As expected, markets did not go quietly into the long holiday weekend.
Thursday was action-packed from start to finish. The Fed made a splash with $2.3 trillion in new financial support for the ailing US economy, which suffered another body blow as 6.61 million Americans filed for unemployment benefits last week, taking the three-week total to nearly 17 million.
As part of its new support measures, the Fed expanded its corporate bond buying program to include fallen angels and high yield ETFs. Jerome Powell is Fred Sanford – officially in the junk business. It was the best day for the high yield products in a decade (bottom pane).
Although equities pared gains into the close, US stocks ended the week up 12%, an eye-popping rally that pushed the S&P some 24% higher from the local, bear market lows. It was the S&P’s best week since 1974 (top pane).
The Dow, meanwhile, very nearly notched its best weekly advance since 1938, barely missing the mark set two weeks back.
On the week, small caps outperformed the broader market by the most since Trump’s election and the second-most in two decades.
“That stack of blues on the NY Fed’s desk is limitless. Even I have underestimated the Fed’s willingness to use their balance sheet in whatever-means-necessary fashion”, Kevin Muir, formerly head of equity derivatives at RBC Dominion, and better known for his exploits as “The Macro Tourist”, remarked. “The world has indeed changed”.
Gold rose more than 4% on the week to the highest since 2012.
Oil tumbled Thursday, even as the Saudis and Russians buried the proverbial hatchet on the way to outlining the contours of a deal to balance an oversupplied market in the face of the largest demand shock in history.
The hotly-anticipated OPEC+ teleconference produced an agreement to slash production by around 10 million barrels/day next month and into June, with Saudi Arabia and Russia both reducing output to 8.5 million barrels/day. But it was a “sell the news” event – go figure. Crude is still down more than 50% in 2020.
Now, market participants will look to a meeting of G20 energy ministers on Friday for signs that the US may be willing to join the effort to stabilize prices.
Estimates vary, but near-term demand destruction is pegged at somewhere in the neighborhood of 30 million barrels/day, triple the prospective OPEC+ cut. EIA data out Wednesday showed the supply of finished motor gasoline plunged to levels never witnessed in figures back to February of 1991 last week.
After June, as the virus effect on the global economy subsides, the OPEC+ cuts would be tapered, delegates suggested.
Speaking of “tapering”, the Fed will reduce its daily purchases to $30 billion/day from $50 billion in a continuation of the recent trend that finds the central bank trimming the pace of buying even as it ramps up support for the economy.
After the bell, EU finance ministers said they’d reached an “excellent accord” on a $590 billion package aimed at bolstering the bloc’s own economic fortunes amid a horrendous contraction triggered by virus containment efforts. On Wednesday, a deal seemed out of reach, but it appears fiscal policymakers managed to rise to the occasion, a rarity.
Democrats undercut Mitch McConnell’s bid to top up the Paycheck Protection Program by $250 billion. Chuck Schumer and Nancy Pelosi are angling to double the additional funding and, crucially, want more discretion when it comes to dictating where the money goes. Ultimately, that battle will not last – the program will be topped up, one way or another.
On the virus front, there are now good reasons to believe that New York has hit the apex, which means things should improve from here. Hospitalization rates have collapsed. Of course, fatalities are a lagging indicator, which means the death toll will continue to climb, unfortunately.
“While there is evidence that the virus threat may be beginning to subside, the US remains a long way from a full re-opening and even longer from a return to ‘business as usual'”, ING wrote Thursday, adding that while their base case is for a “rolling process of re-opening in the US from mid-May”, that will “still involve some form of social distancing with stricter testing coming into place”, which in turn means “job opportunities for the millions of workers laid-off, particularly in the leisure & hospitality, retail and transport sectors will remain somewhat limited and unemployment will be slow to fall”.
You’ll recall from March payrolls that leisure & hospitality lost enough jobs last month to wipeout nearly all of the gains from the past two years.
As for markets, Muir reminds you that “there is no reason for the economic fundamentals to converge with financial asset prices with central banks shoving all this liquidity into the system”.
Remember, periods involving crises and market crashes can (and very often will) produce rip-roaring rallies, followed by more nauseating swoons in what, if you’re “in it”, so to speak, can be an exhausting rollercoaster ride.
“Be careful of anyone who argues governments will fail”, Kevin went on to say, in a morning note. “They might, but it won’t be in nominal terms!”
Amen to that.