- Stock recovery depends on whether G7 follows through with stimulus
- Oil prices recover along with equity markets ahead of OPEC+ meeting later this week
- China services PMI likely to add to the negative global PMI news
Stock recovery depends on whether G7 follows through with stimulus — The U.S. stock market rebounded sharply higher on Monday after a series of statements by G7 central banks promising action to support their economies. Also, G-7 finance ministers and central bank chiefs reportedly plan to hold a teleconference this morning to discuss a coordinated response to the coronavirus epidemic.
However, stocks will not be able to follow through on Monday’s recovery rally unless central banks actually deliver easier monetary policies, rather than just make promises that melt away in the coming days and weeks.
There is some room for the U.S., Canada, and the UK to cut rates with their policy targets of 1.625%, 1.75%, and 0.75%, respectively. However, policy rates are already negative in Europe and Japan and those central banks will be loath to cut rates deeper into negative territory and further hurt bank profits. On the fiscal front, there isn’t much room for action considering lofty national debts that already exist for Japan, the U.S., and Europe.
There is also the problem that interest rate cuts will not directly address the economic problems caused by the coronavirus, i.e., broken supply chains, a sharp drop in travel and public activities, and school and business closures in some areas. However, interest rate cuts and liquidity injections will at least help to support the global stock markets, which in turn can help stabilize consumer and business confidence and prevent further damage to consumers’ retirement accounts.
The markets will be waiting to see if G-7 finance ministers and central bankers today announce any coordinated moves on fiscal or monetary stimulus. If not, then the markets will have to wait until policy meetings by the respective central banks and any fiscal announcements by the respective governments.
The markets are fully expecting the FOMC at its meeting in two weeks (March 17-18) to cuts its funds rate target by -50 bp. The markets are expecting a total of -103 bp of rate cuts by year-end, leaving the funds rate target at an average 0.595% by December 2020.
The S&P 500 index (SPX) on Monday closed sharply higher by +4.60% and retraced 44% of the plunge seen in the past two weeks. SPX on Monday remained well above last Friday’s 6-month low, where the index corrected lower by a total of -15.8% from the mid-February record high.
The Nasdaq 100 index (NDX) on Monday closed sharply higher by +4.92%. The index on last Friday’s 4-month low corrected lower by a total of -16.5% from the mid-February record high.
The VIX index on Monday closed sharply lower by -6.69 at 33.42, falling back from last Friday’s 2-year high of 49.48. The VIX on last Friday’s high of 49.48 was just mildly below the 4-1/2 year high of 50.30 posted in Feb 2018 when Volmageddon caused some VIX products to blow up. The VIX reached a record high of 89.53 during the financial market crisis in October 2008.
Oil prices recover along with equity markets ahead of OPEC+ meeting later this week — April crude oil prices on Monday edged to a new 14-month nearest-futures low but then rebounded sharply higher to close the day $1.99 (+4.45%) at $46.75. April crude in post-market trading rallied by another 2.5%.
Oil prices were boosted on Monday mainly by the upside recovery in the stock market, which raised some hopes that the worst might be over for the markets from the coronavirus crisis. There was also increased talk that Russia might be corralled into supporting a production cut at the OPEC+ meeting this Thursday and Friday in Vienna.
The Financial Times reported last Friday that Saudi Arabia is now pitching a 1 million bpd production cut to the OPEC+ group including Russia. However, Russian Oil Minister Novak on Monday said that Russia has not received a proposal for a 1 million bpd production cut and said he is focused on considering the recommendation by the OPEC+ technical committee for a 600,000 bpd cut.
If OPEC does not cut production further, there is little doubt that oil prices will be headed to new lows. Oil demand has fallen sharply due to the coronavirus and OPEC needs to cut production to match the lower demand.
China services PMI likely to add to the negative global PMI news — The consensus is for tonight’s China Feb Caixin services PMI to show a -2.5 point decline to 49.3, adding to January’s -0.7 point decline to 51.8. A decline of only -2.5 points today would be a victory considering that last Friday’s China non-manufacturing PMI from the National Bureau of Statistics plunged by -24.5 points to a record low of 29.6 as the service sector was hard-hit by quarantines and sharply reduced consumer spending.
China’s two manufacturing PMI reports for February have already been released. The Feb manufacturing PMI from the National Bureau of Statistics plunged by -14.3 points to a record low of 35.7. The Feb Caixin China manufacturing PMI fell by -10.8 points to 40.3.
The U.S. and European manufacturing sectors were already in a recession before the coronavirus emerged as a major problem. Conditions in the world manufacturing sector as a whole are now recessionary after JPMorgan’s Feb global manufacturing PMI fell by -3.2 points to 47.2, falling below the expansion-contraction level of 50.0.
