Futures Storm Higher, Reversing All Tuesday Losses Ahead Of FOMC Minutes, 20Y Auction

US equity futures staged another remarkable overnight reversal, recovering all late Tuesday losses and rising right back to the 2950 resistance level observed in recent weeks, as investors clung to hopes of a recovery from the global recession amid signs of more central bank and government stimulus while eyeing fresh outbreaks of the coronavirus. 

"Sustained central-bank support should prevent a new market correction,” wrote Xavier Chapard, global macro strategist at Credit Agricole. At the same time, "the main driver of asset prices should be the expectations regarding the timing, speed and extent of the economic recovery."

Contracts on three main US inexes accelerated gains in the European morning, with traders looking beyond  Tuesday’s report which raised doubts about progress in Moderna’s coronavirus vaccine as attention turned to a different company, Aldeyra Therapeutics, which said it would advance the investigational new HSP90 inhibitor ADX-1612 to clinical testing for COVID-19, sending its stock as much as 34% higher.  Facebook climbed in the premarket after outlining steps for employees to return to work in July. Lowe’s Cos Inc jumped 8.4% in premarket trade after becoming the latest retailer to report an upbeat quarterly same-store sales; Target slumped after declining to provide FY guidance. The FAAMGs rose between 0.9% and 2.6% in early trading. Big Wall Street banks including Bank of America, Citigroup, JPMorgan gained about 2%.

"With headlines suggesting that more fiscal and monetary stimulus around the globe is under way and with the virus curve being much flatter than a couple of months ago, we would treat yesterday’s setback as a corrective move,” said Charalambos Pissouros, senior market analyst at JFD Group.

In Europe, bourses, and sentiment in general, have been choppy this morning but continues to drift higher ahead of the entrance stateside. The Stoxx Europe 600 Index erased an early decline, with Experian among the top advancers after the Irish credit-services firm weathered the pandemic better than analysts expected.

Asian stocks gained, led by health care and communications, after rising in the last session. Most markets in the region were up, with India's S&P BSE Sensex Index gaining 0.9% and Thailand's SET rising 0.8%, while Singapore's Straits Times Index dropped 0.6%. The Topix gained 0.6%, with Tokyo Keiki and UACJ rising the most. Tokyo Stock Exchange was among stocks which surged amid speculation that it may be a contender to join the Nikkei 225 equity index.

The Shanghai Composite Index retreated 0.5%, with Yutong Bus and Nanjing Chervon Auto Precision posting the biggest slides. Overnight, China's 5-year LPR was held at 4.65%. China has twin issues of weak external demand and elevated domestic debt, so the LPR will likely be trimmed over the coming months according to BMO's Stephen Gallo. The upcoming third annual session of the thirteenth NPC will probably see a rethink of China's GDP growth target.

Investors have been whipsawed by conflicting news regarding a possible vaccine for the virus, as many governments around the world ease lockdowns even as the pandemic continues to spread, with Brazil now the world’s hotspot for new infections.

In rates, Treasuries were steady with yields slightly cheaper across the curve ahead of Wednesday’s 20-year bond auction, broadly holding late-Tuesday advance spurred by closer examination of Moderna Inc.’s vaccine study. FRA/OIS continues tightening after latest drop in 3-month dollar Libor. Yields remain within 0.5bp of Tuesday closing levels, 10-year around 0.69%; bunds and gilts outperform by 1bp and 2bp. In the UK, the Debt Management Office sold 3.75 billion pounds($4.6 billion) of 2023 bonds at a negative yield of -0.003% for the first time.

In FX, the dollar slipped against most Group-of-10 peers, and the euro climbed toward a two-week high. The euro advanced for a fourth day against the dollar, yet failed to rise above Tuesday’s high. The euro’s gains coincide with progress on a 500 billion-euro fiscal-stimulus plan by the European Union, though critics say the package may be too little, too late to counter the devastating effect on the region’s economies and bolster the outlook for corporate profits.

The pound was among the worst G-10 performers after April U.K. inflation slowed to the weakest level since 2016; New Zealand’s dollar rose against most peers after central bank Governor Adrian Orr signaled that negative rates in the nation are still some way off. The yen hovered against the greenback while ultra-long Japanese government bonds climbed after an auction of 20-year debt drew the highest bid-to-cover ratio since July last year. The Norwegian krone gave up an earlier gain against the euro and the dollar amid profit taking and selling against its Swedish peer. South Africa’s rand soared as much as 2% against the dollar, with the country’s central bank seen slashing its policy rate to a record low on Thursday to bolster the economy.

In commodities, West Texas Intermediate crude climbed 1.4% to $32.41 a barrel. Gold strengthened 0.3% to $1,749.62 an ounce. Iron ore dipped 1.8% to $93.83 per metric ton. Platinum gained 2.7% to $914 an ounce.

To the day ahead now, and we’ll get the FOMC meeting minutes as well as April CPI readings from the UK and Canada, in addition to the final Euro Area CPI reading for April too. In terms of central bank speakers, there’s the BoE’s Governor Bailey, Deputy Governors Broadbent and Cunliffe, as well as the MPC’s Haskel, who’ll be giving evidence before the House of Commons’ Treasury Select Committee. Lastly, we’ll hear from the Fed’s Bostic and Bullard, while earnings releases today include Lowe’s and Target.

Market Snapshot

  • S&P 500 futures up 0.9% to 2,943.75
  • STOXX Europe 600 up 0.04% to 339.62
  • MXAP up 0.4% to 148.68
  • MXAPJ up 0.1% to 479.42
  • Nikkei up 0.8% to 20,595.15
  • Topix up 0.6% to 1,494.69
  • Hang Seng Index up 0.05% to 24,399.95
  • Shanghai Composite down 0.5% to 2,883.74
  • Sensex up 0.9% to 30,476.99
  • Australia S&P/ASX 200 up 0.2% to 5,573.05
  • Kospi up 0.5% to 1,989.64
  • German 10Y yield rose 0.7 bps to -0.457%
  • Euro up 0.2% to $1.0942
  • Italian 10Y yield fell 3.8 bps to 1.462%
  • Spanish 10Y yield rose 1.9 bps to 0.661%
  • Brent futures up 1.4% to $35.12/bbl
  • Gold spot up 0.3% to $1,749.43
  • U.S. Dollar Index little changed at 99.44

Top Overnight News from Bloomberg

  • Chinese doctors are seeing the coronavirus manifest differently among patients in its new cluster of cases in the northeast region compared to the original outbreak in Wuhan, suggesting that the pathogen may be changing in unknown ways and complicating efforts to stamp it out
  • China denounced U.S. Secretary of State Michael Pompeo for referring to Taiwan’s leader Tsai Ing-wen as “president,” vowing to “take necessary countermeasures” in response
  • In a challenge to the proposal set out by Germany and France on Monday to fund the economic recovery, Austria, the Netherlands, Denmark and Sweden expect to publish their framework some point after 3 p.m. Brussels time, according to two European officials familiar with their plans
  • Goldman Sachs is reopening offices including Frankfurt, Madrid and Milan as its European operations begin to re-emerge from shutdowns prompted by the coronavirus
  • If you’ve missed the rebound in European equities, it might be a little late to get in on the game now. Strategists only expect the Euro Stoxx 50 Index to rise another 3.8% from Monday’s closing level to 3,023 by the end of the year, according to the average response in a poll by Bloomberg News

Asian equity markets traded indecisively following the soured mood on Wall St amid ongoing US-China tensions and with the major indices pressured heading into the close as vaccine hopes were knocked by reports that Moderna's COVID-19 vaccine did not produce data critical to its assessment. ASX 200 (+0.2%) was initially subdued by weakness in the utilities and energy sectors, while a record decline in preliminary retail sales and deteriorating relations with China added to the lacklustre tone, before a recovery in financials and strength in tech helped overturn the losses. Nikkei 225 (+0.8%) was underpinned by stimulus hopes after the BoJ announced to hold an off-schedule meeting this Friday to discuss a new loan scheme for firms impacted by the virus and with the Japanese government to set up a JPY 50bln fund with the private sector to inject capital into businesses. However, weakness was seen in Fujifilm on reports its Avigan drug was not showing apparent efficacy as a coronavirus treatment and earnings releases were also a catalyst for price action with both Sharp and Mitsubishi Motors suffering from weaker results in which the latter posted a full-year loss. Hang Seng (U/C) and Shanghai Comp. (-0.5%) mirrored the choppy trade after the PBoC kept its Loan Prime Rates unchanged as expected and following the verbal jousting between China and the US. Finally, 10yr JGBs attempted to nurse the prior day’s losses following the recent rebound in T-notes and following stronger results at the 20yr JGB auction although the gains were eventually reversed amid outperformance in Japanese stocks.

Top Asian News

  • Thailand Cuts Rate for Third Time as Economic Crisis Worsens
  • Turkey Turns to Gulf Ally Again With $15 Billion Qatar Swap Line; Lira-Averse Banks Fuel Turkish Fears of Another Dollar Rush
  • Debt Binge to Widen India’s Fiscal Gap to 13%, Says HSBC

A choppy and overall mixed session thus far in the European equity space [Eurostoxx 50 +0.3%], with little conviction amid light news flow and despite a mostly positive APAC handover. That being said, US equity futures grind higher and nurse the losses seen following yesterday’s Moderna disappointment. Sectors are mixed with clear outperformance seen in defensives vs. cyclicals ex-IT, reflecting more risk-aversion-heavy trade. The breakdown also paints a similar picture with Healthcare the outperformer whilst Autos, Banks, and Travel & Leisure all reside towards the bottom. In terms of individual movers, Fiat Chrysler (-3.2%) shares were halted amid doubts raised about the Co’s USD 6bln dividend following talks for a 3yr long EUR 6.3bln loan facility, with sources stating that Italy could look into Fiat Chrysler’s planned pay-out, with Peugeot (-3.4%) also lower in sympathy. On the flip-side Marks & Spencer (+4.5%) sees post-earnings gains after revenue printed in-line with forecasts. Fresenius SE (+3.9%) holds onto gains on the back of a broker upgrade at Morgan Stanley.

Top European News

  • U.K. Inflation Slows to Weakest Since 2016 Amid Virus Crisis
  • London Office Landlord Braces for Recessionary Hit to Rents
  • Cambridge University Moves All Lectures Online Until 2021
  • Norwegian Air Drops 60% as Reality Sinks In for Shareholders

In FX, hot on the heels of RBNZ Deputy Governor Bascand’s wait-and-see policy guidance on Tuesday, Governor Orr has echoed sentiments overnight by stating that negative rates are not on the current agenda, but an option for consideration much later. Hence, the Kiwi remains some distance ahead of the chasing G10 pack on the 0.6100 handle vs its US counterpart and closer to 1.0700 against the Aussie that is still hampered by deteriorating trade relations with China and a stark reality check on the retail side as sales slumped in April by more than double the magnitude of the prior month’s rise. In response, Aud/Usd has slipped back under 0.6550 after another test and rejection of recent highs around 0.6570 and now eyeing May PMIs for further direction.

  • CHF/EUR - The Franc and Euro are both holding gains relative to a broadly soft Dollar, as the DXY continues to pivot 99.500 ahead of FOMC minutes after little new from Fed chair Powell in testimony yesterday, but perhaps more impetus via his opening remarks at an event on Thursday. Eur/Usd is establishing a firm base above 1.0900 and decent option expiry interest between 109.30-35 (1 bn), while Usd/Chf straddles 0.9700 and Eur/Chf rotates either side of 1.0600 following its sharp spike from near 1.0500 multi-year lows in wake of Germany and France reaching agreement on a common EU debt funded COVID-19 rescue package.
  • CAD/JPY/GBP - All narrowly mixed vs the Greenback as the Loonie maintains momentum within 1.3960-16 parameters with ongoing assistance from firm crude prices awaiting Canadian CPI, while the Yen has pared more losses following a 3rd test of resistance just above 108.00, but crucially from a technical perspective no further approach towards the 200 DMA. Next up, Japanese trade data tomorrow before the BoJ’s bank lending inter-schedule policy meeting on Friday. In contrast, Sterling has succumbed to more ‘sell in May’ and chart-inspired downside pressure with stops, albeit light so far, tripped at 1.2225 in Cable that represents one side of in inverse head and shoulders formation, but the Pound has regained some poise post-soft UK inflation data and pre-BoE testimony to a TSC.
  • SCANDI/EM - Somewhat contrasting fortunes for the Scandinavian Crowns as Eur/Sek resumes its bearish tendencies towards 10.5500, but Eur/Nok rebounds from sub-10.9000 in wake of the Riksbank’s latest FSR and a Norges Bank economist survey both highlighting the adverse impact and risks related to the coronavirus. Meanwhile, the Turkish Lira looks apprehensive in the run up to tomorrow’s CBRT rate decision even though the Bank’s swap line to Qatar has been boosted by Usd10 bn to Usd15 bn, but the SA Rand is heading back down with more purpose after breaching a prior May peak ahead of retail sales and the SARB on Thursday with another 50 bp ease seemingly priced in.

In commodities, WTI and Brent front-month crude futures trade choppy and swing between gains and losses. WTI June expired yesterday whilst holding up above USD 30.0/bbl at USD 32.50/bbl, whilst June/July settled in backwardation – which some suggested show a clear significantly shift in sentiment MM. That being said, short-covering and low vol/open interest may have also influenced the June price action. Underlying fundamentals seem to be broadly improving, but “poor refinery margins suggest that this strength is unlikely to be sustainable in the near term.” ING says, “. We would need to see strength in refinery margins in order to persuade refiners to increase utilisation rates, but at current levels, there seems little incentive for them to do so.” On the geopolitical front, Iranian Navy said it will continue with its activities in the Persian Gulf despite US warnings, reported via ISNA, which follows remarks by the US navy that "Armed vessels approaching within 100 meters of a US naval vessel may be interpreted as a threat". Private inventories yesterday printed a headline draw of 4.84mln barrels. Investors will be eyeing the DoEs for confirmation. Elsewhere in the States, North Dakota’s oil and gas regulators will be meeting today to discuss mandated cuts, albeit little is expected from the meeting and the State only pumps ~1.4mln BPD vs. Texas’ 5mln BPD. In terms of metals, spot gold trades modestly firmer around USD 1750/oz and seems to be deriving strength from a weaker Dollar amid light news flow in early European trade. Copper similarly remains little changed within a tight intraday band.

US Event Calendar

  • 2pm: FOMC Meeting Minutes

DBs Jim Reid concludes the overnight wrap

I have decided that at the end of this week we’ll pause Corona Crisis Daily for now as new case growth and fatalities have been suppressed for now. I really hope it’s a permanent halt but we stand ready to bring it back if the virus has a second wave. Thanks for the numerous interactions and feedback on the report. It’s been a wild ride. In today’s edition we make some big assumptions as to what the fatality rate would be across all age buckets if the entire global population had been exposed to the virus. We use the latest England and Wales data (out yesterday), which splits the numbers by 5-year age buckets and estimate that if the global fatality rate was 0.75% - as many scientists think will end up being in the right ballpark - then our crude estimate is that the 20-64 year old ‘working age’ population fatality rate would be 0.1%. For over 70s, it could be 4.6% and 16.6% for over 90s. At the other end of the spectrum, based on this analysis we think 1 in every 298,000 under 14 year olds would die, again highlighting the hugely age discriminant nature of this virus. This analysis contains many big assumptions including over the end state fatality rate and the same proportionality across ages as current but you can see the theory in today’s CCD.

After around 9 weeks of working from home, being more productive, publishing more reports than ever before and conducting numerous video and audio meetings, at 4:30pm yesterday afternoon my internet finally went down for the first time. After 30 minutes of fighting it, I went into the garden put on my sunglasses and finished the work I had to do on my iPad using 4G. Just as I was finishing my iPad turned itself off and said it had to cool down before it could be used again. That’s how unseasonably hot it was yesterday here in the UK. Even the technology melted.

After a Monday session where there were no clouds to be seen for miles around, yesterday a few storm clouds appeared late in the New York session in the form of a report from health publication STAT saying that some vaccine experts may have doubts over the Moderna vaccine that saw markets rally universally the day before. The article found that ”based on the information made available by the Cambridge, Mass.-based company, there’s really no way to know how impressive — or not — the vaccine may be.” This caused a pullback in risk markets that were already a bit more mixed yesterday as we were reminded of the reality of the savage hit to the economy and to earnings. A reminder that our house global economic forecasts are based around a vaccine not being widely available over the next 18 months. Interestingly in our monthly survey published on Monday (link here) 75% thought that there would be a vaccine available within 18 months. This was obviously before any of the Moderna news this week.

The S&P 500 moved between gains and losses before the more negative Moderna news and ending the session -1.05%. While not especially deep given the sell-off of recent months, the pullback was broad based with all 24 industry groups trading lower by the end of the day and 80% of the index being down. Back in Europe, the story was similar even though they closed before the vaccine story, with equities closing lower after giving up morning gains, with the STOXX 600 down -0.61%. European auto stocks lagged behind as April EU vehicle registration fell 78% yoy with just over 290,000 cars sold, the lowest since the data started being tracked in 1990. Yesterday also saw short-selling bans end in a number of European countries and consequently benchmarks in those countries underperformed the broader index with Spain (IBEX -2.51%), Italy (FTSE MIB -2.11%), Belgium (BEL20 -1.69%), France (CAC -0.89%), Greece (ASE -1.37%), and Austria (ATX -4.30%) all declining.

In terms of earnings, Home Depot, the hardware giant, was down -2.90% after it announced that its virus-related costs surpassed the rise in sales, even as more people undertook home improvement projects while in lockdown. EPS for the company missed estimates at $2.08 (vs. $2.25), the first miss since 2014. Walmart was another giant member of the Consumer Staples sector that saw a large rise in sales as customers stockpiled into lockdowns. Sales ex-gas was up 10% in Q1, above the consensus +8.6%, while adj. EPS was reported at $1.18, beating the estimated $1.12. The shares were up +4% premarket, before trading lower on the day, finishing -2.11% as the company withdrew its 2020 guidance.

Oil had a less volatile day than seen recently, with WTI up just +2.14% as Brent actually fell back -0.46%, bringing its run of 3 successive advances to an end. It wasn’t all bad news for commodity prices though, as copper, which is often taken to be an industrial bellwether, rose a further +0.71% to reach a 2-month high.

Overnight, with little in the way of fresh news markets in Asia are trading more mixed with the Nikkei (+0.93%) and Kospi (+0.24%) up while the Hang Seng (-0.11%) and Shanghai Comp (-0.45%) are both down. Meanwhile, futures on the S&P 500 are trading up +0.59% while WTI oil is up a further +0.53%. Iron ore prices are also up +1.65% this morning bringing the gain since April 29th to 19.24%, a period, which also hasn’t seen a single daily decline.

Moving on. Fed Chair Powell appeared with Treasury Secretary Mnuchin before the Senate Banking Committee yesterday, where he said that the US was facing its biggest economic shock in living memory. The Fed Chair reiterated that more fiscal support may be needed but did shy away from taking a side in the current debate between Republican and Democratic lawmakers regarding the need for additional stimulus funding for state and local governments. Powell also talked up the ability of the Fed to make a difference, saying that “It’s all ahead of us. The amount that has gone out so far, in the context of the U.S. economy, is fairly modest.” The Main Street lending facilities, focusing on small business, should be up and running within 2 weeks. Lastly, Secretary Mnuchin, when asked about ultra-long US bonds, said that the Treasury did not find enough demand for that duration in studies undertaken prior to the current pandemic. Elsewhere, Minneapolis Fed President Kashkari said that it was “probably a year or two away before we really start seeing strong economic growth”.

Turning back to Europe, and on the recovery fund proposals from Merkel and Macron on Monday, the French finance minister Bruno Le Maire said yesterday that it “probably couldn’t be available before the start of 2021”. Furthermore, they’ll need to persuade all of the 27 member states to get it through, and some have already sounded notes of resistance, such as Austrian Chancellor Kurz the previous day who tweeted that they were willing to help with loans, whereas the proposal was for the fund to use grants instead. Also on European politics, it’s worth noting that French President Macron’s party lost its parliamentary majority yesterday after a number of MPs defected. See this piece here from Marc de-Muzion on the recent French political developments.

Against this backdrop, there was a further narrowing of peripheral spreads in Europe though, suggesting that investors continue to be reassured on balance by the prospects of an EU-wide recovery fund. By the end of the session, the spread of 10yr yields on Italian (-3.4bps), Spanish (-9.4bps), Greek (-13.3bps) and Portuguese (-9.2bps) debt over bunds had all narrowed even in a risk off equity session in Europe. In the US meanwhile, 10yr Treasuries also advanced, with yields down -3.7bps.

The downturn in risk market sentiment wasn’t helped by the economic data. Starting with the US, and housing starts in April fell to an annualised rate of 891k (vs. 900k expected), a -30.2% drop from the previous month’s reading. This now puts them at their lowest level since February 2015, and follows an -18.6% drop a month earlier. The building permits number was somewhat better than expected at 1.074m (vs. 1.000m expected), but that was also down -20.8% from the previous month. Here in the UK meanwhile, the number of jobless claims rose by 856.5k to 2.097m, which is their highest level since July 1996, while there was the largest quarterly decrease in vacancies (which fell to a 6-year low in the three months to April) since the current time series began back in 2001. In Germany, however, the ZEW survey’s expectations reading rose to 51.0 in May (vs. 30.0 expected), its highest level since April 2015. However, the current situation did fall to -93.5 (vs. -86.6 expected), the lowest since July 2003.

To the day ahead now, and we’ll get the FOMC meeting minutes tonight, but before then we’ll also get the Euro Area’s advance consumer confidence reading for May, as well as April CPI readings from the UK and Canada, in addition to the final Euro Area CPI reading for April too. In terms of central bank speakers, there’s the BoE’s Governor Bailey, Deputy Governors Broadbent and Cunliffe, as well as the MPC’s Haskel, who’ll be giving evidence before the House of Commons’ Treasury Select Committee. Lastly, we’ll hear from the Fed’s Bostic and Bullard, while earnings releases today include Lowe’s and Target.