It will be difficult, if not impossible, for US equities to repeat last week’s blockbuster performance.
“Bear market rally” though it almost surely was, market participants will take whatever they can get after the historic beating risk assets took in March. 12% on the S&P in just four sessions is a welcome development when you’ve just lived through one of the most harrowing routs in recorded history.
This is a bit anecdotal, but I think it’s safe to say that most observers believe the ~25% bounce off the local lows is, at best, an example of “too far, too fast” – especially considering investors are flying almost totally blind headed into earnings season. At worst, those lows will be re-tested and breached before the “true” bottom is in. Or so goes the narrative, anyway.
Policy support, both monetary and fiscal, is a big driver of the rebound. The Fed is now in the market for everything from Treasurys to munis to high yield ETFs, and is prepared to accept almost anything that can be even loosely described as “investment grade” as collateral for cheap funding.
“The key question is whether the Fed will be a daily buyer in a range of assets across the board (as they have done in their QE programs)”, JonesTrading’s Mike O’Rourke wrote, in a Sunday evening note. “If so, that should be alarming because as we are all aware, the central bank was unable to unwind QE”, he added, before asking whether the Fed will “wind up like the Bank of Japan, owning ETFs it cannot sell?”
The Fed’s balance sheet swelled beyond $6 trillion last week. Daily buying under the unlimited QE regime will be tapered this week, even as the Fed steps up its support for the economy on a variety of fronts.
The OPEC+ deal should be a positive for risk assets, but we’ll see how it pans out. Following the agreement (which was finally cemented on Sunday), Energy Secretary Dan Brouillette jumped in to defend the planned US cuts against allegations they aren’t “real”.
“While it’s important to the members of OPEC that they have mandatory cuts, we simply do not have that system in the US”, he told reporters, on a call. Cuts to capex plans are proof that America’s contribution to the production curbs is no illusion, he suggested. He also reiterated that these very “real” curbs will ‘subsume” some of the cuts Mexico was unwilling to make. US production cuts are seen at between 1.6 million and 2 million barrels per day.
If crude can catch a sustainable bid, if would be a tailwind for risk assets. It would also provide a lift to inflation expectations at a time when across-the-board demand destruction threatens to usher in a deflationary spiral even if, eventually, shut-ins and collapsing trade stoke shortages and the “wrong” kind of inflation.
Obviously, the debate will continue on the proper time to reopen major economies across the world. The virus curve is flattening in key “hot spots”, but as Neel Kashkari reminded an anxious nation on Sunday, the odds of a “V-shaped” recovery are probably not great. Instead, he sees an 18-month period of rolling shutdowns and sporadic restarts as the medical community works to find a real solution to the problem.
“Following the Easter weekend, markets will have much to tussle with over the week ahead, with several critical Q1 earnings releases in the US along with meaningful economic data expected to reveal further the horrific extent of the coronavirus’s impact on the global economy”, Axicorp’s Stephen Innes said Monday.
“China’s Q1 GDP release on Friday will be closely watched, along with crucial US data on retail sales and industrial production”, Innes added, cautioning that “as investors’ focus turns to the real economy a reality check or two remains in the cards where the markets could end up showing investors all the mercy of a Greek tragedy”.
In addition to what are likely to be egregious retail sales numbers and a massive drop in factory production, we’ll be forced to digest another disastrous jobless claims print stateside.
Last week’s lamentable figures brought the three-week total to nearly 17 million and things are going to get considerably worse, even on the most optimistic forecast from economists surveyed.
“Risk assets have rallied over the past several days on the back of monetary and fiscal policy bazookas being deployed worldwide, and on signs that the spread of COVID-19 is slowing”, SocGen’s Jason Daw remarks, on the way to warning that “the rally is now slowing, as investors gauge how challenging it may be for countries to exit lockdowns without triggering new waves of infections, and the extent of economic damage already inflicted”.
A smattering of early data out Sunday evening (or Monday morning depending on where you’re based) was somewhat foreboding.
South Korea’s first 10 days exports for April dropped 18.6% YoY and imports fell 13%. Shipments to to China were down more than 10% and more than 20% to the EU.
Meanwhile, Mexico’s jobs market just had its worst March in a quarter century, new data shows. The country shed 130,593 jobs last month, the Mexican Social Security Institute said, blaming “the effects of the health emergency”.
“As far as equity investors are concerned, last week’s rally propelled the S&P 500 to dangerous territory”, JonesTrading’s O’Rourke went on to say Sunday. “Although the pandemic progress of the past week and the Fed programs are not exactly one-off events, they won’t be repeating on a daily basis as disappointing earnings and economic data will be for the next couple of months”, he wrote. “No matter how active the Fed is, this is not a tape to chase higher”.
