Weekly Market Update: Markets strain under Coronavirus fears, plunge in Treasury yields, and OPEC+ collapse
Fri, 06 Mar 04:04 PM EST/09:04 PM GMT
Global markets were unable to escape the grasp of the spreading coronavirus which appeared headed towards pandemic proportions. Covid-19 cases reached ~100K globally with big daily jumps continuing to be seen in hotspots outside of Asia, though the news coming out of China appeared to improve. The US saw its first significant cluster outbreaks in New York and Seattle further unsettling investors. On Tuesday, G7 finance ministers and central bankers met and pledged a coordinated response, and shortly thereafter the Federal Reserve announced an emergency 50 basis point rate cut. The rate cut failed to have its intended effect as panicky markets tumbled, and futures markets continued to price in another 50 bps cut at the FOMC’s regularly scheduled meeting just two weeks from now. On Wednesday, stocks surged after former VP Biden had big wins in many of the Super Tuesday Democratic primaries which prodded Mike Bloomberg and Elizabeth Warren to drop out of the race.
The volatility seen in both bond and stock markets was breathtaking. The Dow had multiple 1,000 points days for the second straight week. The S&P posted a streak of the largest percentage swings on daily basis seen since the days before 1987’s Black Monday. As the week progressed cascading US Treasury yields held the markets by the throat as investors confronted the ever increasing possibility of recession and expected central back action. On Friday, the US 10-year yield plunged below 70 basis points, while the VIX hit 50 and gold traded at $1,690 despite an outstanding Fed employment report for February. Adding to the overall consternation, crude prices plunged 10% after Russia refused to join an OPEC proposal to further cut production to address global demand destruction caused by the coronavirus outbreak. Markets were shaken by the potential for crumbling commodity prices to cause dislocations in the high-yield bond market that could hit debt-laden energy companies.
In corporate news this week, several major firms warned of trouble ahead amid the spread of coronavirus, with the pain particularly acute in the travel sector. Southwest Airlines cut its Q1 guidance, seeing a ‘significant decline’ in recent days in demand and an increase in cancellations. Lufthansa announced it would reduce capacity by up to 50% in coming weeks, more than previously planned, due to a slump in demand. United said its cuts to domestic and international flights would likely extend into May. Semiconductor names such as Skyworks, Qorvo, and Microchip Technologies all trimmed their outlooks on reduced demand and greater supply chain obstacles. Visa lowered its Q2 revenue growth guidance, citing a slowdown in travel and cross-border spending. Starbucks announced an adverse impact on China results, though noted it was seeing robust performance outside of the countries affected most by coronavirus. Hyatt withdrew its full year guidance as booking decreases extended beyond greater China and group cancellations picked up. Costco reported exceptionally strong February same store sales as customers stocked up on supplies, while Target’s quarter came in largely in line. AMD shares jumped after it affirmed Q1 and provided bullish long-term financial targets. Elliott Management reportedly took an activist stake in Twitter and is pushing to oust long-time CEO Jack Dorsey. Through an extremely volatile week, the S&P ended higher by 0.6%, the DJIA gained 1.7%, and the Nasdaq edged up 0.1%.
MON 3/2 *(AU) RESERVE BANK OF AUSTRALIA (RBA) CUTS CASH TARGET RATE BY 25BPS TO 0.50% (record low), AS EXPECTED**; in response to coronavirus outbreak H Withdraws FY20 outlook due to evolving coronavirus impact; seeing decrease beyond greater China in near-term transient bookings and an increase in near-term group cancellations over past week PFE Exec: we have identified compounds that have a high probability to be effective against coronavirus - comments at White House (IL) Israel news organizations release election exit polls: Likud Party 36 seats, Blue and White Party 33; Netanyahu one seat short of governing majority - KAN Exit Poll (US) NBC's Engel: Just finished interview with Dr. Fauci, US director of infectious diseases. He said: We're dealing with clearly an emerging infectious disease that has “now reached outbreak proportions and likely pandemic proportions" (US) Treasury yields continue to fall on speculation the Fed will ease policy to prop up financial markets pummeled by the spread of the coronavirus.
TUES 3/3 *(EU) EURO ZONE FEB ADVANCE CPI ESTIMATE Y/Y: 1.2% V 1.2%E; CPI CORE Y/Y: 1.2% V 1.2%E TGT Reports Q4 $1.69 v $1.66e, Rev $23.4B v $23.5Be (US) G7 Statement of G7 Finance Ministers and Central Bank Governors; Reaffirm our commitment to use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks *(US) FED CUTS TARGET RANGE BY 50BPS; SAYS VIRUS POSES EVOLVING RISKS TO ECONOMIC ACTIVITY; DECISION IS UNANIMOUS; FOMC CLOSELY MONITORING DEVELOPMENTS AND WILL USE TOOLS AND ACT AS APPROPRIATE TO SUPPORT THE ECONOMY (largest cut and 1st intra-meeting move since 2008) (US) US Treasury 10-year yield moves below 1.00% for the first time (US) Pres Trump: would approve a payroll tax cut for middle income earners this year if Democrats support it; the market is in good shape - press
WEDS 3/4 *(US) FEB ADP EMPLOYMENT CHANGE: +183K V +170KE *(CA) BANK OF CANADA (BOC) CUTS INTEREST RATES BY 50BPS TO 1.25%; MORE-THAN-EXPECTED; Sees Covid-19 virus as 'material negative shock' to Canadian and Global outlooks (US) Michael Bloomberg to suspend Democratic presidential campaign; announces support for VP Biden (US) Association of American Railroads weekly rail traffic report for week ending Feb 29th: 477.6K, -9.6% y/y (IT) Italy Education Min: confirms schools and universities to close from Thurs until March 15th due to coronavirus *(US) FEDERAL RESERVE BEIGE BOOK: SIGNS OF CORONAVIRUS ARE NEGATIVELY IMPACTING TRAVEL AND TOURISM STARTING TO EMERGE CDC Dep Director Redd: CDC estimates coronavirus fatality rate is 0.5-1.0% - press
THURS 3/5 HPQ Rejects Unsolicited Exchange Offer from Xerox LUV Cuts Q1 RASM -2% to +1% (prior +3.5-5.5%); CASM +5-7% (prior +6-8%); sees "significant decline" in recent days in demand over coronavirus and increase in cancellations (US) Q4 Final Nonfarm Productivity: 1.2% v 1.3%e; Unit Labor Costs: 0.9% v 1.4%e (US) Elizabeth Warren said to suspend her Presidential campaign - NYT (UK) BoE Carney: BoE will take all necessary steps to support UK economy and financial system through coronavirus outbreak (US) California trade association: Coronavirus is causing a backlog of exports to Asia at US ports; some China-bound meat shipments are being temporarily diverted to other countries - press COST Reports Q2 $2.10 v $2.07e, Rev $38.3B v $38.4Be; Feb SSS benefited by 3% from coronavirus concerns AMD Provides long-term financial targets; Rev ~20% CAGR, gross margin >50%, operating margin mid-20%s, FCF margin >15% - investor day
FRI 3/6 (RU) Russia said to only agree to an extension of current OPEC+ production cuts and NOT to proposed deepening of 1.5M bpd; position on issue will not change - press *(US) FEB AVERAGE HOURLY EARNINGS M/M: 0.3% V 0.3%E; Y/Y: 3.0% V 3.0%E; AVERAGE WEEKLY HOURS: 34.4 V 34.3E *(US) FEB CHANGE IN NONFARM PAYROLLS: +273K V +175KE (highest since May 2018) OPEC delegate: OPEC+ talks have ended without a deal - press LHA.DE To cut capacity by up to 50% in coming weeks (more than previously planned) due to slump in demand US govt reportedly considering ways to discourage some travelers from going on cruises in order to limit spread of coronavirus - press (US) Fed’s Rosengren (hawk, nonvoter in 2020): Fed should be allowed to broaden what assets it can buy (which would require a change in the Federal Reserve Act); runs real risk of limits on QE power with Treasuries; negative rates won't do much for the economy in a downturn