Month: March 2020

This bear market has been unusual to say the least, not because of the scale of the decline, but rather because of the speed and the volatility.

The average bear market (at least based on US history) experiences a decline of around 35% – very similar to the falls that were seen at the recent low in most markets in the current bear market.

But, as Goldman Sachs’ Peter Oppenheimer notes, the speed of the declines is what stands out as being exceptional; it is hard to believe that the US equity market was trading at a record high just five weeks ago. Its fall into bear market territory (the first 20% decline) took place in record time, just 16 trading days, compared with 44 in 1929, the previous fastest fall. Meanwhile, volatility has been at record levels.

After three consecutive days of moves of +/- 9% (the first such series since 1929), last week posted an 18% three-day rally in the US, and similar moves in many other markets. This was the strongest comparable return in the US since 1933 and in Europe on record.

So the question is – is this a bear-market rally to be faded like in 2008? Or is this is the market turn?

Goldman’s Oppenheimer weighs the bull and bear case below, and his conclusion is clear: despite the scale of the policy support, which we agree is a necessary condition for markets to rebound, we think it is too early and the level and valuation of equity markets still too high.

Reasons to be optimistic

Does the rally mark a genuine turning point for equities? The scale of the likely hit to Q2 growth would be historic. Our economists have lowered again their forecasts for Q2, and now expect annualised falls of 34% in the US (over three times worse than the previous biggest quarterly decline in 1958), and over 40% in Europe – similar to the scale of the falls that China experienced in Q1. But many investors would argue that, while unprecedented, these numbers are no longer surprising or even shocking. Most seem to agree that with over 90% of the world’s economies in effective lockdown, it is unsurprising that growth should fall significantly near term. It is what happens after the near-term collapse that the market is starting to discount. On this, there is encouraging evidence coming out of China and some other countries as production and demand start to recover (see China: Update of high frequency trackers on Chinese economic activity, 27 March 2020).

On the policy side, too, there are reasons to be encouraged. The support from both monetary policy and fiscal stimulus has been remarkable both in its size and swiftness. New initiatives have emerged at rapid speed to offset the worst impact of the downturn and to try to ensure a rapid and vigorous recovery. The Fed’s new QE programme is now uncapped and it is supporting markets it doesn’t normally support directly, in particular the commercial paper and credit markets. In effect, the Fed has taken more action than in the entire Global Financial Crisis (GFC) in just a few weeks. The ECB too, has shown more speed and flexibility than in the past. Its new QE package includes loosened criteria over how much debt can be bought in each country, allowing greater support for Italy in particular.

On the fiscal side too, our economists estimate the policy so far announced amounts to 3½% of GDP expansion globally. In addition, there have been government guarantees on loans and workers’ pay. These measures should take deficits to around 8% of GDP in Germany and north of 10% for the US and UK. Meanwhile, Japan has also launched a fiscal package that exceeds that of the financial crisis era, and China, too, is focusing on a new rescue plan. Japan’s ruling Liberal Democratic Party has proposed a stimulus package worth around US$556bn.

Reasons to be cautious

But despite the scale of the policy support, which we agree is a necessary condition for markets to rebound, we think it is too early and the level and valuation of equity markets still too high. Most equity markets, following the recent rally, are down only around 25-30% from their highs and these were highs not just in market levels, but also in valuation. While some valuation metrics have clearly come down from levels at the start of the year, the rally last week suggests that current market levels do not reflect the scale of EPS decline that we are forecasting. For example, we expect falls of 33% in the US and 45% in Europe. The bottom-up consensus numbers are as follows.

In addition, many of the valuation metrics no not look like crisis-level lows. For example, the European P/E based on consensus forward earnings is now back up to 12x 12m fwd – in the GFC and sovereign debt crisis they fell to a low of roughly 7x and 8x respectively (again both measured on forward consensus estimates).

Some valuation metrics, such as dividend yield, do look cheap, but this may not be enough. Our US strategists forecast S&P 500 dividends will decline by 25% to US$44 per share in 2020. Dividends actually rose by 9% during 1Q. However, they expect a wave of dividend suspensions, cuts, and eliminations will result in dividends declining by 38% during the next nine months so on a full-year basis dividends will be 25% below the level of 2019 — see US Equity Views: Dividends to fall by 25% in 2020: Highlighting 40 stocks for income-oriented investors (median yield of 4.0%), 30 March 2020.

In Europe, meanwhile, the French government has argued that companies in which the government has stakes should not pay dividends, and the government will vote against them during the AGM, while Norway has required financials to stop paying dividends. The German government may also impose restrictions on payouts by companies receiving state aid. Given that 10 of the 50 Euro STOXX 50 companies have government stakes, an apparently high dividend yield may not offer much support for investors.

The timing of any recovery in economic activity is also unclear. Currently our economists are assuming that recovery will start in May/June based on an assumption that we see a peak in the number of those infected and a sharp decline in new infections within the next couple of months. But this may be too optimistic. Furthermore, the rise in unemployment, particularly in the US, may dampen the speed of recovery. Last week’s jobless claims, for example, at over 3m showed the fastest rise in history – roughly 5x faster than the previous record in 1982.

The Bear Bounce

Last week, between March 23 and March 26 the MSCI AC World rallied 16% in 3 days, while the S&P’s rally of 18% was the best 3-day rally since 1933. Last week overall was the strongest weekly performance for MSCI AC World since the GFC.

Our US strategists have shown that bear market rallies are quite common, particularly during the bear market of 2008. For example, between September and December 2008, the S&P 500 experienced six distinct bounces of 9% or more, with some rallies as large as 19%, during the course of between one and six trading days. But the market low did not occur until March 2009, when the pace of economic contraction began to slow.

Below, we extend this analysis to the global equity market.

Taking the experience of the bear markets since the 1980s, including the collapse of the technology bubble in 2000-2002 and the GFC in 2008, we see a pattern of rebounds before the market reaches a trough.

For example, during the GFC there were 6 rallies similar to the one we had last week. Below we show the 18 global bear market rallies since the dot-com bubble.

• On average, they last 39 days and the MSCI AC World return is almost 15%.

• Cyclicals outperform Defensives 83% of the time and by 4% on average.

• We find a similar result at the regional level; EM outperforms DM 67% of the time and by more than 2% on average.

• There is not a clear pattern in the performance of Value vs. Growth nor Small vs. Large caps.

Why do these bear market rallies occur?

Nothing falls in a straight line, so it would be unusual if there were never rallies within bear markets (or corrections in bull markets). But there are usually two reasons for these rallies:

(i) longer-term expectations of growth are starting to rise, even if short term is still pretty negative; and

(ii) policy measures.

For example, on the second point of policy the clearest one is the rally in end-2008 to early 2009, which coincided with the start of QE: On November 25, 2008, the Federal Reserve announced that it would purchase up to US$600bn in agency mortgage-backed securities (MBS) and agency debt. But that point did not actually mark the trough in equities.

We see the BYs generally rise during these bear market rallies – suggesting the longer-term inflation/real growth expectations are turning. That said, we found that in general our activity indicators are still falling during these rallies and often still fall in the months after they finish – in other words, they are not associated with near-term growth improvement.

*  *  *

Oppenheimer reiterates his warning from above: despite the scale of the policy support, which we agree is a necessary condition for markets to rebound, we think it is too early and the level and valuation of equity markets still too high.

At best, Case-Shiller’s home price data is lagged seriously, but in the case of the current chaos that the US is going through, January’s home-price index data may as well be from Venus, compared to our current Mars.

Nevertheless, the Top-20-City Composite home price index rose at 3.08% YoY in January (below the 3.2% exp), its fastest rate in 12 months…

Source: Bloomberg

This is the fifth straight annual acceleration and corroborating other recent data that showed a flurry of housing market activity prior to the coronavirus pandemic.

Prices in all 20 cities rose in the year through January, led by a 6.9% jump in Phoenix and 5.1% gains in Tampa, Florida; San Diego; and Seattle.

As Bloomberg notes, the figures indicate a residential real estate market that was building momentum at the turn of the year against a backdrop of declining borrowing costs, steady job growth and warmer weather. The strength in home sales probably dissipated in March as government efforts to control the virus outbreak forced business closures and caused a dramatic surge in layoffs.

A coronavirus political bombshell went off in the heart of Europe, grabbing world headlines early this week, after Hungary’s parliament voted to allow Prime Minister Viktor Orban sweeping emergency powers deemed necessary to fighting the pandemic.

The bill approved by the nationalist government givens Orban the right to rule by decree, without having to consult lawmakers or other branches of government. It overwhelmingly passed 138 votes in favor with 53 against — easily past the required two-thirds majority.

It predictably evoked immediate backlash from leaders across Europe and the West, given he’s already long been under scrutiny for allegedly weakening Hungary’s judicial and parliamentary systems in what critics have long complained is a bid for greater ‘authoritarian’ control. From the start, it should be remembered, he was loathed by EU technocrats for rejecting the so-called open door response to migrants and refugees in 2015.

The new emergency powers legislation is now in effect as of Tuesday. Crucially, Orban alone has the ability to decide when the emergency powers end. The prime minister sought to assure parliament and the public during Monday’s vote: “When this emergency ends, we will give back all powers, without exception.”

He said the unprecedented legislation was necessary as “Changing our lives is now unavoidable,” according to prior statements. “Everyone has to leave their comfort zone. This law gives the government the power and means to defend Hungary.”

Though Hungary has significantly fewer cases than most other European states at over 440, including 15 deaths, it reportedly has lagged behind in testing, with fears its health care system is too weak to handle a serious outbreak.

Critics of Orban and his Fidesz party, though hugely popular within the country, have slammed the new emergency powers’ legislation as an egregious betrayal of free speech among citizens, given authorities can hand out up to five year prison sentences for “spreading false information”. 

CNN listed the most controversial elements of the new law as follows:

The suspension of parliament, punishments for journalists if the government believes their coronavirus reporting is not accurate, and heavier penalties for violating quarantine regulations are all made possible by the order. No elections or referendums can be held while it is in place.

The law says specifically that “a person who, during the period of a special legal order and in front of a large audience, states or disseminates any untrue fact or any misrepresented true fact that is capable of hindering or preventing the efficiency of protection is guilty of a felony and shall be punished by imprisonment for one to five years.”

Orban shot back, however, telling critics in a national radio broadcast this week: “We cannot react quickly if there are debates and lengthy legislative and lawmaking procedures. And in times of crisis and epidemic, the ability to respond rapidly can save lives.”

“The Government is not asking for anything extraordinary,” he added. “It is asking for the ability to rapidly enact certain measures. We don’t want to enact measures that the Government has no general right to enact — we simply want to do so swiftly.”

Despite other European countries in some cases enacting similar drastic and draconian coronavirus measures involving the curtailing of individual rights and movement, EU officials and pundits dramatically declared it essentially the ‘death of democracy’ in central Europe.

With US dealers no longer using the Fed’s repo facilities (this morning we had another “no bid” overnight repo with just $250MM in MBS submitted for a $500 billion op) as the Fed soaks up all securities via its aggressive QE which is still buying $75BN in paper each day, perhaps Powell felt a bit unloved and at 830am this morning the Fed unveiled yet another “temporary” emergency liquidity providing facility, this time to foreign central banks, in the form of a repo facility targeting “foreign and international monetary authorities”, i.e. foreign central banks which will be allowed to exchange Treasuries held in custody at the Fed for US dollars.

In other words, just a week after the Fed “enhanced” its swap lines with central banks and included a bunch of non G-5 central banks to the list of counterparties, it has found that this is not working – perhaps due to the prohibitive rates on the facility – and is now handing out dollars outright against US denominated securities. We wonder if the central bank uptake will be any higher than the repo facility aimed at US dealers and which is now redundant. Of course, when that fails the Fed can just offer to buy all central bank securities in what even reputable FX strategists now joke is a Fed on full tilt, and intent on buying out all foreign central banks.

And so, just as the financial situation was starting to stabilize, the Fed reminds everyone just how broken everything still is.

Fed launches ANOTHER temporary facility to provide $USD liquidity to foreign central banks (this time foreign central bank holdings of US Treasury’s can be exchanged for dollars).

At this rate, Fed is on course to buy out foreign central banks… and call it an M&A facility pic.twitter.com/iAXRCVoZS9

— Viraj Patel (@VPatelFX) March 31, 2020

The full announcement is below.

Federal Reserve announces establishment of a temporary FIMA Repo Facility to help support the smooth functioning of financial markets

The Federal Reserve on Tuesday announced the establishment of a temporary repurchase agreement facility for foreign and international monetary authorities (FIMA Repo Facility) to help support the smooth functioning of financial markets, including the U.S. Treasury market, and thus maintain the supply of credit to U.S. households and businesses. The FIMA Repo Facility will allow FIMA account holders, which consist of central banks and other international monetary authorities with accounts at the Federal Reserve Bank of New York, to enter into repurchase agreements with the Federal Reserve. In these transactions, FIMA account holders temporarily exchange their U.S. Treasury securities held with the Federal Reserve for U.S. dollars, which can then be made available to institutions in their jurisdictions. This facility should help support the smooth functioning of the U.S. Treasury market by providing an alternative temporary source of U.S. dollars other than sales of securities in the open market. It should also serve, along with the U.S. dollar liquidity swap lines the Federal Reserve has established with other central banks, to help ease strains in global U.S. dollar funding markets.

The Federal Reserve provides U.S. dollar-denominated banking services to FIMA account holders in support of Federal Reserve objectives and in recognition of the U.S. dollar’s predominant role as an international currency. The FIMA Repo Facility, which adds to the range of services the Federal Reserve provides, will be available beginning April 6 and will continue for at least 6 months.

 

Just over a week ago, when we reported on the ongoing feud between Goldman and JPM to come up with the most terrifying GDP forecast for the US, and when we asked if a Second Great Depression has begun after Goldman’s chief economist Jan Hatzius slashed his Q2 GDP forecast from -5% to -24%, we said “we expect Goldman to take the machete to this analysis as well in the coming days, because if the US economy is indeed paralyzed for at least one quarter, then all of GDP could be lost.”

We were right, because early on Monday morning Goldman’s Haztius did just that, and in a report titled “The Sudden Stop: A Deeper Trough, A Bigger Rebound”, he writes that he is “making further significant adjustments to our GDP and employment estimates. We now forecast real GDP growth of -9% in Q1 and -34% in Q2 in qoq annualized terms (vs. -6% and -24% previously) and see the unemployment rate rising to 15% by midyear (vs. 9% previously).”

Yes, the Q1 GDP drop is stunning…

… but it is the Q2 collapse which wipes out more than a third of the US economy that is truly jawdropping because as Hatzius admits, “it would represent a decline that is more than three times larger than the previous low in the history of the modern US GDP statistics.”

Detailing the assumptions behind his latest revision, Hatzius explains that he has increased his estimates of the peak hit to services consumption, manufacturing activity, and construction, “in light of new evidence on the severity of the hit across the different sectors” and now expects the level of GDP in April to be 13% below the January/February trend, as shown in Exhibit 1. “We assume that this drag then fades gradually by 10% each month in the services industry and by 12.5% in the manufacturing and construction industries.”

Behind the core of the drop Goldman sees a 19% annualized drag from services consumption on Q2 growth, on top of a 3pp drag on Q1 growth. as shown in the next chart.

Ok but why do the reputable epidemiologists at Goldman believe the pandemic will fade in coming weeks? Here’s why (and yes, warm weather makes an appearance):

While the exact timing of the medical and economic recovery is highly uncertain and relapses are plausible, our assumption is that stronger lockdown and social distancing measures and perhaps some weather effects reduce new infections sharply over the next month. Combined with potential medical breakthroughs or adaptation by firms and consumers, this slowdown in new infections is likely to lead to a gradual economic recovery. The slow pace of recovery in our forecast even in 2021 allows for longer-lasting scarring effects on businesses and workers

And at the risk of repeating ourselves too, we will say that within a week, Goldman will cut its forecast again this time to -50% as we approach the moment when even banks admit the entire US economy has ground to a halt.

In any case, as Goldman explains further, its latest apocalyptic forecast reflects the net effect of two directionally offsetting changes:

• On the one hand, the anecdotal evidence and the sky-high jobless claims numbers show an even bigger output and (especially) labor market collapse than it had anticipated. This not only means deeper negatives in the very near term but also raises the specter of more adverse second-round effects on income and spending a bit further down the road.
• On the other hand, both monetary and fiscal policy are easing dramatically further, which will tend to contain these second-round effects and add to growth down the road. The Phase 3 fiscal package was much bigger than we had expected, we now anticipate a Phase 4 package focused on state fiscal aid, and the Fed is likely to use the $454bn addition to the Treasury’s Exchange Stabilization Fund aggressively to sustain the flow of credit to private-sector and municipal borrowers.

The chart below translates the monthly path of the level of GDP shown in Exhibit 1 into a quarterly path of GDP growth, adding the impact of what Goldman believes will be second round effects and the fiscal impulse. For the first half of 2020, the bank now look for real GDP growth of -9% in Q1 and -34% in Q2, versus -6.3% and -24% previously. As Hatzius admits, the “Q2 forecast would represent a decline that is more than three times larger than the previous low in the history of the modern US GDP statistics (-10% in 1958 Q1).” Subsequently, the bank’s assumptions about the gradual fading of the virus drag imply a growth pace of just over 15% in the second half of 2020. In conclusion, Goldman’s forecast of full-year 2020 growth is now -6.2% on an annual average basis and -5.4% on a Q4/Q4 basis.

In other words, to preserve its traditional cheerful aura – even as it now forecasts a depression in the second quarter, Goldman has offset its future forecast with an even more vicious V-shaped recovery, and has upgraded its expectations for the recovery after midyear, now expecting a hilarious 19% annualized GDP gain in Q3 (vs. 12% previously), with the bank’s estimates implying that a bit more than half of the near-term output decline is made up by year-end and that real GDP falls 6.2% in 2020 on an annual-average basis (vs. 3.7% in our previous forecast).

Good luck with that.

Finally, turning away from GDP, Goldman’s unemployment outlook is just as dire, admitting that the surge in layoffs has “already outpaced our expectations.” Jobless claims rose about twelve-fold over the week of March 15-21 to 3.28mn, nearly five times the previous historical high for a single week, with Goldman noting that jobless claims are likely to rise further during the week of March 22-28.

Press reports citing state officials indicate that claims rose dramatically from March 15-21 to 22-28 in California and Texas. Our analysis of anecdotal press reports for the 15 most populated states suggests a significant increase in total claims during March 22-28, in part because many states experienced application bottlenecks in the first week and in part because stay-at-home orders likely had a greater effect in the second week.

As a result, Goldman now estimates that the level of jobless claims rose by more than 2mn to about 5.5mn during March 22-28. A less conservative extrapolation of the estimated ratio of week 2 to week 1 claims in these states would imply an even higher national total. It then expects even higher numbers in the coming weeks:

We expect claims to remain very elevated—likely over 2mn—for at least another week (March 29-April 4) and somewhat elevated after that. Widespread reports of application bottlenecks suggest that many laid off workers have yet to file. Some employers, especially in the retail sector, are taking a staggered approach to layoffs. And many business owners and workers are just beginning to learn about the more generous unemployment insurance benefits—which will exceed normal wages for many workers—and the expansion of coverage included in the Phase 3 legislation. In total, we expect over 11mn claims to be filed in the first three weeks of the coronacrisis and at least a couple million more in the rest of April.

What do soaring claims mean for the unemployment rate?In short, Goldman now sproject a nearly 12% increase in the unemployment rate to a peak rate of 15%.

Finally, just like JPM, Goldman admits it really has neither the visibility nor the proper models to predict what happens next as the US economy slides into a depression:

Using the labor market data in this fashion requires an estimate of “Okun’s law”, the relationship between the change in the unemployment rate and the change in real GDP (relative to trend). Normally, the coefficient for Okun’s law is thought to be about 2, meaning that a 1pp rise in the unemployment corresponds to a 2% hit to real GDP. During this crisis, however, a more appropriate Okun’s law coefficient is likely to be closer to 1.

Our current estimate of a roughly 12pp increase in the unemployment rate implies a roughly 12% peak decline in the level of GDP, which is broadly consistent with the estimates in Exhibits 1 and 2. Going forward, we plan to use this relationship and its industry-level counterparts aggressively to keep our GDP estimates up to date in coming months as more timely labor market data become available. This could well imply further substantial revisions to our real GDP estimates—in either direction—as the scale of the labor market downturn comes into fuller view in coming weeks and months.

This means that as we enter the cruelest month in the history of the US economy, when GDP may plunge double digits in April alone, brace for even more cuts from Goldman which will forecast a -50% GDP print before it’s all said and done.

The torrid quarter-end rally which many attributed to a flood of forced pension fund buying as part of aggressive rebalancing, reversed overnight as US index futures reversed all overnight gains even as European stocks headed for a fifth increase in six sessions amid ongoing debate whether the market meltdown has ended despite the accelerating spread of the coronavirus (spoiler alert: no), while treasury yields dipped below 0.7% while the disconcerting dollar rally is back front and center.

S&P 500 futures rose as high as 2,640 before sliding back under 2,600 as politicians were said to contemplate a fourth round of stimulus, but they struggled to stay in the green as speculation the pension fund bid had faded. Oil producers Exxon Mobil Corp. and Occidental Petroleum Corp. jumped in the premarket thanks to a rebound in oil prices from 18-year lows after the United States and Russia agreed to discuss stabilizing energy markets.

In Europe, energy shares led gains in the Stoxx 600 Index after the World Health Organization said signs emerged of some stabilization in the region’s outbreak. A measure of European corporate-credit stress eased further. Even with today’s modest rebound Europe is still set for its worst quarter on record.

The US was no better, and despite the recent rally the slump from the mid February record highs has set the Dow Jones .on course for its worst first quarter ever, while the S&P 500 is on track for its worst since 1938.

Earlier in the session, Asian stocks were little changed, with energy rising and industrials falling despite China reported ridiculously strong manufacturing data, which saw the mfg PMI surge to three year highs, in what was a clear political message from Beijing that China’s economy had a V-shaped recovery and had put the coronavirus concerns behind it.

China’s official manufacturing purchasing managers’ index (PMI) bounced to 52.0 in March, up from a record-low 35.7 in February, but analysts cautioned that a durable near-term recovery is far from assured as the global coronavirus crisis knocks foreign demand.

As Bloomberg notes, signs of a recovery across equities worldwide have arrived at the end of their worst quarter since 2008, which has put investors in a quandary, questioning whether some $12 trillion in extraordinary monetary and fiscal stimulus by countries and central banks can counter further the global economy grinding to a halt as the outbreak spreads. New York City, which is emerging as the new epicenter of the pandemic, reported a 16% increase in deaths in six hours. Italy and the Netherlands are considering extending lockdowns, and Spain’s 849 deaths were the most in one day for the country.

“We just don’t know how long the lockdown or stasis of the world economy is going to be,” said Toby Lawson, head of global markets at Societe Generale Securities Australia, told Bloomberg TV. “It would be very premature to say that we’ve seen the bottom.”

In FX, the dollar rose at least 1% versus the euro and three other major peers. The yen sank as the end of Japan’s fiscal year brought positioning adjustments after suffering a mini flash crash at the Tokyo fixing. Japan’s ruling party proposed the country’s biggest-ever stimulus package worth 60 trillion yen ($554 billion). EUR/USD fell under 1.10 as the dollar extended gains for a second day, supported by month- and quarter-end flows; the Bloomberg Dollar Spot Index was set for its best quarter since 2016.

Elsewhere, Norway’s krone was the best performing currency of the day among Group-of-10 peers as oil prices rebound; the currency was still set for its worst quarter since 1992 against the greenback on the back of the worst quarter on record for oil. Yen declined on dollar demand from Japanese investors to re-balance their portfolios on the final day of the fiscal year. The Australian and New Zealand dollars gained with commodities after Chinese manufacturing activity rebounded strongly in March, boosting risk sentiment. The pound slumped and headed for its worst quarter since the 2016 Brexit referendum

Gilts fell after the U.K. Debt Management Office announced it will more than double its issuance to sell 45 billion pounds ($55 billion) of bonds in April, with four auctions being conducted per week. US Treasurys gained across the curve.

Expected data include Conference Board Consumer Confidence. Conagra, McCormick, and Blackberry are reporting earnings.

Market Snapshot

• S&P 500 futures up 0.9% to 2,633.75
• STOXX Europe 600 up 1.9% to 320.86
• MXAP down 0.06% to 136.58
• MXAPJ up 1.4% to 435.89
• Nikkei down 0.9% to 18,917.01
• Topix down 2.3% to 1,403.04
• Hang Seng Index up 1.9% to 23,603.48
• Shanghai Composite up 0.1% to 2,750.30
• Sensex up 4% to 29,577.93
• Australia S&P/ASX 200 down 2% to 5,076.83
• Kospi up 2.2% to 1,754.64
• German 10Y yield rose 1.3 bps to -0.477%
• Euro down 0.5% to $1.0998
• Italian 10Y yield rose 15.0 bps to 1.307%
• Spanish 10Y yield fell 1.4 bps to 0.592%
• Brent futures up 3% to $23.44/bbl
• Gold spot down 0.9% to $1,607.97
• U.S. Dollar Index up 0.3% to 99.45

Top Overnight News

• Italy is discussing an extension of lockdown measures into May as European countries fight to contain the spread of the coronavirus, even as the outbreak shows signs of slowing
• German unemployment rose by just 1,000 in March, significantly less than economists predicted, before far-reaching restrictions on business and movement sparked thousands of furloughs in Europe’s largest labor market
• Stress is easing in dollar funding with key U.S. channels tentatively following overseas counterparts. The three-month dollar Libor fixing fell for the first time in over two weeks on Monday, while commercial paper rates — the yield on short-term notes issued by companies — also retreated
• The worst quarter for credit markets since at least the global financial crisis is ending with some signs of improvement. Spreads on credit-default swaps and dollar bonds in Asia dropped Tuesday
• Japan’s ruling party proposed the country’s biggest-ever stimulus package worth 60 trillion yen ($554 billion) as the spreading coronavirus locks the economy in a recession
• A surge in hedging costs for Japanese investors has wiped out the attraction of a popular trade — French bonds. Yen investors had to pay as much as 0.7% to hedge their euro exposure for three months last week, surging from just above 0.2% last month, a Bloomberg gauge showed

Asia equity markets were mostly higher (before trimming some gains) as the region took its cue from the gains on Wall St following recent global stimulus efforts and with sentiment also underpinned by an improvement in the latest Chinese PMI figures. ASX 200 (-2%) and Nikkei 225 (-0.9%) were lifted from the open with early outperformance in Australia led by the largest weighted financials sector and with sentiment also boosted after yesterday’s record AUD 130bln stimulus announcement, while Japanese exporters initially benefitted from a weaker currency, although both indices then gave up the gains amid Q1-end rebalancing and amid some doubts regarding the Chinese data. Hang Seng (+1.3%) and Shanghai Comp. (+0.1%) conformed to the early constructive tone following encouraging Chinese PMI data in which headline Manufacturing and Non-Manufacturing PMI topped estimates and the Composite PMI also printed in expansion territory. However, gains in the mainland were somewhat limited as some downplayed the data given that it was a recovery from the prior month’s record low base and with China’s stats bureau warning the rebound does not mean the economy has returned to normal and that this month’s data alone cannot determine an improving trend. Finally, 10yr JGBs were pressured in a continuation of the pullback from the 153.00 level, with demand subdued by the early upbeat tone in risky assets and following weaker results at the 2yr JGB auction.

Top Asian News

• Japan Plans Record 60 Trillion Yen Stimulus as Virus Spreads
• Yunda Jumps After Report Alibaba Plans to Buy at Least 10% Stake
• China Factory Rebound Hints Worst Is Over as Stimulus Lies Ahead
• Hong Kong Retail Sales Plunge Record 44% in February on Virus

European equities trade on a firmer footing once again (Eurostoxx 50 +0.3%) as sentiment remains upbeat alongside quarter-end rebalancing flows and post-Chinese PMI metrics, albeit stocks have drifted off highs. On the data front, price garnered some support from the last survey data out of China in which headline Manufacturing and Non-Manufacturing PMI topped estimates and the Composite PMI also printed in expansion territory. However, it is worth noting that some desks have downplayed the data given that it was a recovery from the prior month’s record low base and with China’s stats bureau warning the rebound does not mean the economy has returned to normal and that this month’s data alone cannot determine an improving trend. In terms of sector specifics, energy names sit near the top of the pile in a bounce-back from some of the declines yesterday with WTI now back above USD 21/bbl and Shell (+4.0%) shares shrugging off expectations of a USD 400-800mln Q1 impairment charge and weak refining margins. Elsewhere, travel and leisure names have also seen support during today’s session as hopes continue to be pinned on government support measures, albeit, from a UK standpoint, Times’ Swinford noted comments from Transport Secretary Shapps that the “UK government is attempting to find the right solution for airlines”, something which Swinford inferred as meaning that it “doesn’t sound like a big bailout is coming”. The main theme in the pre-market was largely centered around the suspension of buybacks and dividends (details of which can be found in the European equity opening news) with particular focus on the UK banking sector with the latest reports via Sky News suggesting that the Prudential Regulation Authority will, on Tuesday or Wednesday, state that Barclays, HSBC, Lloyds and RBS will not be paying dividends as part of FY results. Notable individual movers include Imperial Brands (+12.4%) after signing a new revolving credit facility of EUR 3.5bln and noting no material impact on group performance, Bayer (+2.0%) has reached a settlement with US plaintiffs and WPP (+6.9%) are firmer despite suspending its buyback, dividend and outlook, whilst noting that it maintains a strong balance sheet.

Top European News

• Euro-Area Inflation Slows More Than Forecast on Oil Slump
• Nightmare Haunting Euro’s Founders May Now Be Reality With Italy
• Smiths Delays Ventilator Unit Spinoff as Virus Roils Markets
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In FX, the Buck has extended gains vs major counterparts, albeit to varying degrees as a sharp rebound in Chinese PMIs, some consolidation in crude and remaining asset rebalancing flows for the final trading session of March, Q1 and the current financial year help some rival currencies to resist the Greenback’s advances. However, the DXY looks more assured around 99.500 and certainly back on the 99.000 handle within a 99.694-99.100 range, and could continue its recovery towards resistance at 99.915 (prior 2020 high before the psychological 100.000 mark was breached precisely one month later on March 20 when the index hit 102.999).

• NOK – The G10 outlier and outperformer, partly due to the aforementioned bounce in oil prices, but mainly as the Norges Bank plans to jack up foreign currency sales against the Norwegian Krona to the equivalent of Nok2 bn per day in April from Nok1.6 bn this month and only a quarter of the new daily total in February. Eur/Nok is hovering just above 11.5100, but has been under 11.5000 in contrast to Eur/Sek flat-lining between 11.1040-0610 parameters.
• CAD/AUD/NZD/GBP/EUR/JPY/CHF – Firmer or more stable crude is also providing the Loonie with some underlying support around 1.4200 vs its US peer, while the Aussie and Kiwi are both holding off overnight pre-Chinese PMI flash crash lows of 0.6080 and 0.5948, though down from best levels reached (0.6200+ and 0.6037 respectively) when the headline prints exceeded consensus and regained 50+ growth rather than deep contraction levels. Elsewhere, the Pound has lost its grasp of 1.2400, but faring better against the Euro circa 0.8900 as the single currency retreats through 1.1000 vs the Buck on soft Eurozone inflation and the ongoing nCoV spread in Spain. Note, hefty Eur/Usd option expiries do not seem likely to impact at this stage, but for the record there are several ranging from 1 to 1.6 bn rolling off from 1.1000 to the 1.1100 strike and beyond. Meanwhile, the Yen and Franc are towards the bottom of 108.70-107.75 and 0.9649-0.9581 bands and hindered by safe-haven outflows, with the latter not deriving any support from considerably firmer than forecast Swiss retail sales.
• EM – Some respite for the Rouble after a call between US President Trump and his Russian counterpart Putin aimed at stopping the dispute with Saudi Arabia over the price of oil and market share, but little joy for the Lira even though the CBRT has rolled out more liquidity provisions for Turkish banks.

In commodities, WTI and Brent front-month futures experience consolidation from the prior session’s hefty losses, in which prices tumbled to their lowest points in almost 20 years. The former outperforms on the prospect of potential US-Russia cooperation in the energy markets to stem the rotting prices. US President Trump conducted a phone call with his Russian counterpart yesterday with Kremlin noting that this was at the request of the US. The leaders agreed on the need for stability in the energy markets, albeit no further details were released. WTI front-month contracts have reclaimed USD 21/bbl to the upside having yesterday printed a base at around USD 19.30/bbl, whilst Brent touched a multi-year low at ~ USD 21.60/bbl, with prices now nearer to USD 23.50/bbl. Elsewhere, spot gold trades subdued amid a firmer USD and with portfolio rebalancing also in the fray. The yellow metal hovers just above the 1600/oz mark having hit an overnight peak at USD 1626/oz. Meanwhile, copper prices remain supported by the strong China NBS manufacturing PMIs which rose back into expansionary territory from last month’s detrimental print. Copper gains a firmer footing above USD 2/lb ahead of resistance at 2.5/lb from a technical standpoint.

US Event Calendar

• 9am: Case Shiller 20-City MoM SA, est. 0.4%, prior 0.43%
• 9am: Case Shiller 20-City YoY NSA, est. 3.23%, prior 2.85%
• 9:45am: MNI Chicago PMI, est. 40, prior 49
• 10am: Conf. Board Consumer Confidence, est. 110, prior 130.7; Expectations, prior 107.8; Present Situation, prior 165.1

DB’s Jim Reid concludes the overnight wrap

We’re straight to Asia this morning where the main story is the significant bounce back in China’s PMIs. The manufacturing PMI jumped to 52.0 for March which is relative to 44.8 expected and 35.7 last month, and is also the strongest print since September 2017. Meanwhile the services PMI printed at 52.3 versus 42.0 expected and 29.6 last month. That left the composite reading at 53.0 versus 28.9 in February. A sub-index of new manufacturing export orders also rose to 46.4 in March, up from 28.7 last month.

Despite the huge jump, the accompanying statement from the NBS said that “while manufacturing PMI rebounded rapidly in March, the survey showed companies still face relatively big operational pressures,” and added that more firms are reporting funding shortages and falling demand than in February. The statement also said that “the global virus spread will hit the world economy and trade seriously and bring new, severe challenges to the Chinese economy.” So the tone still remains understandably cautious but nonetheless the data does provide sliver of hope for expectations of a ‘V or U’ shaped recovery for markets in the aftermath of coronavirus induced lockdowns.

Chinese markets have posted small gains following the data with the Shanghai Comp and CSI 300 up +0.42% and +0.56%, while the Hang Seng has gained +1.09%. Elsewhere, it’s more mixed. The Kospi has risen +1.77% however the Nikkei (-0.48%) and ASX (-1.53%) are both down.

In other overnight news, Bloomberg has reported that the White House and congressional Democrats are preparing for a fourth round of economic stimulus to get the US through its coronavirus outbreak. The report added that the White House has already compiled lists of requests from government agencies totalling roughly $600bn towards this and the proposals include more state aid as well as financial assistance for mortgage markets and the travel industries. Futures on the S&P 500 are little changed.

Following on from this the main story in financial markets yesterday was the astonishing fall in oil prices – albeit one which has reversed this morning – where the combination of an impending global recession and the Saudi-Russia price war saw yet further declines. By the end of the session yesterday, WTI was down by -6.60% to just $20.09/barrel, which is its lowest level since 2002, and the 8th time this month alone that WTI has declined by more than 5% in a single day. With just one day left in the month to go, the price of WTI crude has now more than halved since the end of February (-54.69%), making this month for WTI even worse than the falls in October 2008 (-32.62%) and the biggest monthly decline in data going back to March 1983. Remember that in the first week of the year WTI hit $65.65 intra day after the US/Iranian military strike and escalation, so it’s down -69.11% since that peak.

The movements in the oil market have attracted the attention of global leaders, with President Trump telling Fox News yesterday that he planned to talk with Russian President Putin about oil, also saying that “I never thought I’d be saying that maybe we have to have an oil increase, because we do. The price is so low”.

Over in global equity markets it was a generally positive picture after Friday’s declines, with the S&P advancing +3.35%. The move continues the S&P’s run of having moved by at least 1% in either direction in 20 out of 21 sessions so far this month. In a further sign that some semblance of stability could be returning, the VIX index of volatility fell by -8.5pts yesterday to 57.08pts, which is its lowest level in over two weeks. In Europe, equities pared back losses to close higher, with the STOXX 600 recovering from an intraday low of -2.42% shortly after the open to close up +1.28%. Banks dragged on the index however, with the STOXX Banks index falling a further -5.69% yesterday as lower core rates in Europe have started to become a trend again.

Having said that 10yr Treasury yields were up +5.2bps yesterday to 0.73%, as large equity moves and general optimism saw long end rates rise, even as the short end yields went lower. In Europe, for a second session running there was a notable widening in peripheral spreads. The spread of Italian 10yr yields over bunds was up +16.7bps, bringing its 2-day rise to 37.8bps, while the spread of Spanish (+8.2bps), Portuguese (+8.7bps) and Greek (+6.3bps) yields over bunds also widened yesterday. Italian bonds may have been impacted by continuing concern at there not being any outline of assistance for the country at last week’s meeting of EU leaders and also Conte’s words over the weekend that anti-EU sentiment could increase in the country. Staying with fixed income, credit spreads broadly tightened in the US, with HY cash spreads -17bps tighter and IG tightening -9bps, while EUR spreads widened 11bps and IG widened 1bp.

It was a strong day for the US dollar yesterday, with the Bloomberg dollar index snapping a run of 4 successive declines to strengthen by +0.71%. However, the oil-producing currencies suffered, with both the Canadian dollar (-1.28% against USD) and the Norwegian Krone (-0.57%) struggling yesterday against other major currencies.

Before we look at yesterday’s data with all of the uncertainty around making point forecasts in this environment, Justin Weidner on our US Economics team has built a simple model based on only five parameters (e.g., the length of containment measures, initial decline in output, etc.) to trace out the potential impact of the Covid-19 on US GDP growth over the next two years. Here’s the link to the model: DB US Eco Covid-19 GDP model . The team describes the model in a report out yesterday (see Tracing the economic fallout ) and also detail simulations. They find that the median path has growth falling 37% in Q2 on an annualized basis and -1.1% in 2020 (Q4/Q4). The interquartile range has outcomes ranging from -22% to -51% for Q2 annualized growth and from -4.4% to +0.5% for 2020 Q4/Q4 growth. Their own forecast (-33% in Q2 and -3.2% for 2020) fits well within these ranges.

Now to those economic data releases, the European Commission’s monthly economic sentiment indicator for the Euro Area fell by -8.2 points in March from 103.4 to 94.5. This is the largest monthly decline since records began in 1985. However, the survey responses were collected between 26 February-23rd March, and for many countries the vast majority of responses were collected before lockdown measures began, so further deterioration is still likely ahead of us. Over in the US meanwhile, the Dallas Fed manufacturing outlook survey saw the general business activity index fall to -70.0 in March, well below the -10.0 reading expected and the lowest level since the survey began in June 2004. Finally, we got the German inflation reading for March, where the preliminary estimate of HICP came in at 1.3%, down from February’s 1.7%.

To the day ahead now, and data releases include the flash estimate of Euro Area CPI for March, as well as the preliminary readings for France and Italy. Meanwhile we’ll get the change in German unemployment for March, along with the final reading of Q4 GDP in the UK and January’s GDP in Canada. Finally in the US, we’ll get the Conference Board’s consumer confidence indicator for March, along with the MNI Chicago PMI and the S&P/Case-Shiller US National Home Price Index