollar Index up 0.3% to 100.04
- German 10Y yield rose 1.5 bps to -0.522%
- Euro down 0.2% to $1.0815
- Italian 10Y yield fell 7.3 bps to 1.671%
- Spanish 10Y yield unchanged at 0.795%
Top Overnight News
- U.S. Vice President Mike Pence self-isolated after his press secretary tested positive for coronavirus, while three members of the White House task force are in quarantine. Russia reported a record number of new cases in one day and now has more confirmed infections than Italy
- With tens of millions of Americans expected to mail in their ballots for the Nov. 3 general election, the country may not know whether President Donald Trump or Joe Biden won for days, even weeks
- In the middle of a spat between Europe’s top courts over the limits of European Central Bank monetary stimulus, President Christine Lagarde is probably preparing to do even more
- China’s credit provision in April was much stronger than the same period in recent years, signaling the central bank’s credit easing policy is helping revive domestic demand
- A sell-off in China’s sovereign notes worsened, with the benchmark 10-year yield surging to its highest level since March
Asian equity markets begun the week on the front foot after last Friday’s gains on Wall St where stocks were underpinned by the easing of US-China trade tensions to help the major indices disregard the abysmal US jobs. data In addition, efforts to ease coronavirus restrictions and a slowing pace of deaths from the pandemic have added to the optimism. ASX 200 (+1.3%) and Nikkei 225 (+1.1%) were higher as earnings updates were also in focus for Australia and with risk appetite in Tokyo stoked amid reports the Japanese government will compile a 2nd extra budget to address the coronavirus and may lift the state of emergency declaration early in many prefectures. Hang Seng (+1.5%) and Shanghai Comp. (U/C) were also positive after the PBoC pledged to resort to more powerful policies and step up counter-cyclical adjustments to support the economy and fend off risks, with outperformance in Hong Kong led by a surge in tech and gambling names. Finally, 10yr JGBs were lower on spillover selling from T-notes and amid the upside in risky assets, but with downside cushioned due the BoJ’s presence in the market in which the central bank upped purchases of 3yr-5yr JGBs by JPY 50bln to a total of JPY 350bln.
Top Asian News
- Tencent’s $40 Billion Gain Masks a Deeper Long-Term Threat
- China Liquor Giant Defies Global Slump With $60 Billion Gain
- Rout of China’s Bonds Worsens Amid Concerns on Surge in Issuance
- The Billionaire Club Behind China’s Most Indebted Developer
- Gay Club Outbreak Poses Challenge to Korea’s Open Virus Strategy
European equities have given up earlier gains [Euro Stoxx 50 -0.9%] as the mostly positive APAC sentiment deteriorated throughout the session. Fundamental news-flow remain light, but initial signs of a potential resurgence of the COVID-19 outbreak in so-called “success countries” may weigh on investors’ minds. Italy’s FTSE MIB (+0.1%) currently remains the sole bourse in the green as the index is propped up by broad-based gains across Italian Banks amid reports the Italian Gov’t is said to be mulling state guarantees for up to EUR 15bln of bonds issued by banks, according to a draft decree. This would offer banks support from the economy ministry for six months, which could be extended by a further six months if needed but requires the green light from the European Commission. Sectors are mostly in the red with the exception of Consumer Stables; broad sectors reflect risk aversion, whilst Energy underperforms amid price action in the complex. The sector breakdown also paints a similar picture, with Travel & Leisure incurring losses to sit as a laggard. In terms of individual movers, Wirecard (+7.5%) holds onto a bulk of its gains after appointed a new Chief Compliance Officer and raising total board members to seven. French Auto names, namely Renault (+3.7%), see support from the French Finance Minister who said the state is ready to help the auto industry, but production must be brought back to France in exchange. Ericsson (Unch) shaved most of its gains but remains cushioned after upping its 2025 global 5G subscriptions forecast to 2.8bln vs. Prev. 2.6bln.
Top European News
- ECB Heads for More Stimulus Even as Courts Spar Over Limits
- European Car Stocks Rise as China Industry Group Predicts Growth
- Riksbank Says It’s Ready to ‘Scale Up’ Crisis Measures If Needed
- Denmark Becomes First European Stock Market to Erase 2020 Losses
In FX, risk sentiment has soured in early EU trade, but Usd/Jpy has breached resistance at the psychological 107.00 level that kept the headline pair in check during the Asia-Pac session amidst broad strength in Yen crosses and to the benefit of the Dollar in general. Indeed, the DXY edged just above 100.000 at best after stalling on Friday post-NFP, with the index also acknowledging a rebound in US Treasury yields alongside curve re-steepening as FFFs unwind negative pricing from end 2020 contracts to April next year at the earliest. Back to the Jpy, latest reports about another supplementary budget follow the BoJ’s April Summary of Opinions noting further room for coordinated fiscal and monetary policy stimulus as Japan remains at risk of deflation, and Usd/Jpy has consolidated about the 21 DMA (107.16).
- NZD/AUD - The Kiwi is treading cautiously into the RBNZ policy meeting that is expected to see QE boosted even though NZ is preparing to scale down its lockdown status by Thursday and continue to reopen the economy, while ANZ business sentiment and the activity outlook both improved somewhat per preliminary survey readings for May. However, Nzd/Usd is testing 0.6100 from 0.6150+ at one stage overnight and the Aud/Nzd cross has bounced firmly between 1.0612-78 parameters as the Aussie derives some underlying traction from PBoC guidance pointing at stronger measures to support the Chinese economy including stepping up counter-cyclical adjustments. Nevertheless, Aud/Usd has also pulled back from best levels towards 0.6500 awaiting this week’s jobs data.
- EUR/GBP/CHF/CAD - All conceding ground to the Greenback, with the single currency unable to clear 1.0850 and subsequently drifting back down to the low 1.0800 area, but perhaps cushioned by decent option expiry interest from 1.0810-00 ahead of the NY cut, while Cable has been unable to maintain 1.2400+ status again before the resumption of UK-EU trade talks and with little support from PM Johnson’s 3-point plan to remove COVID-19 restrictions. Elsewhere, the Franc has retreated from circa 0.9700 after commentary from SNB chief Jordan confirming that intervention has increased to curb Chf appreciation and backed up by increases in weekly sight deposits, and the Loonie has reversed from around 1.3900 alongside crude prices after outperforming its US counterpart in wake of last Friday’s Canadian-US employment report face-off.
- SCANDI - Rather mixed starts to the new week for the Norwegian Krona and its Swedish peer as the former revisited support in Eur/Nok ahead of 11.0000 on the back of significantly firmer than forecast inflation metrics, but the latter bounced from near 10.5700 to 10.6100+ following Riksbank minutes that appear less intransigent on the subject of lowering the repo rate, if required, while maintaining that QE can be scaled up further if necessary.
- EM - Far from out of the woods, but the Lira has managed a feat of sorts with its recovery momentum continuing (towards 7.0700 vs almost 7.2700 at the new ATH) after spill-over from the ban on 3 foreign banks trading the Try resulted in a depressed volume volatility spike stopping some of Turkey’s biggest brokers taking orders from retail customers. However, reports suggest the banking regulator may reverse the ban if the banks adhere to regulations regarding lending to local institutions.
In commodities, WTI and Brent front-month futures remain on the backfoot, albeit off lows seen earlier in the trade. Prices see more consolidation from last week’s rise, albeit concerns are resurfacing regarding a potential second wave in COVID-19 cases – with reported cases in Wuhan and South Korea alongside Germany’s R0 climbing to 1.1 from ~0.7. Elsewhere, following Saudi Aramco upping their OSPs across all regions – UAE’s ADNOC and Kuwait’s KPC followed suit. Otherwise, news-flow has been light for the complex in early EU trade, with eyes on this week’s monthly oil market report releases – which will incorporate reopening economies as a factor when deciding revisions to global demand forecasts. Furthermore, Oklahoma’s oil and gas regulators will be meeting later today to discuss mandated state-wide oil cuts, albeit no fireworks are expected from the confab. WTI June resides towards mid-range after printing a base under USD 23.75/bbl and a roof at USD 24.80bbl, whilst Brent July also trades towards the middle of its current intraday USD 29.80-30.96 band. Meanwhile, spot gold moves in tandem with the Buck, moving within a tight band between USD 1702-1712/oz for much of the session; however, the yellow metal has subsequently dropped beneath this and the USD 1700/oz mark. Copper remains contained around flat levels for the session amid a lack of drivers.
US Event Calendar
- 12pm: Fed’s Bostic Discusses the Response to Covid-19
DB's Jim Reid concludes the overnight wrap
One thing that broke the monotony of lockdown yesterday was Bronte whelping and clawing at an old half meter high stone ornament in our garden. We went to see what all the fuss was about and through a small crack we discovered a nest with freshly hatched very tiny baby birds in it. They were possibly hours or even minutes old. I put the end of my iPhone in to investigate and got some remarkable footage. You can see it if you look at my Bloomberg header or I can send it to you if you want your heart warmed! My wife spent the whole afternoon trying to make the ornament Bronte proof as she paid no attention to us trying to get her to leave them alone. She was going crazy around the ornament. We didn’t think the mum would fly in with food while Bronte was around. So Trudi has built a moat made out of deckchairs, and garden netting. I saw the mum fly in twice after we went inside so hopefully they all got food. Why she couldn’t choose a tree like other birds I’ve no idea.
From cracks in the stone to cracks in the global economy as late last week DB published its latest World Outlook with the title “Turning gloomier”. As the title suggests we’ve downgraded what were already pretty aggressive numbers back in March. Under the base case we now see US (-7.1%), German (-9.0%), UK (-11.5%), French (-14%) and Italian (-14%) growth even weaker for 2020 with 2021 only seeing the US recover a third of this output loss with Euro Area growth a bit higher (4-6% growth) given the bigger shock in 2020 but with regional differences. Under the more negative protracted pandemic scenario France, Italy and Spain all see growth down around -20% for 2020 with less than a quarter of this loss recovered in 2021. Underpinning the base case assumptions is that a vaccine won’t be widely available over the next year and a half and that social distancing impacts large swathes of the economy as it reopens. So you could see room for upside if a vaccine is found and widely used. See the report here.
On reopenings, the U.K. last night announced a cautious phased approach as PM Boris Johnson addressed us all here. However, people who can’t work from home that can go to work seem to be being encouraged to do so immediately if they can avoid public transport. From Wednesday we’ll be able to take unlimited exercise and be able to meet one person from outside our own household as long as we stay two metres apart. Sunbathing is now allowed in parks and you can take part in sport with your own household. From June 1st the hope is to reopen some school years. I watched the whole speech to work out whether I can play golf now. It seems I can from Wednesday but only alone or with a family member (not likely).
The speech has seen a bit of a backlash for sending mixed messages but the problem is that it is really difficult to see a way of near normality emerging in the months or even quarters ahead with current public opinion (generally in favour of a safety first approach), politics (trying to balance public opinion with the destruction of the economy) and without a vaccine. Esteemed professor and famed economic historian Niall Ferguson reminded us in the U.K. Times yesterday that there is no vaccine for Malaria, HIV, Tuberculosis amongst others and that many that have arrived have taken many years. So unless we find a vaccine in record quick time or if public opinion changes on the risk/reward of the virus then we may have to get used to a long period of social distancing. Our new World Outlook showed that in the US for example, about 20% of occupations are classified as “high contact intensity” and 50% as medium contact intensity. High intensity areas include such occupations as food services, personal services, and education, as well as health care. Medium intensity areas include retail and construction, among others. So the length of time of any social distancing regime will be key to how quick or slow we reach the level of output pre-covid.
In terms of this week it’s fairly quiet data wise as it often is the week after payrolls. Fed Chair Powell's appearance on Wednesday may be the highlight though. He will be speaking on current economic issues at a webinar hosted by the Peterson Institute. There seems to be a lot of focus on what he may say about the policy towards negative rates. Market pricing of the future fed funds rate has dipped into negative territory in recent weeks even if some of this is technical. The Fed does seem very reluctant to endorse negative rates as an option but the market is concerned that they may have no choice in the future. So the Fed may need to increasingly lay out a convincing narrative as to how they’ll avoid it for markets to not price it in.
There’ll be a few interesting data releases to look out for, including Q1 GDP readings from Germany (Friday) and the UK (Wednesday), US CPI (tomorrow – expected to see the weakest core print on record), along with the important monthly Chinese data dump for April and US Retail sales (Friday). Earnings season is starting to wind down, though there’ll still be 20 S&P 500 and 71 Stoxx 600 companies reporting. 86% of the S&P 500 has reported first quarter results for 2020 through the end of last week. 66% of those companies have beat earning-per-share estimates, which is below the historical average of 73%. The blended (actual and estimated results) earnings decline is -13.6% for the quarter. If those results hold, it will be the largest year-over-year decline since the third quarter of 2009. It would also be the fourth quarter in the past five that the S&P 500 reported a year-over-year decline in earnings. The S&P 500 doesn’t seem to be that fussed though and is now at levels it traded at in October last year just before the phase one deal was signed with China. Meanwhile the NASDAQ is now up for 2020 (+1.66%). A truly remarkable achievement in the face of something akin to an economic depression. In terms of the earnings highlights, tomorrow we’ll hear from Allianz, Duke Energy, Vodafone, Deutsche Post and ThyssenKrupp. Then on Wednesday, we’ll hear from Cisco Systems and Commerzbank. And on Thursday, there’s Deutsche Telekom, Merck and Applied Materials.
For those missing the days when major stress was thinking about Brexit, you’ll be pleased to learn that there’ll also be another round of talks between the UK and the EU on their future relationship post-Brexit starting today.
A quick check on our screens this morning show that markets in Asia have kicked off the week on the front foot. Indeed the Nikkei (+1.59%), Hang Seng (+2.00%) and ASX (+1.76%) have posted the biggest gains while the Shanghai Comp (+0.13%) and Kospi (+0.24%) have posted more modest gains. Futures on the S&P 500 are up +0.45%, WTI Oil -0.61% and 10y Treasury yields up just over 1bp.
In terms of overnight news, the PBoC said in its quarterly monetary policy report that it will resort to “more powerful” policies to counter the hit to growth due to the coronavirus pandemic and removed reference to the phrase “will avoid excess liquidity flooding the economy” from the policy outlook section. Meanwhile, Bloomberg has reported that the European Commission has threatened to sue Germany after the country’s top court questioned the legality of the ECB’s bond-buying program. The EC president Ursula von der Leyen said that “the final word on EU law is always spoken” by the European court, “nowhere else.”
Last week risk assets continued to recover as countries released reopening plans and investors seemingly looked past bad economic data and uncertain earnings forecasts. The S&P 500 rose +3.50%, (+1.69% Friday) even in the face of the worst jobs report in history. Technology stocks continued to show their resilience, with the NASDAQ rising +6.00% on the week (+1.58% Friday) – the index is now up +1.66% YTD as discussed above. European equities also rose on the week, as the Stoxx 600 gained +1.08% (+0.91% Friday). The various European indices had different reactions to a week that saw a significant divergence in economic data and plans to ease restrictions whilst the German constitutional court ruling created some risk-off. The DAX rose +0.39% (+1.35% Friday), while the Italian FTSE MIB fell -1.42% (+1.13% Friday), and the CAC slid -0.49% (+1.07% Friday). The FTSE, which was closed on Friday, was up +3.00% over the week with a rally in Oil and fall in sterling helping slightly. The Nikkei saw a shortened week as well, with Monday through Wednesday off, rising by +2.56% Friday to finish the week up +2.85%. The CSI 300 gained +1.30% (+0.99% Friday) on a 3 day week, while the Kospi fell -0.09% on a 4 day week (+0.89% Friday). In other risk markets, oil continued to rally for a second week in a row. WTI futures rose +24.97% last week (+4.97% Friday) to $24.72/barrel and Brent crude rose +17.13% on the week (+5.13% Friday), the third weekly gain in the last eleven weeks.
The VIX fell -9.2pts to 27.98 last week (-3.5pts Friday). That was the first time the volatility index fell under 30 since late February, before the rout in global equities. With equity volatility decreasing and oil prices rising, US high yield credit spreads tightened on the week. US HY cash spreads were -18bps tighter on the week (-8bps Friday), while IG was +4bps wider on the week (+1bp Friday). In Europe, HY cash spreads were +17bps wider (-3bps Friday), while IG widened +6bps (flat Friday).
Bond-equity correlations were negative on the week again, with core sovereign bond yields in the US and Europe up last week as equities rallied. US 10yr Treasury yields were up +7.1bps (+4.2bps Friday) to finish at 0.683%, 14bps from the March lows. Meanwhile, 10yr Bund yields rose +4.9bps (+0.8bps Friday) to -0.54%. Other European debt widened on the week. Spanish, Italian, and French sovereign 10yr debt was -2.4, -3.4 and -2.6 bps wider respectively to Bunds. Italian debt trading in a 30bps yield range over the week but rallying -7.5bps on Friday.
Economic data last Friday gave markets another historic moment during this covid-19 crisis. The 20.5mn decline in April nonfarm payrolls was actually slightly better than DB’s 22mn projection, as was the 14.7% unemployment rate, which was below our 17.1% estimate but was still the worst since the Great Depression (from 4.4% a month earlier and well above the 3.5% February print). Similar to last month, the U-3 unemployment rate was substantially understated, potentially by as much as five percentage points so u/e is expected to rise further. If there was one silver lining it was that the vast majority of unemployed (78%) were "on temporary layoff" compared to 11.1% who were "not on temporary layoff". These will be key stats to follow to see evidence of the potential long-term scarring of the US economy.