- Weekly global market focus
- Stocks fall as coronavirus spreads and business disruptions accumulate
- T-note yields post new record low on plunge in inflation expectations and expectations for aggressive Fed easing
- Saudi Arabia launches price war and oil prices plunge -20% on Sunday night
Weekly global market focus — The U.S. markets this week will focus on (1) further assessment of the economic damage being done by the spreading coronavirus, (2) the plunge in crude oil prices on Sunday night by as much as 20% after Saudi Arabia over the weekend launched a price war, (3) Democratic primaries in six states on Tuesday, (4) whether the plunge in commodity prices continues and helps push inflation expectations and bond yields even lower, (5) the Treasury’s sale of $78 billion of 3-year, 10-year, and 30-year securities, and (6) this week’s U.S. economic data with the key report being Friday’s preliminary-March U.S. consumer sentiment index (expected -6.0 to 95.0).
In Europe, the focus will be on Thursday’s ECB meeting, where the market is expecting the ECB to cut its deposit rate by -10 bp to -0.60% and announce new targeted loan measures. The markets will also be watching to see if the ECB promises to expand its QE program if the coronavirus situation worsens.
In Asia, the focus will be on whether authorities are making any sustained progress on slowing the spread of the coronavirus and the extent to which China’s economy gets back in gear. New virus cases in China’s Hubei province, the epicenter of the outbreak, have been trending downward but there are fears of a second virus wave as restrictions are lifted and people start mingling again. Bloomberg News estimates that the Chinese economy last week was running at 70-80% of capacity, up from 60-70% in the previous week.
Stocks fall as coronavirus spreads and business disruptions accumulate — The S&P 500 index (SPX) last Friday fell by -1.71%, adding to last Thursday’s -3.39% plunge. SPX last Friday closed only 3.9% above the 6-month low of 2855.84 posted on Feb 28, where the index corrected lower by a total of -15.8% from the mid-Feb record high, Losses in the stock market accelerated late last week as the virus spread across the U.S. and as business disruptions piled up.
Stocks also fell because the markets are largely in the dark about how pervasive the virus might be since only 5,861 virus tests have been done in the U.S. so far, according to an FDA official on Saturday, compared with 140,000 tests in South Korea, for example. The FDA on Saturday said that 1.1 million U.S. coronavirus tests have been shipped and that more are on the way, which should allow the U.S. to catch up on testing and allow the markets to get a better handle on the extent of the problem.
The VIX last Friday soared to an 11-year high of 54.39 but then fell back and closed the day +2.32 at 41.94. Last Friday’s high of 54.39 was the highest the VIX has been since the 2008 spike up to a record high of 89.53.
T-note yields post new record low on plunge in inflation expectations and expectations for aggressive Fed easing — The 10-year T-note yield last Friday fell to a new record low of 0.66% and closed the day sharply lower by -15 bp at 0.76%. The 10-year T-note yield plunged by a combined -29 bp just last Thursday/Friday and has now plummeted by a total of 116 bp from 1.92% at the end of 2019. The 10-year breakeven inflation expectations rate last Friday fell to a new 4-year low of 1.27% due in part to last Friday’s -10.1% plunge in oil prices.
The Dec 2020 federal funds futures contract last Friday fell by another -9 bp to a yield of 0.205%, reflecting expectations for a further 92 bp of Fed easing (3.7 rate cuts) by year-end from the current target midpoint of 1.125%. The market is fully expecting the FOMC at its meeting next week to cut its funds rate target by another -50 bp to 0.50%/0.75% and then to implement a further a -25 bp cut at the following meeting on April 28-29 to 0.25%/0.50%. The market is discounting about a 40% chance of a fourth rate cut to 0.00%/0.25% at the June 9-10 meeting, which would match the post-crisis low seen during 2008-2015.
Bond yields also continue to fall overseas. The German 10-year bund yield last Friday edged to a new record low of -0.75% and closed the week -10 bp at 0.71%. The 10-year UK gilt yield last Friday dropped to a new record low of 0.20% on expectations for the BOE to cut its base rate by at least -25 bp at, or before, its next policy meeting in two weeks on March 26. The Chinese 10-year government bond yield last Friday fell to a new multi-decade low of 2.62% and closed the week down -11 bp at 2.63%.
Saudi Arabia launches price war and oil prices plunge -20% on Sunday night — The OPEC+ meeting last Friday collapsed without an agreement for a production cut for Q2, let alone the additional 1.5 million bpd production cut that Saudi Arabia was pushing for to address the collapse in oil demand caused by the coronavirus. After the talks collapsed last Friday, Russian Oil Minister Novak ominously said that OPEC+ countries after April 1 are free to pump oil at will and have no obligation to extend their Q1 production cuts.
Saudi Arabia on Saturday then shocked the markets by announcing extremely sharp price discounts for their customers in an obvious attempt to grab market share from competitors. Bloomberg reported that Saudi Arabia plans to boost production well above 10 million bpd in April from 9.7 million bpd in March, and will further boost production to 12.0 million if necessary. Saudi Arabia wants to impose some serious pain on Russia for not agreeing to cut production. In the meantime, the collapse in prices will force high-cost producers and some American shale producers out of the market. Saudi Arabia has some of the lowest production costs in the world and believes it will be the last one standing in an all-out price war. April WTI crude oil prices last Friday plummeted to a 3-1/2 year nearest-futures low and closed the day down -$4.62 per barrel (-10.07%) at $41.28.