Wall Street’s Bulls Triumph in a Week of Doubt and Dismal Data
The dueling forces in this historic period for financial markets pit animal spirits and hope against the coronavirus and its trail of economic destruction. For now, the optimists have the upper hand.
The S&P 500 just posted back-to-back weekly gains for the first time since early February, before either the pandemic or the crash took hold in the U.S. The advance was small by recent standards, but it’s another milestone in 2020’s remarkable markets story.
Prior to this week, risk appetite was boosted by a combination of stimulus measures and early indications the outbreak could be brought under control. This week was all about the latter, and the rising belief that the world’s largest economy may reopen sooner than expected.
Drawing on coverage from across Bloomberg News, this was the week on Wall Street and beyond.
Monday 13 April: The long weekend is over for the U.S., although a large chunk of Europe remains shut -- including London. That can make the moves fickle and market signals untrustworthy because a lot of the usual participants aren’t operating.
A day of doubt then, and that’s how it plays out. The benchmark for American shares, the S&P 500 Index, just notched the best week in more than four decades. That’s a good thing for most investors, but they are also aware that after major market quakes there are often big aftershocks -- in either direction.
The confused picture surrounding the virus and its economic legacy aren’t helping. The number of infections and deaths keep growing, but at a slower rate in many large nations -- a sign the extreme containment measures are helping to control the outbreak. Yet the toll keeps climbing, and the ramifications for trade, industry and society at large are becoming ever clearer.
One of the big pillars of support has been central bank action. Today the Federal Reserve announces it will dial back operations in the market for repurchase agreements following signs the upheaval in dollar funding has eased. Repo rates are in check and other benchmarks such as the London interbank offered rate are returning to less stressed levels.
Crisis averted? That depends on your perspective. The size of the central bank’s funding operations remain far larger than before the virus hit. Meanwhile, a flood of new T-bills threatens more pressure, helping push the bid-ask spread on the benchmark rate for overnight lending backed by Treasuries higher today.
There remains plenty to worry about. President Donald Trump is at loggerheads with state governors over who has the authority to reopen the country, while Federal Reserve Bank of Minneapolis President Neel Kashkari reckons the nation may face 18 months of rolling shutdowns.
Internationally, France extends its own lockdown as the global infection count pushes toward 2 million. Even a historic deal to end the oil price war is a footnote to the demand collapse caused by the pandemic -- when trading for the week began in Asia crude’s surge was brief, and it will end lower today.
“The real question we don’t have an answer to at this point is what does the world actually looks like in 12 months,” says Charlie Diebel, head of fixed income at Mediolanum International Funds Ltd. “If you can figure that out, that’s going to be the real rain maker in terms of making your investors money. At the moment, there are just too many cross currents.”
Looming over it all is the quarterly earnings season. It begins in earnest tomorrow, starting as always with the big Wall Street banks. Lenders are a hotspot in this crisis, squeezed on three sides by falling interest rates, rising credit demand and in all likelihood a surge in defaults.
With all that potentially captured in the forward-looking comments -- if not yet the financial ones -- banks are among the big stock losers. In a rare occurrence, the S&P 500 finishes down more than 1% while the Nasdaq 100 -- a tech gauge dominated by the likes of Amazon.com Inc. -- ends up by a similar amount.
The classic haven assets look as uncertain as everything else -- gold and the yen finish higher while Treasuries fall.
Tuesday 14 April: Earnings season arrives. Usually it’s both a quantitative and qualitative affair, where the figures are measured against the expectations of Wall Street’s army of analysts while the forward-looking statements are parsed for new opportunities or threats.
This time will be different. The economic hit from the virus has been so swift and brutal that most estimates are meaningless, and to some extent the backward-looking results are, too. Essentially, the market will have to price shares of each company with a lot less concrete information than usual.
Deep Global Recession
The IMF is predicting a 2020 global contraction of 3% Source: International Monetary Fund
That means the macro picture is more important, and at first blush it’s not good. The International Monetary Fund predicts the “Great Lockdown” recession will be the steepest in almost a century and economists are ramping up their expectations for job losses. In the U.S., even the worst-case scenarios start to look realistic. On the virus itself, the New York City death toll crosses 10,000. U.K. fatalities rise again.
So it’s a gloomy backdrop as JPMorgan Chase & Co. and Wells Fargo & Co. results land. Shares of both slump as profits take a big hit from loan loss provisions. The lenders, like everyone else, are bracing for tough times ahead.
All doom and gloom then? Not quite. Johnson & Johnson, the world’s largest health-care conglomerate, surges after posting stronger sales and boosting its quarterly dividend. A report says President Donald Trump will make some “important announcements” in the next few days regarding states reopening their economies. Leaders across Europe weigh steps to exit quarantines as Spain, Germany and Italy all report fewer infections.
The bottom line is the IMF is telling investors nothing they haven’t already figured out for themselves. These other things are new and promising, and the S&P 500 closes at a one-month high.
The note of caution is in the havens, where this time gold, Treasuries and the yen all climb together. The yellow metal is now loitering near a seven-year high.
“It seems that equity investors are shrugging off the U.S. wall of unemployment which we are about to hit,” says Gregory Perdon, CIO at Arbuthnot Latham Co & Ltd. “And that doesn’t seem like a prudent strategy.”
Wednesday 15 April: This rally has been built on stimulus, a flattening virus curve and fear of missing the bottom. All of that is about expectations of a rebound in the economy, so the bad data can be endured because it is seen as temporary.
The question is how bad can data get and still be endured, and for how long? Today may provide an answer.
With the price war now over, oil is a more useful barometer of global economic health. After three days falling, crude is steady for much of the Asian trading day. But the International Energy Agency is about to change all that.
The plunge in demand for oil this year will be a record, the agency says in its monthly report, and April will be the worst of it. Before 2020 is done, a decade of demand growth will be wiped out. Productions cuts won’t even prevent a potential exhaustion of storage facilities by the middle of the year.
This is the economic face of the coronavirus: a collapse in consumption on a scale never seen before. Oil, already at low levels, tanks. Futures in New York will close below $20 per barrel for the first time since 2002. It takes the currencies of commodity producers with it, and energy shares, too. And they take the Stoxx Europe 600 Index in their turn. The benchmark equity gauge slumps the most in more than two weeks.
“Markets are back into consolidation mode,” Simon Ballard, chief economist at First Abu Dhabi Bank, writes in a note. “It is increasingly apparent that the long-term economic impact of COVID-19 could be far more severe than many are currently assuming.”
Then more big bank earnings. Bank of America Corp. and Goldman Sachs Group Inc. slide in pre-market trading after following rivals in setting aside billions of dollars for loans likely to sour. In the mounting gloom the dollar is benefiting, and its gain adds pressure to other assets.
This all unfolds before 8:30 a.m. Eastern time, when U.S. retail sales data for March hits the tape alongside New York state manufacturing data. It’s the biggest decline in records dating back to 1992 for the former, and the largest drop since just after World War II for the latter. Worst still are the indications for April -- surveys show this will actually get worse. It is inevitable that homebuilder data 90 minutes later is abysmal.
The writing is on the wall even before global confirmed coronavirus cases top 2 million, New Jersey fatalities pass 3,000, France’s death count jumps by the most yet and Germany extends its lockdown.
Risk appetite can’t possibly survive the onslaught. All the major industry groups drop as the S&P 500 has its worst day in two weeks. The dollar surges. Treasuries jump, sending the yield on 10-year U.S. notes down by the most since late March. The benchmark American stock gauge is now at the lowest level versus bonds since 1983.
Thursday 16 April: In the past four sessions U.S. stocks have alternated between higher and lower closes, and it’s anyone’s guess where they will go today. Future’s are up after yesterday’s slump, but the weekly jobless claims await, not to mention more earnings.
It will be a messy, confused day on just about every level.
In earnings, BlackRock Inc. says there were net outflows from its long-term investment products for the first time in five years, but adjusted first-quarter earnings per share and revenue both beat expectations. Morgan Stanley posts a 24% jump in trading revenue, while casting doubt on whether those gains can continue.
On the economic front, unemployment claims are truly awful, but expectations were so bad that somehow it was a beat. More than 5 million Americans filed for jobless benefits last week, bringing the total in the month since the coronavirus pandemic throttled the U.S. economy to 22 million.
That effectively erases a decade worth of job creation -- and yet S&P 500 futures actually rise after the release while Treasuries and the dollar pare a gain.
What is happening? Once again, all this was anticipated. Investors are looking past the predictable bad news to the potential good. Trump has said he will unveil guidelines today to relax stay-at-home rules, which is a potential game changer for the markets. The economy is in dire straits, and the longer it is shut down the less likely a rapid rebound becomes.
Caught between these hopes and a slew of downbeat headlines -- the small business relief fund running out of cash, New York extending its lockdown, the U.K. doing the same -- the S&P 500 ping pongs between gains and losses all day.
In the end, with Trump due to deliver his guidelines at 6 p.m. and having already told some state governors they’ll be able to reopen businesses before May 1, stocks close in the green. The Nasdaq 100 wipes out its decline for 2020. Futures trading after the regular session get an extra boost from a report virus patients treated with Gilead Sciences Inc.’s drug showed improvement and Boeing Co.’s plans to restart some manufacturing.
The old saying on Wall Street is that stocks are not the economy. But increasingly there are fears that the split between them has gone too far.
“Given unemployment spikes, ageing demographics, and confidence scarring, it is risky to assume that fiscal and monetary policy will have such traction so as to return the real economy to pre-COVID times,” Citigroup Global Markets Inc. economists including Catherine Mann write in a note. “Markets are inordinately sanguine.”
Bloomberg’s most-read stories of the day tell the tale: Stories about reopening the economy and market moves are in the top three. The jobless claims barely make it into the top 10.
Friday 17 April: Investors are hungry for good news. The president’s much heralded guidelines to reopen the economy have essentially shoved the tough decisions to state governors. Gilead’s drug successes are promising but a long way from being conclusive. Yet Friday is risk-on -- at one point it looks like S&P 500 futures could hit their upper trading curbs.
There are other rays of light for those looking for them. Procter & Gamble Co. says organic sales rose 6% as the coronavirus pandemic prompted panic-buying of household staples. Credit markets are in rude enough health that Ford Motor Co., recently relegated to junk status, is selling new debt.
One place where there is no good news to be found, no matter how hard an investor looks, is the oil market. West Texas crude slumps again, at one point dipping below $18 per barrel. There’s no single trigger, just the last miserable day of a miserable week. Data showing that the economy in China, the world’s second largest, contracted for the first time in decades won’t have helped.
It is this kind of bad news that remains easiest to find. China also said its revising up its virus death toll. Spain records the most new infections in a week, Russia reports another record jump and cases in Singapore are soaring.
In the U.S., more and more homeowners aren’t paying their mortgages. A wave of distress is emerging in the municipal bond market. Shake Shack Inc. thinks it might break debt covenants this quarter, just one of countless companies in crisis. The Fed eases off on Treasury purchases -- a good sign for market stability but not great for stimulus fans.
The S&P 500 is undaunted, rising 2.7%, its best Friday in a month. A last piece of good news for investors to take into the weekend: the first back-to-back weeks of green since this madness began.