- Weekly global market focus
- FOMC throws the kitchen sink at the markets and the economy
- Stocks recover as Congress moves forward on virus-relief package
- Crude oil prices stabilize after U.S. announces SPR purchases
Weekly global market focus — The U.S. markets this week will focus on (1) the continued assessment of the coronavirus crisis and its impact on the U.S. and global economies, (2) the FOMC’s blast of stimulus measures announced Sunday afternoon, (3) oil prices, which were extremely volatile in Sunday night’s trading with some support from last Friday’s announcement of U.S. oil purchases for the SPR, (4) the Treasury’s sale of 10-year TIPS on Thursday, and (5) this week’s busy economic calendar.
In Asia, the markets will assess the economic damage to the Chinese economy with Sunday night’s release of the Jan/Feb retail sales and industrial production reports, expected -4.0% y/y and -3.0% y/y, respectively. The PBOC this Friday will announce the 1-year loan prime rate (LPR), which is the main reference rate for corporate loans. The consensus is for at least a -5 bp cut in the 1-year LPR as the PBOC cuts funding rates to soften the blow to the Chinese economy from the coronavirus.
The Bank of Japan on Sunday announced that it will hold its policy meeting today rather than on Thursday. The BOJ is likely to announce additional stimulus measures and loan programs and perhaps expand the scope of its QE program.
In Europe, the markets will monitor the extent of the economic damage as other countries join Italy in closing stores and restaurants and clamping down on the movement of people. A range of interest rate cuts are expected this week with central bank meetings in Norway, Turkey, South Africa, and Russia.
FOMC throws the kitchen sink at the markets and the economy — In an attempt to prevent the coronavirus from causing a financial crisis, the FOMC late Sunday afternoon delivered an emergency basket of stimulus and support measures. Due to Sunday’s emergency FOMC meeting, the FOMC canceled its Tue/Wed meeting.
The FOMC has multiple goals of (1) preventing systemic stress and panic in the financial markets from becoming any worse, (2) trying to ensure that credit is getting to households and businesses to help them get through the crisis, (3) making sure there isn’t a meltdown in the corporate bond market, (4) preventing the economy from falling off a cliff, and (5) preventing a downward spiral in confidence among consumers, businesses, and market participants.
To those ends, the FOMC on Sunday announced several key actions. The FOMC cut its funds rate target by 100 bp to 0.00/0.25%, which will help bring down Treasury yields across the maturity curve. The Fed said it will continue its nearly unlimited-sized repo operations to provide daily liquidity to banks. The Fed also expanded and cut rates on its dollar liquidity swap lines with overseas central banks to make sure that plenty of dollar liquidity is available worldwide. To aid bank lending, the Fed cut the bank reserve requirement to zero and cut the discount rate to 0.25%.
In a new and aggressive QE program, the Fed announced that it would buy at least $500 billion of Treasury securities and $200 billion of mortgage-backed securities in coming months. The Fed didn’t set any time parameters and indicated it would deploy the program as needed. That was a good sign since the Fed can front-load the program to provide support and liquidity to the Treasury market. In fact, the Fed announced that it would begin the program on Monday by purchasing $40 billion of Treasury securities.
Stocks recover as Congress moves forward on virus-relief package — The U.S. stock market last Friday rallied sharply as the U.S. government began a stronger response to the coronavirus crisis. The House late last Friday passed a virus-relief bill supported by President Trump, and the Senate is expected to approve that bill today. The House’s virus-relief bill included free virus testing, two weeks of paid sick leave, enhanced job benefits, increased food aid, and higher funding for Medicaid benefits.
U.S. government officials last Friday also assured the public that coronavirus testing will be stepped up significantly in the coming days, which will allow the markets to get a better handle on the size of the problem.
In another positive move, the Bank of Canada last Friday cut its policy rate by another -50 bp to 0.75%, adding to its -50 bp rate cut earlier this month. The Chinese central bank last Friday injected more reserves into the banking system and also cut bank reserve requirement ratios, thus freeing up more lending power for banks. European governments also stepped up their promises of fiscal stimulus.
The S&P 500 index (SPX) last Friday rebounded sharply higher by +9.29%, nearly reversing the previous day’s -9.51% sell-off. SPX on last Thursday’s 14-month low fell by a total of -27.0% its mid-Feb record high. The Nasdaq 100 index last Friday closed sharply higher by +10.07%, partially recovering from last Thursday’s 9-month low where the index fell a total of -25.4% from the record high.
The VIX index last Friday edged to a new 11-1/4 year high of 77.57, where it remained below the record high of 89.53 posted in November 2008. The VIX then fell sharply due to the recovery in stocks and closed the day down -17.64 at 57.83.
Crude oil prices stabilize after U.S. announces SPR purchases — April crude oil prices last Friday settled +0.73% higher but then rallied sharply by about $2 per barrel in after-market trading when President Trump announced oil purchases for the U.S. Strategic Petroleum Reserve. The SPR fill-up could generate about 430,000 bpd of demand over about six months if the reserve is filled up, according to data from Bloomberg News. The U.S. government has room to buy about 79 million bbls of oil to bring the SPR from its current level of 635 million bbls to its capacity of 713.5 million bbls.