US Futures Soar To New Record Highs On "Coronavirus Optimism" Ahead Of Powell Testimony

Global stocks resumed their ascent to all time highs on Tuesday amid fresh coronavirus "hopes" after China’s top medical advisor said the Chinese epidemic may peak over the next few weeks. Momentum came from the US, where the S&P 500 closed at a fresh all-time high on Monday, and takeover target Sprint soared more than 60% in the pre-market after T-Mobile US was said to be poised to win court approval for its $26.5 billion takeover. The dollar nudged lower versus a basket of its major peers.

US equity futures climbed alongside stocks in Europe and Asia following news that a judge is set to approve a merger between Sprint and T-mobile will be approved, and investors pushed benchmarks to record highs before congressional comments from Fed Chairman Jerome Powell. Oil rose and Treasuries slipped.

Despite the latest dose of coronavirus optimism which judging by the record high in stocks has been injected every single day with two notable occasions, China’s factories were struggling to re-open after an extended break and analysts warned that investors might be underestimating the economic damage, but the mood remained strong after another Wall Street surge overnight.

The death toll in mainland China climbed past 1,000 on Tuesday, but the number of new confirmed cases fell, although contrary to the market's interpretation that this is due to a slowdown in the pandemic it mostly reflects a limitation on how many cases China can test as well as a change in the definition of an infection by China's health council.

So for today's dose of optimism, Zhong Nanshan, an epidemiologist who helped fight the SARS epidemic in 2003, said the situation in some provinces was already improving. “The peak time may be reached at ... maybe middle or late this month,” Zhong told Reuters.

The reaction was quick: Europe's Stoxx 600 index rose as much as 0.7% to a record high of 427.46 points, with basic resource stocks leading the gains, rising 1.7%, as commodity prices recovered from the slowdown in Chinese consumption of raw metals and energy.

"There are some hopes that the peak of virus may be on the horizon, but we are still quite cautious,” said TD Securities’ European Head of Currency Strategy Ned Rumpeltin. “We are still pretty far from the all clear ... and we just don’t know what the macroeconomic impacts are going to be.”

In China, factories were slow to reopen after an extended Lunar New Year break, leading analysts at JPMorgan to again downgrade forecasts for growth this quarter. “The coronavirus outbreak completely changed the dynamics of the Chinese economy,” they said in a note we discussed previously. They assumed the contagion would peak in March and factories would slowly resume opening this month. In that case, growth would slow to around 1% in the first quarter, before rebounding to 9.3% in the second. Should the contagion not peak until April, the economy could contract in the first quarter, with a rebound spread over the second and third quarters, JPMorgan warned.

Even so, MSCI's broadest index of Asia-Pacific shares ex-Japan rose 0.9%, snapping a two-day decline, riding on an overnight advance in U.S. stocks with Shanghai blue chips ahead by 0.8%. Japan's Nikkei was closed for a holiday, although Nikkei futures traded up 0.8%. As risk sentiment improved, the region’s benchmark MSCI Asia Pacific ex-Japan Index gained as much as 1.1%. Hong Kong and South Korea equities climbed the most, while India’s Sensex Index also advanced. Even with a death toll that has topped 1,000, China reported the lowest number of new coronavirus cases since Feb. 1, an encouraging sign as health officials look for the outbreak to peak. Singapore, meanwhile, cautioned that it expects a 25% to 30% decline in tourist arrivals and spending this year.

Analysts continued to dance between painting the latest global economic slowdown as good news for stocks, while also explaining why a return to growth would also be good news for stocks: "At the margin, we have to consider that the rebound in growth we were expecting over 2020 may be either delayed or somewhat less vigorous than we were anticipating due to the impact of the virus,” Mark Robertson, head of multistrategy at Aviva Investors, said in an interview in Sydney. “But ongoing monetary policy support, especially what was delivered last year, a reduction in uncertainty around trade wars, should still be a tail wind."

All this leads to today's main event: Fed Chair Powell's testimony before Congress to begin two days of testimony as markets are now pricing in almost 40bps of rate cuts this year by the Federal Reserve to cope with coronavirus damage. The Treasury yield curve slightly inverted to reflect the danger of recession, even as Powell is expected to reiterate that the U.S. economy is doing well but that rates can stay low given the current low inflation environment.

In FX, the Bloomberg dollar index edged lower, easing from 2020 highs while commodity-related currencies advanced amid signs that the rate of contagion from the coronavirus is stabilizing. Gains in global stock indexes and U.S. equity futures added to the risk-on mood. Norway’s krone touched the strongest level this month as oil prices rose and risk assets were in demand. Bets on the euro in the options market have turned bearish, ending a divergence with spot trading that had held since mid-January, with investors in both now showing a united preference for short exposure in the common currency. The yen edged lower as its haven appeal eroded; Japanese financial markets were shut due to a Tokyo holiday.

Treasuries fell alongside European bonds, under pressure after being led lower by bunds, which extended losses ahead of a six-year Dutch auction and a syndicated sale from Italy. Ahead are Powell's testimony and $38BN 3-year note sale, first of three quarterly refunding auctions. Futures activity was constrained during Asia session by a holiday in Japan that closed the cash market, with yields 1bp-2bp higher across the curve led by 5- to 7-year sector; 10-year higher by 1.7bp at ~1.59%.

Looking to the day ahead, the New Hampshire primary mentioned earlier is expected to be the main highlight. Central bankers will also be dominating the agenda, with a number of key speakers. From the ECB, we’ll hear from President Lagarde, as well as the Executive Board’s Lane and Schnabel. Over in the US, Fed Chair Powell will be speaking before the House Financial Services Committee as part of the semi-annual monetary policy report to Congress, while there’ll also be remarks from Vice Chair Quarles, Daly, Bullard and Kashkari. Here in the UK, Bank of England Governor Carney will be speaking before the House of Lords’ Economic Affairs Committee and elsewhere Haskel will be speaking. Finally, data releases to look out for include the first look at Q4 GDP in the UK, while the US sees the release of the NFIB small business optimism index for January, along with December’s job openings.

Market Snapshot

  • S&P 500 futures up 0.2% to 3,359.50
  • STOXX Europe 600 up 0.6% to 426.99
  • MXAP up 0.5% to 169.77
  • MXAPJ up 0.9% to 550.05
  • Nikkei down 0.6% to 23,685.98
  • Topix down 0.7% to 1,719.64
  • Hang Seng Index up 1.3% to 27,583.88
  • Shanghai Composite up 0.4% to 2,901.67
  • Sensex up 0.6% to 41,224.88
  • Australia S&P/ASX 200 up 0.6% to 7,055.31
  • Kospi up 1% to 2,223.12
  • German 10Y yield rose 2.3 bps to -0.388%
  • Euro up 0.04% to $1.0915
  • Italian 10Y yield rose 0.9 bps to 0.786%
  • Spanish 10Y yield rose 1.7 bps to 0.276%
  • Brent futures up 1.6% to $54.14/bbl
  • Gold spot down 0.2% to $1,569.71
  • U.S. Dollar Index little changed at 98.83

Top Overnight News

  • The death toll from the coronavirus exceeded 1,000, as the province at the center of the outbreak reported its highest number of fatalities yet and removed top officials. Beijing said regions less hit by the disease should accelerate a resumption of industrial output
  • The European Central Bank has set out an ambitious timetable for its strategic review that could see a decision on whether to change its inflation goal by the summer, according to euro-area officials. The reappraisal has eight study teams covering themes ranging from the core topic of inflation to modern challenges such as climate change and trade
  • Little more than a month since Sweden’s central bank raised its key policy rate to zero in December the jury is still out on the move. The narrative of sustainably strong inflation that the Riksbank clung to while justifying the increase looks set to unravel, leaving investors to speculate whether it might eventually need to revert to more stimulus
  • The U.K. government will break away from European Union rules governing financial services, but wants to agree a “durable” trading relationship for banks, Chancellor of the Exchequer Sajid Javid said. The European Union swiftly rebuffed the call for London’s financial services firms to enjoy continued access to the single market
  • The U.K. economy narrowly avoided a contraction in the fourth quarter, adding to evidence of a pickup following Boris Johnson’s election win. Johnson is set to push ahead with the HS2 high-speed rail project linking London to northern England, despite political opposition and spiraling costs
  • Treasuries now make up more than half of the world’s haven assets, double the share they accounted for during the global financial crisis, according to Eurizon SLJ Capital. That complicates matters when the spread between long- and short-term yields inverts: what used to be a reliable American recession indicator is instead an barometer of investors diving for cover worldwide

Asian equity markets were higher across the board after taking the cue from US peers which looked past the ongoing coronavirus concerns and resumed last week’s rally to lift the S&P 500 and Nasdaq to unprecedented levels. ASX 200 (+0.6%) was led by outperformance in tech and with firm gains in the largest weighted financials sector. Chinese markets were also upbeat despite the PBoC liquidity drain and continued rise in the casualties from the coronavirus in which the death toll has now surpassed 1000, although the pace of additional confirmed cases slowed from the prior day. Following yesterday’s reassurances offered by Chinese President Xi, the Hang Seng (+1.2%) and Shanghai Comp. (+0.4%) traded positively with the former buoyed by property names and with Geely Auto the frontrunner in Hong Kong as it explores a merger with its Volvo unit, while Japanese markets remained shut for National Day holiday.

Top Asian News

  • Hong Kong Stocks Miss Key Level as Virus Worry Limits Gains
  • China Starts Giving ‘Force Majeure’ Slips to Virus-Hit Companies
  • Geely Surges in Hong Kong on Proposed Merger With Volvo Cars
  • Key Erdogan Ally Says Turkish Ties With Russia Must Be Reviewed

European stocks trade firmer across the board [Eurostoxx 50 +0.7%] albeit off earlier highs, following on from a similar APAC handover - after the state of play overnight was dictated by the gains on Wall Street. Subsequently, the pan-European Stoxx 600 hit fresh record highs whilst the bellwether Eurostoxx 50 reached levels last seen in 2008.  France’s CAC (+0.3%) marginally lags regional peers with the index weighed down by Michelin (-2.8%) post-earnings after the group watered-down guidance in which it now expects the FY20 operating income to be “slightly down YY” whilst also acknowledging softness in passenger cars, light trucks and off-road tire markets. Sectors are all in positive territory and reflect risk appetite as cyclicals outpace defensives. In terms of individual movers, Daimler (+1.0%) shares remain resilient post-earnings despite a slash to its FY dividend -  which was set at EUR 0.90/shr, down from the prior of EUR 3.25/shr and below the expected EUR 1.30/shr. Shares remain buoyed following comments from its CEO who noted that cost-cutting measures will be ramped out as part of its initiative, whilst the overall risk sentiment also aids the stock as DAX30 Mar’20 futures probe its contract high of 13639 (Note: Daimler has a 5.6% weighting in DAX30). Sticking with Germany, Deutsche Telekom (+4.1%) shares are bolstered amid source reports that the long-awaited T-Mobile (+8.8% pre-market) and Sprint (+64% pre-market) merger may get the green light from US district judge later today. Deutsche Telekom is T-Mobile’s majority shareholder with a holding of ~63%. On the flip side, NMC Health (-13.6%) received a double whammy despite opening with mild gains, initial downside stemmed on the back of a City regulator probe into the complex director share pledges at NMC after the Co. revealed that it was not apparent who actually controls its largest shareholdings. Thereafter, the second wave of downside arose from KKR has confirming that it has not made an offer regarding an offer for the Co, and adding that it does not intend to make an offer for NMC – which comes amid yesterday’s upside in the NMC shares amid sources noting that it is in talks with KKR regarding a potential deal valued at around GBP 2bln.

Top European News

  • U.K. Economy Avoids Contraction Amid Post-Election Bounce
  • JPMorgan Upgrades Two Greek Banks on Improved Asset Visibility
  • Johnson Set to Back $129 Billion U.K. High-Speed Rail Plan
  • Russia Studying Recommendations of OPEC+ JTC on Coronavirus

In FX, it is déjà vu for the Aussie and Norwegian Krona, but this time the former has rallied on domestic grounds rather than Chinese data to an extent at least, while the latter has extended post-CPI gains with the aid of a firm bounce in oil prices. Aud/Usd is back above 0.6700 and Eur/Nok has crossed 10.1000 to the downside in wake of an acceleration in Australian home loans and as crude rebounds ahead of API inventory updates, the official EIA data on Wednesday and Russia’s meeting with oil companies to discuss OPEC+ proposals for deeper output cuts.

  • USD - Notwithstanding the ongoing outperformance noted above, and resilience in other G10 currencies, the Dollar is still appreciating steadily with the DXY nudging over another Fib resistance level before fading a fraction below the psychological 99.000 mark. Perhaps some reticence and caution ahead of Fed chair Powell part 1, but the index has carved out a marginally firmer 98.810-917 range and registered a fresh 2020 peak in the process.
  • CAD/NZD/GBP - The aforementioned recovery in oil has cushioned the Loonie to a degree between 1.3289-1.3320 parameters, but the Kiwi remains capped under 0.6400 as the clock ticks down to Wednesday’s RBNZ policy meeting and the Aussie continues to outshine its Antipodean counterpart (Aud/Nzd briefly above 1.0500 at one stage). However, the Pound looks more comfortable above 1.2900 vs the Greenback and around 0.8450 in Eur/Gbp cross terms following a raft of UK data including a firmer than forecast preliminary Q4 y/y GDP print. Cable stalled a whisker short of yesterday’s best and 1.2950, with attention now turning to BoE speakers from 12.30GMT.
  • EUR/CHF/JPY - All narrowly mixed against the Buck, as the single currency fends off more concerted attempts to breach 1.0900 and stays within striking distance of option expiries at 1.0915-20 in 1.2 bn, but lags the Franc that is still pivoting 0.9775 and holding above 1.0700 respectively amidst heightened German political uncertainty. Elsewhere, the Yen remains rangy just over 110.00 in holiday-thinned trade after Japan’s National Day and against a firmer Yuan (Cnh and Cny both maintaining 7.0000+ status vs the Usd).
  • EM - More Lira underperformance on geopolitical jitters as the situation in Syria threatens to escalate further after reports that Turkey has increased military activity with Government forces retaliating. Usd/Try has advanced beyond 6.0440 in contrast to Usd/Zar staying well below 15.0000 even though SA manufacturing output fell far more than expected in December.

In commodities, WTI and Brent front-month futures are posting firm gains in early EU trade in a continuation of the sentiment-driven upside seen during the overnight session. WTI has just about reclaimed USD 50/bbl following yesterday’s sub-50 settlement whilst Brent hovers around the USD 54/bbl mark following yesterday’s settlement close to USD 53/bbl. On the OPEC+ front, Kazakhstan’s Energy Minister noted that the members would either meet in late February or early March to discuss further action – which does somewhat defer to earlier comments out of some OPEC+ members, with the Azeri Minister noting over the weekend that a February meeting was discussed but "the situation was analysed and the meeting will be held in March as planned", whilst Russian Energy Minister Novak attempted to bide his time to assess market impacts. ING notes that a March meeting “may concern many in the market as waiting too long to take action in the wake of the demand impact from the coronavirus.” For reference, sources noted the Russian Energy Minister said they will hold a meeting tomorrow with domestic oil producers to discuss the OPEC+ deal, which could add more meat on the bone regarding Russia’s next steps/thought process. Looking ahead to today’s session, the monthly EIA STEO will be released at 1700GMT with credence on global growth demand forecasts against the backdrop of the coronavirus. Thereafter, the weekly API private inventory report will be released – with forecasts for a headline crude build of 3mln barrels over the week. Tomorrow will see the release of the OPEC monthly report followed by the IEA oil report on Thursday. Elsewhere, spot gold trades lower with the yellow metal pressured by the overall risk appetite. Conversely, copper conformed to the risk tone and clambers back towards USD 2.6lb.

US event calendar

  • 6am: NFIB Small Business Optimism, est. 103.5, prior 102.7
  • 10am: JOLTS Job Openings, est. 6,925, prior 6,800
  • Mortgage Delinquencies, prior 3.97%
  • MBA Mortgage Foreclosures, prior 0.84%

Central Banks

  • 6am: Fed’s Daly Speaks in Dublin
  • 10am: Powell to Speak Before House Financial Services Panel
  • 12:15pm: Fed’s Quarles Speaks on Bank Supervision
  • 1:30pm: Fed’s Bullard Discusses Economy and Monetary Policy
  • 2:15pm: Fed’s Kashkari Speaks in Kalispell, Montana

DB's Jim Reid concludes the overnight wrap

Morning from a very rainy New York. I thought I had a tough day yesterday with the EMR, an 8-hour flight, transfers, a full afternoon of meetings and then the EMR again. However, my wife always brings me crashing back down to earth as she told me last night how Maisie was late for school again because the 2yr old twins locked themselves in the toilet again and covered themselves with hand moisturiser from those pump dispenser bottles. Then a couple of hours later at a music sing-a-long class the twins love, the person who runs the class took my wife aside and asked whether she thought this class was still suitable for the boys. This seemed to be code for they are too rowdy and not welcome anymore. I grilled my wife as to what they do that’s so bad and she said that they are just incredibly loud and feed off each other. My wife was very affronted and upset over it. To be fair in my younger days I once got chucked out of a gig for singing very loudly in the front row. Mentioning that on the phone from 3500 miles away late last night didn’t help the mood much.

Being stateside it’ll be interesting to monitor the mood in the election primaries first hand ahead of New Hampshire tonight. Returning to our market survey, last month 89% of our respondents thought Trump would win the US Presidential race and only 10% thought Sanders would get the Democratic nomination. Will any of that change in our survey this month? Feel free to fill in and influence it. In terms of what to expect tonight, the RealClearPolitics polling average has Bernie Sanders in the lead with 28.7%, ahead of Pete Buttigieg at 21.3%, while Amy Klobuchar (11.7%), Elizabeth Warren (11.0%), and Joe Biden (11.0%) trail behind them. Senator Klobuchar has received a large boost in post-debate polling, coming at both Buttigieg and Biden’s expense – which could ultimately play to Senator Sanders’s benefit tonight. Indeed, Sanders won the state by a decisive 22-point margin against Hillary Clinton in 2016’s primary and is the incumbent US senator for the neighbouring state of Vermont. That said, few would have expected that Joe Biden would have come in 4th place in Iowa last week, so it’s definitely still an open contest. Indeed, with no candidate withdrawing from the race following the Iowa Caucuses, it’ll be interesting to see if New Hampshire performs its traditional winnowing role that sees some of the candidates start to drop out of the race.

Ahead of going to New Hampshire himself to rally for the largely uncompetitive Republican primary, President Trump spoke yesterday afternoon to a room of the nation’s state governors. On trade, the President turned his attention to Europe saying that his administration would soon take on the EU and address the “tremendous trade deficit with Europe” like they did China. Europe and global markets wait nervously to see whether Mr Trump will go after the continent’s trade practises in election year. The President also talked down the effects of the Coronavirus on the US, pointing out the relatively few number of cases within the country (13 following another overnight), and a belief that the coming warmer weather would help curtail the spread of the novel disease. Finally, Trump released his preliminary annual budget in which he proposed cuts to social programs and taxes, while increasing defense and entitlements spending. The budget, which is just an opening salvo and would not have to be approved until after the 2020 election in November, would take the federal debt above $30trl over the next decade. This further signals how both major parties in the US have embraced larger debt burdens going forward. See our piece last week (link here) on the latest huge increase in long term debt projections from the CBO.

Seemingly sharing President Trump’s lack of fear over the coronavirus, US equity markets rose to new highs last night, with the S&P 500 up +0.73% and the NASDAQ +1.13%, while in Europe, the STOXX 600 pared back earlier losses to close up +0.07%. Energy stocks underperformed on both sides of the Atlantic, suffering from oil’s continued decline as both brent crude (-2.20%) and WTI (-1.49%) fell back, although they have recovered about half of those losses this morning.

This morning Asian markets are following Wall Street’s lead with the Hang Seng (+1.28%), Shanghai Comp (+0.34%) and Kospi (+0.91%) all up, with Japanese markets closed for a holiday. The latest on the virus also is that the number of deaths in China stand at 1,016 with 42,638 confirmed cases. On that the impact of the coronavirus is said to be causing Singapore to lose 18,000 to 20,000 tourists per day which is the equivalent of a drop of 25% to 30%. It’ll be worth watching some of these data points as they start to get released covering the virus impacted period.

Back to yesterday and the main global under-performer was Irish equities following the country’s election over the weekend, with the ISEQ all-share index losing -1.20% as investors reacted to the prospect of a leftward shift in policy after Sinn Féin’s strong performance. Fianna Fail’s deputy leader Dara Calleary said in an interview with broadcaster RTE that Fianna Fail will engage with Sinn Fein saying “we’re not going to refuse to talk to them, but let’s be in no doubt that those policy difficulties and those principles are still difficult hurdles.” Bookmaker Paddy Power has made a Fianna Fail-Sinn Fein-Green grouping as the most likely outcome in government formation.

Bonds mostly followed the slightly softer sentiment in Europe rather than the late US risk rally as yields saw a decline across the board. 10yr Treasuries were down -1.4bps to 1.570% but sold off a couple of bps in the last hour of trading. 10yr bund yields fell -2.5bps, while the spread of BTPs over bunds rose by +3.5bps. Meanwhile the dollar index was up +0.15% yesterday, strengthening for a 6th consecutive session to reach a 4-month high, and Bitcoin strengthened +1.25% against the dollar as it climbed to a 5-month high. The move lower in 10yr Treasuries was accompanied by a +0.6bp increase in the 3-month, causing the Fed-preferred 3-month-10y yield curve measure to invert yet again.

Back to politics and before the New Hampshire poll tonight, the main political news from yesterday came from Germany, where CDU leader Annegret Kramp-Karrenbauer announced that she would be standing down as leader and won’t be the party’s chancellor candidate at the next election. This is a major development in German politics that throws open the question of where the CDU goes next and who might be the next chancellor after Angela Merkel steps down. The catalyst for AKK’s resignation was last week’s debacle in the German state of Thuringia, where the local CDU joined with the far-right AfD to help elect an FDP politician as regional premier, marking the first time that the AfD had acted as kingmaker in German politics. However, AKK’s performance had been in question for some time, and since taking over the leadership in December 2018 she has made a number of perceived gaffes and seen her own authority over the party weaken.

In terms of what happens next, AKK said that she’d be staying on for now in order to oversee the leadership contest, so don’t expect any immediate changes over the coming days. For who might succeed her, names in the frame include Friedrich Merz, who was AKK’s main opponent in the last leadership race, and enjoys strong support from the CDU base. He also announced only last week that he’d be stepping aside from his role at BlackRock next month in order to focus on politics. Another is Armin Laschet, the state premier of North-Rhine Westphalia, a more moderate figure who has governed the country’s most populous state since June 2017. You can read all the latest from our German economists who put out a note on the issue yesterday (link here).

Here in the UK, the FT has reported overnight that the UK government will ask the EU to sign up to a “permanent equivalence” regime for financial services that will last for “decades to come” to ensure that the city of London can maintain access to the European market after Brexit. Earlier, the UK Chancellor of the Exchequer Sajid Javid had said that the UK government will break away from EU rules governing financial services, but wants to agree a “durable” trading relationship for banks. However, he added, “We may choose to do things in the same way as the EU if it works for the UK. But there will be differences, not least because as a global financial center the UK needs to keep pace with and drive international standards. Our starting point will be what’s right for the UK”

There was very little in the way of data yesterday, though the Bank of France’s industry sentiment indicator for January fell to 96 (vs. 97 expected), a 4-month low. That said, the services sentiment reading rose one point to 98, while construction also rose one point to 106. According to this, GDP is expected to grow by +0.3% in Q1, following the -0.1% contraction in Q4. Elsewhere, Italy reported poorer-than-expected industrial production numbers for December, with a decline of -2.7% (vs. -0.6% expected), which follows weak numbers out of France and Germany last week.

Looking to the day ahead, the New Hampshire primary mentioned earlier is expected to be the main highlight. Central bankers will also be dominating the agenda, with a number of key speakers. From the ECB, we’ll hear from President Lagarde, as well as the Executive Board’s Lane and Schnabel. Over in the US, Fed Chair Powell will be speaking before the House Financial Services Committee as part of the semi-annual monetary policy report to Congress, while there’ll also be remarks from Vice Chair Quarles, Daly, Bullard and Kashkari. Here in the UK, Bank of England Governor Carney will be speaking before the House of Lords’ Economic Affairs Committee and elsewhere Haskel will be speaking. Finally, data releases to look out for include the first look at Q4 GDP in the UK, while the US sees the release of the NFIB small business optimism index for January, along with December’s job openings.