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While equity exchange traded funds showed no obvious signs of
stress during this year’s sell-off, the picture looked vastly different
in the bond space. In March, some of the biggest corporate bond ETFs’
shares traded at discounts of more than 5 per cent to net asset value
(NAV), having not exceeded discounts of 0.1 per cent in January.
Investors
wishing to raise cash in the teeth of a crisis may well have balked at
the prospect of such deep discounts. But the official explanation
asserts that the problems lie with the underlying fixed-income market
and how it arrives at prices, rather than ETFs, which appear to have
worked as a price discovery tool and a pressure valve for an illiquid
market.
The Investment Association (IA), the UK trade body for
asset managers, draws a stark contrast between the underlying bond
market and bond ETFs in a policy briefing on the subject. It notes that
price discovery for fixed-income securities can be difficult because the
bond market itself is fragmented and not standardised, with no closing
auction period. Bonds are traded over the counter (OTC), or via a
network of dealers and brokers, rather than on an exchange.
As
such, the NAVs for underlying holdings that ETFs (and open-ended bond
funds) refer to are often based on a theoretical bond price that is
“indicative, reasonably estimated and as close as possible to a fair
value”. The theoretical price might not be what a bond actually trades
for, especially in times of stress when valuations are fluctuating
rapidly.
This article was previously published by Investors Chronicle, a title owned by the FT Group.
Research
suggests enormous volumes of bond ETF shares successfully changed hands
in March, with exchanges allowing investors to buy and sell ETF shares
without actually trading bonds. A white paper from Invesco, an ETF
provider, states that US-listed bond ETFs traded a total of $738.8bn on
exchange in March, with just $19.8bn redeemed in the primary bond market
over the period.
This means that $719bn of fixed-income ETF
shares changed hands without a real bond actually being sold — a strong
defence of ETF liquidity. High trading volumes also occurred on the back
of market improvements: on April 9, the day the US Federal Reserve
announced additional stimulus plans, trade in the iShares $ Corporate
Bond Ucits ETF (LQDE) was more than nine times its average daily volume,
according to figures provided to the IA.
Even with investors able
to trade fixed-income ETF shares in bulk, the discounts on show may
have seemed alarming. However, the argument runs that the theoretical
prices achieved in the underlying bond market were stale and
unrealistic, while the prices on ETF shares reflected actual trading
activity.
This view is not limited to ETF cheerleaders. The Bank of England, in its Interim Financial Stability Report
for May, states that prices on bond ETFs “appear to have provided
information about future changes in underlying asset markets, offering
evidence that they incorporated new information more rapidly than the
NAV of assets held within their, and equivalent, funds”.
In its own assessment
the Bank for International Settlements adds: “Compared with the
relative staleness of bond prices and NAVs, ETF prices can be useful
tools for market monitoring and valuable inputs to risk management
models that require up-to-date assessments.”
In other words, ETFs
provided an element of price discovery that was lacking in the
underlying market. It is also “entirely possible that the cash bond
market would have collapsed” had ETFs not been around to relieve the
selling pressure, Invesco argues.
The official argument also deals
with claims that the arbitrage mechanism was found wanting. Normally
arbitrage can prevent ETF share prices from diverging too wildly from
NAVs. If an ETF's shares trade at a discount to NAV, for example, market
participants should be able to buy the shares cheap and separately sell
its constituent parts at a higher price for a risk-free profit.
$719bn
value of ETF fixed-income shares that changed hands in March without a real bond actually being sold
While some of the discounts looked steep at the time, the IA has
argued that there was “no obvious arbitrage opportunity” because market
participants agreed that the ETF prices were based on actual tradeable
bond values.
By contrast, ETF shares trading at premiums or
discounts to NAV can sometimes reflect other developments, such as when a
UK-listed ETF trades at different hours to its underlying market (and
misses some price movements). High transaction costs can also sometimes
lead to slight premiums and discounts.
Invesco has argued that now
is the time to focus on improving how bonds are priced. The asset
manager notes that more over the counter (OTC) markets should have
central reporting of trades and prices, with this data distributed to
market participants with minimal delay. Pricing should also have more
emphasis on traded prices rather than “stale” quotes. The events of
March, they add, should provide “ammunition” for a change.
European equities climbed and Wall Street was set to build on
its record highs after data showed Germany’s historic economic collapse
was less severe than feared and business sentiment has continued to
brighten.
The rise across Europe’s stock bourses echoed gains in
New York on Monday, with the benchmark S&P 500 index rising to a new
record.
German GDP contracted 9.7 per cent in the second quarter,
which was the height of the coronavirus pandemic in Europe, as private
consumption, investments and exports collapsed. An earlier reading had
shown the economy shrinking by 10.1 per cent between April and June,
however.
Meanwhile, a survey by Germany’s highly regarded Ifo
Institute showed sentiment among business leaders in Europe’s biggest
economy improved to its highest level since February. The research
group’s business climate index rose to 92.6 for August, up from 90.4 in
July.
The data boosted the euro, which rose 0.4 per cent against
the dollar to purchase $1.1830. The Europe Stoxx 600 index rose 0.6 per
cent, Germany’s DAX was 0.8 per cent higher, while France’s CAC 40
gained 1 per cent.
Equities in peripheral European economies
followed the trend, with Spain’s Ibex gaining 1.1 per cent and Italy’s
MIB adding 0.7 per cent.
S&P 500 futures advanced 0.5 per
cent, suggesting the index will add to its 4.9 per cent rise so far in
August. Shane Oliver, head of investment strategy and chief economist at
AMP Capital, said that while shares were “vulnerable” in the
“seasonally weak months” leading up to the US election in November,
various positive factors could push them higher.
He pointed to
“good progress in developing vaccines, the downtrend in the US dollar
[and] signs of recovery and low interest rates”.
The German GDP
data were a “final glance in the rear view mirror,” Carsten Brzeski of
ING wrote, predicting a recovery in the July to September quarter
because of a reduction in VAT and summer domestic tourism. “The economy
will have one of its best quarterly performances ever in the third
quarter,” he said.
Shamik Dhar, chief economist at BNY Mellon, added that while coronavirus cases were once again rising across Europe,
hospitalisation and death rates did not appear to be heading back
towards the levels seen in March and April. “The course of the disease
remains hugely uncertain and this latest spike may lead to more regional
lockdowns,” he said. “But my essential view is that Germany will bounce
back,” he added, in part because of pent-up consumer demand.
In
London the FTSE 100, which has lost almost a fifth of its value during
2020 as fears over the economic impact of Covid-19 and Brexit mount,
rose 0.6 per cent. In Asia-Pacific, shares across the region rose for a
second day, with MSCI’s benchmark up 0.4 per cent.
Asian markets
were buoyed by positive signs from the US and China regarding the
countries’ trade deal after a meeting between China’s vice-premier Liu
He, US trade representative Robert Lighthizer and Steven Mnuchin,
secretary of the treasury.
“Both sides see progress and are
committed to taking the steps necessary to ensure the success of the
agreement,” said the office of the US Trade Representative in a statement.
Brent
crude, the international oil benchmark, added 0.2 per cent to $45.24 a
barrel. Gold added 0.4 per cent to $1,932 per troy ounce.
Two Chinese managers have applied to launch exchange traded
funds that will track the newly launched Hang Seng Tech Index, according
to records from the China Securities Regulatory Commission.
China
Asset Management and Dacheng Fund Management have made applications to
list the new ETFs, which will be aimed at mainland Chinese investors and
will use the fund managers’ qualified domestic institutional investors
quota.
Depending on the approval time, these could be the first
ETFs introduced in either the mainland or Hong Kong markets tracking the
Hang Seng Tech Index, which was launched on July 27.
The new
index incorporates 30 constituent stocks, including heavyweight Chinese
tech giants such as Tencent, Alibaba and Meituan.
This article was previously published by Ignites Asia, a title owned by the FT Group.
Hong
Kong managers have been relatively slow to roll out any fund product
aimed at capturing potential growth of the index. Hang Seng Investment
Management, a subsidiary of Hong Kong-listed Hang Seng bank, said in
late July that it was still researching the possibility of launching a
fund product based on the index.
China Fund News, a mainland
Chinese publication, has reported that the launch of the Hang Seng Tech
Index has been greeted with enthusiasm in China due to its strong
weighting towards technology firms that are well known to Chinese
investors.
China AMC and Dacheng already have other ETF products
tracking Hang Seng indices, as do China Southern Asset Management, E
Fund Management and Fullgoal Asset Management.
The main blue-chip
Hang Seng index has been struggling to regain losses suffered since its
high point of 29,056 points seen in January this year, partly due to
coronavirus but also due to the political tension between the US and
China.
Hong Kong’s economy contracted 9 per cent in the second
quarter compared with the same period a year ago. The various political
and public health crises have partly offset the excitement brought about
by a slew of Chinese tech firms going public or carrying out secondary
listings in Hong Kong. *Ignites Asia is a news service
published by FT Specialist for professionals working in the asset
management industry. It covers everything from new product launches to
regulations and industry trends. Trials and subscriptions are available
at ignitesasia.com.
Shares in a pharmaceutical group that is developing a
coronavirus vaccine alongside China’s military more than doubled on its
trading debut, as investors brushed aside longstanding doubts over
profitability.
CanSino Biologics’ stock surged as much as 127 per
cent on its first day of trading on Shanghai’s Nasdaq-like Star Market
on Thursday after the company raised Rmb5.2bn ($748.9m) in a secondary
share offering. The shares later pared some of that initial enthusiasm
to trade 85 per cent higher.
Appetite for Tianjin-based CanSino’s
stock has been driven by its development of an experimental Covid-19
vaccine that seeks to stimulate an immune response to coronavirus using a
chemically weakened common cold.
The treatment has been developed
jointly with a team of leading immunologists from China’s People’s
Liberation Army and has already been approved for use on troops.
Optimism that the company may successfully deliver a vaccine has
helped propel its Hong Kong-listed shares more than 320 per cent since
the start of the year. CanSino’s Hong Kong-traded stock fell 11 per cent
on Thursday.
But the drug, which is about to enter into final
stage trials in Saudi Arabia, is months away from being commercially
available. That, and the fact that CanSino has been chronically
unprofitable, has prompted analysts to question its business model.
The company said in its Star Market prospectus that its net losses had risen from Rmb64.4m in 2017 to Rmb157m last year.
“The
political pressure surrounding a vaccine is enormous and CanSino has
been unprofitable for years,” said Brock Silvers, chief investment
officer of Adamas Asset Management in Hong Kong. “CanSino looks deeply
speculative at this point — no profit, deep tech hype, abundant risk,
but at premium valuations.”
Mr Silvers, who spoke prior to the
listing, added that CanSino was not even at the front of the pack in
China’s vaccine race. Rivals Sinovac Biotech and state-owned Sinopharm
Group have already been approved for phase three trials. CanSino
experienced mixed results in its proposed vaccine’s phase two trial.
China’s
Star Market, which launched a little more than a year ago, is known for
its spectacular listing debuts with retail investors often bidding up
shares. Chipmaker SMIC’s stock soared 246 per cent on its first day of trading last month.
“Before
the Star Market, there’s no chance for unprofitable companies like
CanSino to be listed,” said Zhao Bing, an analyst at Huajing Securities.
Chinese
groups were among the first globally to announce experimental vaccines
and begin clinical trials. But they have increasingly had to conduct
final stage trials in other countries where the virus is still
spreading, given that China appears to have largely contained the
pandemic.
That has put China’s vaccine makers at a disadvantage compared with the likes of the UK’s AstraZeneca — which is working with Oxford university
— US-based Moderna and Germany’s BioNTech, which are based in countries
with a relatively high number of new daily Covid-19 infections. Additional reporting by Xueqiao Wang in Shanghai
European equity markets opened higher on Tuesday, extending a bout of exuberance that began in the US overnight.
While
London’s FTSE 100 traded flat, Germany’s Dax rose 0.8 per cent,
France’s CAC 40 was 0.6 per cent higher and the Euro Stoxx 600 gained
0.4 per cent.
Europe’s gains were led by industries that have
been among the biggest victims of the Covid-19 pandemic. Within the Euro
Stoxx index, automotive shares rose 2 per cent, travel shares gained 1
per cent and the oil and gas segment rose 1.7 per cent.
Investors’
willingness to take more risk followed rises in Asian equities on
Tuesday. Japan’s benchmark Topix index climbed 1.9 per cent and
Australia’s S&P/ASX 200 rose 1.8 per cent in Asia-Pacific trading on
Tuesday. Hong Kong’s Hang Seng rose 0.8 per cent while China’s CSI 300
index of Shanghai- and Shenzhen-listed stocks was little changed.
This
came after Donald Trump dropped his opposition to Microsoft acquiring
the US operations of the popular mobile video app from its Chinese
parent, ByteDance. Microsoft shares rose 5.6 per cent, lifting the
tech-focused Nasdaq 1.5 per cent to a record, and sending a wave of optimism across Asian markets.
The
S&P 500 rose 0.7 per cent overnight following the release of better
than expected US manufacturing data. The Institute for Supply
Management said on Monday that US manufacturing activity hit its highest
level in almost 18 months in July, as orders rose despite a resurgence
in new coronavirus infections.
The US dollar, which had its worst
month in a decade in July because of concerns about the ability of the
coronavirus-scarred economy to lead a global recovery, bounced around a
two-year low.
The dollar index, which measures the performance of
the US currency against those of trading partners, drifted from a
reading of 93.54 to 93.457. The index has declined more than 6 per cent
in the past three months.
Kristina Hooper, chief global market
strategist at Invesco, said the US currency’s weakness was “likely to
persist” in the near term as the withdrawal of emergency unemployment
benefits weighted on the US economic recovery.
“We are already
starting to see a stalling of economic data and families losing their
benefits could make August’s data even worse,” she added. “However, the
US Senate still seems far from reaching a deal on fiscal stimulus.”
The price of gold, which has surged to an all-time high in recent weeks as investors sought out haven assets, was steady at $1,973 per troy ounce.
Brent
crude, the international oil benchmark, dropped 0.6 per cent to $43.87
per barrel ahead of the American Petroleum institute releasing data that
will show how much unsold oil inventory is idling in US warehouses.
Oil
major BP cut its dividend 50 per cent on Tuesday morning, the first
time the group has lowered its payout to shareholders since the
Deepwater Horizon disaster in 2010, as it unveiled a record $6.7bn
quarterly loss.
AMSTERDAM
(Reuters) - Euro zone bond yields held their ground on Thursday with
investors’ main focus expected to be any new developments on the
European Union’s recovery fund, which aims to help the region’s economy
recover from the coronavirus crisis.
FILE
PHOTO: A two Euro coin is pictured next to an English ten Pound note in
an illustration taken March 16, 2016. REUTERS/Phil Noble/Illustration.
Hopes
are high that the 750 billion euro ($851.70 billion)fund will be
approved at a European Union summit late next week. Designed to mostly
offer grants to countries worst hit by the coronavirus, it has been one
of the main drivers of a drop in Southern European borrowing costs led
by Italy in the past few weeks.
On Wednesday, European Council
President Charles Michel said the EU needed to reach an agreement
quickly on the fund but much negotiation was still needed.
Euro
zone finance ministers will meet at 1300 GMT to select their new leader,
while German Chancellor Angela Merkel and Dutch Prime Minister Mark
Rutte will give a joint news conference in Berlin at 1830 GMT.
“We
don’t anticipate a fast agreement (little in the EU moves quickly), but
would be cautious around putting too much weight on negative-sounding
headlines, which are almost certain to be seen,” Mizuho analysts told
clients.
“Instead, we stick to our expectation for a slow but
inexorable grind towards a consensus relatively close to the
Franco-German proposal,” they said, referring to an initial proposal
which offered 500 billion euros in grants before the EU added 250
billion euros in loans to its plan.
On Thursday, Germany’s
10-year yield was unchanged at -0.44%, close to one-week lows, while
Italian 10-year yields were also unchanged at 1.28%.
On the data
front, German exports rebounded 9% in May in another sign of recovering
demand spurred by the lifting of lockdown measures, but rose less than
the 13.8% expected in a Reuters poll.
In the primary market, Ireland is due to sell between 1 and 1.5 billion euros via the sale of 7, 10 and 30-year bonds.
The
price action of high-yield corporate bonds will signal to investors
when the bear market triggered by the coronavirus pandemic is truly at
its bottom, according to Longview Economics.
A bear market is a
broad decline in a stock market, often defined as a price decline of 20%
from a recent high. Sudden, sharp losses in stocks in
early-to-mid-March took global stocks into bear market territory as the
coronavirus pandemic spread worldwide and oil prices plummeted.
Stock
markets have rallied in recent days, however, fueled by unprecedented
monetary and fiscal stimulus from central banks and governments around
the world, and the commencement of efforts to reopen economies following
prolonged lockdowns. Markets have shrugged off dire economic
indicators, such as the U.S. shedding a record 20.5 million jobs in
April, suggesting that investors are beginning to see a case for a
V-shaped recovery.
However, Longview economists believe this is
too optimistic, in terms of the outlook for both earnings and GDP (gross
domestic product). They expect the “current pandemic induced supply
side shock to evolve into a demand side shock” in a more traditional
recession.
Relief rally, not a bull market
In a
note Monday, Longview argued that high-yield corporate bond spreads
have signaled the end of every cyclical bear market since they started
being recorded in 1997, often peaking before the equity bear market low.
Credit spreads are the difference between the yields on a particular corporate bond and a government bond.
“On
this occasion, credit spreads are not confirming the end of the bear
market. Over the last 6 - 7 weeks, the S&P 500 has rallied 34% from
its intraday lows. Credit spreads, though, are little changed
(tightening from 19.4pp (percentage points) to 17.6pp),” the note said.
“That type of muted price action in credit is normal during equity market relief rallies within a bear market.”
As
a bear market nears its end, credit spreads narrow aggressively as the
equity markets rally, Longview economists said. Within seven weeks of
the end of the bear market that originated during the global financial
crisis in 2008, spreads tightened by more than 10 percentage points,
they flagged.
The behavior of spreads was similar in during the
bear markets of 2002 and 2016, but the current muted price action of
U.S. high-yield bonds rated CCC or lower is not signaling the start of a
bull market, Longview economists argued. A CCC rating indicates a
“junk” bond that is considered particularly high risk, and so is high
yield.
“This message is consistent with the behavior of US 10 year bond yields, which remain stuck near their lows,” the note added.
The
message, Longview economists hypothesized, is one of caution that
bankruptcies are inevitable and policy is not yet sufficient to bring
the bear market to a close. The current market action signals a relief
rally, and not the start of a V-shaped recovery, they concluded.
Remove stimulus at your peril
This
was echoed by M&G Investments Macro Fund Manager Eric Lonergan, who
told CNBC Monday that a key risk to any recovery would arise if
stimulus measures were rolled back too soon.
“The reality is we
are going to need stimulus after lockdown is removed, and I fear that
there is a belief out there that once we lift lockdown, we can start
unwinding support,” Lonergan told CNBC’s “Squawk Box Europe.”
He
suggested that economies are not going to return to 100% capacity for
some time and will instead return to at-best around 90-95%, which still
represents a “severe recession in the context of history.”
Lonergan argued that the subtle message in markets was that the cyclical sectors have not recovered with any great momentum.
“If
you look at U.S. banks, which are probably the cyclical indicator, or
10-year Treasuries over the last five weeks, they haven’t shifted very
much,” he said.
Instead, markets have been driven by investors
seeing “some winners” in the tech sector, and have been “very
discriminating” since liquidity concerns sparked the initial mass
sell-off in March, Lonergan concluded.
Wall
Street and much of the Financial District stands empty as the
coronavirus keeps financial markets and businesses mostly closed on
April 20, 2020 in New York City. Spencer Platt | Getty Images
Stock futures rose in early morning trading Tuesday as investors remained focused on the reopening of the U.S. economy.
Futures
on the Dow Jones Industrial Average climbed 240 points, implying a
Tuesday opening gain of around 173 points. S&P 500 and Nasdaq
futures also pointed to a positive Tuesday start for the two indexes.
Investors
weighed fears of a second wave of coronavirus cases against efforts to
reopen businesses and loosen restrictions. California governor Gavin
Newsom said Monday some of the state’s retailers will be allowed to
offer curb-side pickup starting Friday.
Meanwhile, New
York Gov. Andrew Cuomo said that the daily number of hospitalizations
and new deaths are declining, suggesting the state is on “the other side of the mountain.” However, he added that officials are not seeing as steep of a decline as they hoped.
The
overnight moves followed Monday’s modest gains on Wall Street. The
strength in the biggest U.S. technology companies including Microsoft,
Apple, Amazon and Netflix lifted the broad market out of negative
territory. The S&P 500 closed the session 0.4% higher, while the
Nasdaq jumped 1.2%.
“Megacaps mask underlying rally fragility,”
Ken Johnson, investment strategy analyst at Wells Fargo, said in a note
on Monday. “This concentration raises concerns about the rally’s
long-term health and durability as it suggests that ample liquidity,
rather than broadly improving fundamentals, may be fueling it.”
On
Monday, airline stocks suffered a big sell-off with Delta, United,
American Airlines all dropping more than 5%. The decline came after
Warren Buffett’s said over the weekend that his Berkshire Hathaway dumped the entirety of its stakes in the sector due to the fallout from the pandemic.
Tensions
between China and the U.S. appeared to have flared up again. Secretary
of State Mike Pompeo on Sunday said there was “a significant amount of
evidence” of the coronavirus originating in a Wuhan lab. President
Donald Trump previously said he was considering imposing tariffs on
China for its handling of the outbreak.
Stock futures fell early Monday morning as traders weighed the
reopening of the economy along with brewing tensions between China and
the U.S. Dow Jones Industrial Average futures fell 300 points, or 1.2%, pointing to an opening decline of more than 290 points. S&P 500 futures lost 1%. Nasdaq-100 futures fell 0.8%. Warren Buffettsaid his Berkshire Hathaway sold all of its airline holdings
because of the coronavirus outbreak. While the legendary investor was
optimistic over the long term about the outlook for America, the move
shows his concern that the pandemic has changed certain industries
permanently and could be a sign that other investors are too optimistic
about the economy returning to normal quickly.
Airline shares were
the biggest losers in the S&P 500 in the premarket. Delta, United
Airlines, American Airlines and Southwest Airlines all lost more than
10%, while plane maker Boeing dropped 5.6%.
“Mr Buffett is a
long-term investor, so his decision to sell reflects his belief that
airline industry is facing future challenges that fundamentally change
the value-capture of that business,” wrote Tom Lee of Fundstrat in a
note to clients.
Investors are also grappling with worries over
another spat between China and the U.S. On Sunday, Secretary of State
Mike Pompeo said there was a “significant amount of evidence” connecting
the coronavirus to a lab in the Wuhan region of China.
Those comments came after National Economic Council Director Larry Kudlow said Friday that China will be “held accountable”
for the coronavirus. Earlier in the week, President Donald Trump said
he was considering imposing tariffs on China for its handling of the
outbreak.
States across the U.S. are letting
nonessential businesses reopen and are easing stay-at-home orders in an
effort to restart the economy after the coronavirus forced a near-global
halt in economic activity. However, this easing comes as data from the
World Health Organization showed the U.S. had its deadliest 24 hours of the outbreak between Thursday and Friday.
“The
next two to four weeks are critical for both the economic crisis and
the health crisis,” said Marc Chaikin, CEO of Chaikin Analytics. “The
biggest risk to the stock market is a premature reopening of the U.S.
economy. If rising Covid-19 curves reemerge and economies are shut down
again, the damage to the stock market’s psyche will be dramatic.”
Buffett sells airline stakes
“The
world has changed for the airlines. And I don’t know how it’s changed
and I hope it corrects itself in a reasonably prompt way,” Buffett said
Saturday from Berkshire’s first-ever virtual shareholder’s meeting. Berkshire had more than $4 billion invested
across United, American, Southwest, and Delta Airlines before the sale.
Buffett noted his admiration for the industry but added there are
events “on the lower levels of probabilities” that call for a change of
plans.
American and United have both fallen more than 60% year to
date. Delta is down 57% for 2020 while Southwest has lost nearly half of
its value. And the stocks were set for more losses on Monday.
Berkshire also reported a record $137 billion in cash after the first quarter, but Buffett said he doesn’t “see anything that attractive” to deploy that money.
Increasing
hopes of a possible treatment from Gilead Sciences also lifted
sentiment last month. On Sunday, CEO Daniel O’Day said remdesivir —
Gilead’s promising antiviral drug — will be available to coronavirus
patients this week. Gilead shares added 2% in premarket trading.
Stocks
notched their best monthly performance in over 30 years in April in
part because of hopes of an economic reopening. Last month, the S&P 500 rallied 12.7%.
More than 3.4 million cases of Covid-19 have been confirmed globally, including over 1.1. million in the U.S. alone, according to data from Johns Hopkins University.
Futures contracts tied to the major U.S. stock indexes were
higher in the overnight session Wednesday evening after both Facebook
and Microsoft issued better-than-expected revenue projections in their
earnings reports. Dow Jones Industrial Average futures rose 116 points, implying an opening gain of around 155 points. S&P 500 and Nasdaq-100 futures also pointed to Thursday opening gains.
Both Facebook and Microsoft equity climbed in after-hours trading Wednesday evening after each reported promising revenue figures despite the global coronavirus outbreak.
Facebook
soared more than 10% in the overnight session after it reported that,
after an initial “significant” pullback in advertising revenues in March
thanks to Covid-19, it’s seen sales stabilize in the first three weeks of April. It reported first-quarter per-share earnings of $1.71 and revenues of $17.74 billion.
Microsoft
rose about 2.15% in after-hours trading after the company reported
fiscal third-quarter sales growth of 15% thanks to growth in its cloud
business. The software giant said in a statement that the disease “had minimal net impact on the total company revenue”
in the three months ended March 31, but cautioned that “effects of
COVID-19 may not be fully reflected in the financial results until
future periods.”
The overnight moves followed a bounce in U.S. equities during normal trading hours on Wednesday that put the S&P 500 up more than 13% for the month and on track for its biggest one-month gain since 1974.
The Dow Jones Industrial Average rose 532.31 points, or 2.2%, to 24,633.86 during Wednesday’s session. The S&P 500 gained 2.66% to 2,939.51 while the Nasdaq Composite closed 3.57% higher at 8,914.71.
Investors cited developments at Gilead Sciences for the market’s pop during Wednesday’s session after the biotech companyreported positive results from two tests
that showed its drug remdesivir could be a Covid-19 treatment. Dr.
Anthony Fauci, director of the National Institute of Allergy and
Infectious Diseases, said remdesivir shows a “clear-cut” positive effect
when treating the virus.
U.S. traders will on Thursday pore over
the Labor Department’s latest report on jobless claims. Another 3.5
million workers are expected to have filed for benefits last week, which
would bring the total number of Americans seeking unemployment benefits
over the last six weeks to about 30 million.
The Labor
Department’s prior jobless claims report — released April 23 — showed
the number of Americans who had filed for unemployment insurance
benefits over the previous five weeks was 26.45 million.
That number exceeded the 22.442 million positions added to the American economy since November 2009, when the U.S. economy began to add jobs back to the economy after the Great Recession. Click here for the latest news on the coronavirus.
General Electric reported Wednesday a steep decline in first-quarter revenue as the industrial giant took a hit amid the coronavirus pandemic.
The
company posted total revenue of $20.524 billion, which represents a
year-over-year decline of 8%. On an adjusted per-share basis, the
company earned 5 cents. That’s below a Refinitiv estimate of 8 cents per
share.
“The impact from COVID-19 materially challenged our
first-quarter results, especially in Aviation, where we saw a dramatic
decline in commercial aerospace as the virus spread globally in March,”
CEO Larry Culp said in a statement.
As global travel screeched to
a halt, General Electric’s aviation business saw revenue fall by 13% to
$6.892 billion on a year-over-year basis in the quarter, with profit
tumbling 39% to $1.005 billion from $1.66 billion in the division.
Orders also declined by 14%. The company’s power and renewable energy
businesses also saw revenues decline in the first quarter.
Larry Culp, CEO, General Electric
Scott Mlyn | CNBC
GE’s
health care segment, however, saw revenues expand by 7% to $5.292
billion and profit grow to $896 million from $781 million in the
year-earlier period. The company cited “surge demand for products used
in the diagnosis and treatment of COVID-19.”
Culp said the company
is eyeing cost cuts of more than $2 billion along with $3 billion in
cash preservation to cushion the coronavirus blow. GE’s earnings release
also indicated the industrial giant expects this quarter to be worse
than the first.
“The second quarter will be the first full
quarter with pressure from COVID-19, and GE expects that its financial
results will decline sequentially,” GE said.
Shares of General
Electric traded 2.2% lower in the premarket. GE shares have lost about
40% of their value this year through Tuesday.
The company
announced earlier this month that it was withdrawing its 2020 forecast.
The company also said its cash and cash-equivalent holdings topped more
than $47 billion along with a revolving debt facility of $15 billion to
ride out the virus-induced downturn.
Stock futures rose in early morning trading on Wednesday as
investors looked for guidance from the Federal Reserve on the future
path of interest rates with a gradual reopening of the economy in sight.
Futures on the Dow Jones Industrial Average traded 144 points higher, implying a Wednesday opening gain of 193 points. S&P 500 and Nasdaq futures also pointed to Wednesday opening gains for the two indexes.
All
eyes will be on the Fed’s monetary policy decision at 2 p.m. ET
Wednesday. Investors will look to the central bank’s statement and
chairman Jerome Powell’s virtual press conference for clues about how
long interest rates will stay near zero as the economy seeks to emerge
from coronarivirus crisis.
“It doesn’t look like the Fed will
raise interest rates beyond 0% until well-past the pandemic, which we
think might be around 2023,” said Jim Caron, head of global macro
strategies at Morgan Stanley Investment Management. “The market is
pricing a recovery that starts in Q3, but there’s wide variability, and
we need the Fed to give its input.”
While no one is expecting any change to its benchmark interest rate, the Fed could potentially adjust the rate on bank reserves and announce asset purchases targeted toward driving down longer-term rates.
Another
big market catalyst on Wednesday will be a reading on real gross
domestic product at 8:30 a.m. ET. Economists surveyed by Dow Jones
forecast the U.S. economy shrank by 3.5% in the first quarter as the
pandemic disrupted economic activities. U.S. GDP grew by 2.1% in the
fourth quarter.
Stocks fell slightly on Tuesday as a slide in
mega-cap tech shares put pressure on the broader market. The S&P 500
ended the day 0.5% lower, but the equity benchmark is still up more
than 10% this month alone.
The possibility to reopen the economy
soon boosted the areas of the market that had been hit the hardest.
Retailers rebounded sharply with Simon Property Group and Kohl’s jumping
10.7% and 6.7%, respectively.
President Donald Trump said in a press conference Tuesday the U.S. will “very soon” run five million coronavirus tests per day.
The number of most tests the country has run was 314,182 on April 22,
according to the Covid Tracking Project. The lack of testing remains an
obstacle for many states anxious to reopen for business.
Meanwhile,
earnings season remains in focus with Boeing reporting its
first-quarter results before the opening bell on Wednesday. Facebook,
Tesla and Microsoft are set to drop earnings after the bell.
Charging Bull Statue is seen at the Financial District in New York City, United States on March 29, 2020. Tayfun Coskun | Anadolu Agency | Getty Images
Stocks
futures were higher in early Monday morning trade, as oil prices fell,
while investors assessed the possibility of re-opening the global
economy after the coronavirus outbreak. Dow Jones Industrial Average futures were up 177 points, implying a Monday opening gain of around 168 points. S&P 500 and Nasdaq 100
futures also pointed to a higher Monday open for the two indexes. West
Texas Intermediate futures were down more than 10% at $15.18 per
barrel.
Wall Street’s coming off its first weekly decline in
three as a record plunge in oil prices sent investors for a wild ride.
Both the Dow and S&P 500 fell over 1% last week while the Nasdaq
Composite dipped 0.2%.
New York Gov. Andrew Cuomo said Sunday the
state plans to re-open its economy in phases. The first phase, Cuomo
said, would involve New York’s construction and manufacturing sectors.
As part of the second phase, businesses will need to design plans for a
re-opening that include social distancing practices and having personal
protective equipment available.
Cuomo also noted that coronavirus-related hospitalizations have fallen for 14 days and that virus deaths in New York hit a near one-month low. Those comments came as Georgia started to re-open its economy.
“As
various states begin to reopen their economies and relax social
distancing rules, we will get a glimpse of what the new normal looks
like,” said Marc Chaikin, CEO of Chaikin Analytics. “The biggest risk to
the stock market is a premature reopening of the U.S. economy which
results in an increase in COVID-19 cases and requires an abrupt reversal
of these efforts to awaken the economy out of its engineered coma.”
Shelter-in-place
orders and social distancing guidelines forced thousands of businesses
to shut down starting in March as the federal and state governments
tried to contain the coronavirus outbreak. Nearly 3 million cases have
been confirmed worldwide with over 900,000 in the U.S., according to
data from Johns Hopkins.
The outbreak, and subsequent business closures, sparked a wave of job losses. Data from the Labor Department shows that more than 26 million people have filed for unemployment benefits over the past five weeks.
To
be sure, a decline in new virus infections and unprecedented monetary
and fiscal stimulus have sparked a massive stock-market rally from the
lows reached on March 23. Since then, the major averages are all up more
than 20%, with the S&P 500 retracing about half of its decline from
a record set Feb. 19.
Investors have also cheered the
prospects of Gilead Sciences’ remdesivir as a potential treatment for
the coronavirus. On April 16, STAT News reported patients at a Chicago
hospital with severe coronavirus symptoms were quickly recovering after
being treated with the drug in a trial.
A Financial Times report
on Wednesday quelled some of that excitement, however, as it stated
remdesivir did not improve patients’ condition during a trial in China.
Gilead pushed back on the report and the study it cited, noting the
trial was “was terminated early due to low enrollment,” making it
“underpowered to enable statistically meaningful conclusions.”
“This
drug has become the single most important macro topic/theme/trend in
the entire market,” Adam Crisafulli, founder of Vital Knowledge, said in
a note. “Investors are dismissing the “flop” headline from the FT and
continue to anticipate positive results of some kind out of (at least)
one of the many Remdesivir trials now underway (while FDA approval is
widely assumed).”
“The present setup is such that Remdesivir
anticipation will very likely be more beneficial/powerful than the
actual results themselves (the data most likely will show efficacy to
some extent in certain instances, but a medical “silver bullet” isn’t
about to emerge),” Crisafulli added. —CNBC’s Michael Bloom contributed to this report.
In
September 2008, eight bank chiefs filed out of black town cars and into
the Federal Reserve. Their firms had tipped the country toward economic
collapse. But they also offered a way out, and the government handed
them marching orders, in exchange for billion-dollar bailouts.
Today,
the banks are not the cause of the economic crisis. But nor are they
the solution. Changes to the nation’s financial system, put in place
after the 2008 crash to prevent a repeat, have sapped banks’ tolerance
for the kinds of risks that are necessary to bring about a recovery,
according to regulators, experts and bank executives themselves.
Regulators
ringfenced Wall Street from Main Street after 2008 and insulated the
real economy from the financial one. New rules curbed banks’ risk-taking
and pushed more lending and trading outside of banks, to less-regulated
institutions such as hedge funds and nonbank lenders.
Banks are far safer today, but the costs of those changes have
become clear over the past month: sustained turbulence across Wall
Street securities-trading, credit drying up for some of the country’s
largest corporations and the Fed taking unprecedented action, in some cases sidestepping banks that have proven to be imperfect conduits for its rescue efforts.
“There is less risk-taking in the banking system” today, said
Jean Boivin, head of the BlackRock Investment Institute, the think-tank
arm of the world’s biggest asset manager. “As a result, the traditional
channel of [the Fed] lending to banks and having them deploy it is not
as powerful.”
The changes in regulations and market infrastructure that made
banks safer than they were in 2008 also made them less effective at
their basic job: moving money from those who have it to those who need
it, which could be a drag on the nation’s financial recovery.
The Fed is charging into the gap, increasing its sway over the
economy and putting Washington at the center of business like never
before. At the end of March, the central bank said it would lend straight to struggling companies, bypassing banks.
A warning sign flashed back in September. Almost overnight, a
crucial but often overlooked part of the financial system broke down—the
market for Treasury repurchase agreements, or repo, where banks and
asset managers borrow for short periods of time using government debt as
collateral.
The going rates for repo spiked on Sept. 16, tripling in the
course of an afternoon from 2% to about 6%. Suddenly a kind of borrowing
that is usually so inexpensive and plentiful that nobody pays it much
attention became scarce and expensive.
Historically when this happened, banks would seize the
opportunity to earn money at higher rates and jump in. Prices would
abate.
That didn’t happen. Scott Skyrm, a repo trader at Curvature
Securities LLC, watched the next day as rates as high as 9.25% flashed
on his screen. Traders with securities scrambled to find cash to
exchange them for.
“The panic was a classic run on the bank,” said Mr. Skyrm.
“Cash investors did not pull cash out of the market, but they made
borrowing cash more expensive.”
Not until the Fed stepped in with hundreds of billions of dollars in repo funding did the market begin to stabilize. Rates abated within a week.
Bank executives and traders sounded the alarm. At a banking conference that month,
JPMorgan Chase
& Co.’s chief executive, James Dimon, said regulations
requiring his bank and others to hold loads of cash-like assets would
hamper the ability of banks to help keep markets functioning during
tough times.
The Federal Reserve has been stepping in to fill the gap in traditional banking roles. Above, Jerome Powell, the Fed’s chairman.
Photo:
Andrew Harrer/Bloomberg News
“We are dealing with the remnants of what happened back in
September today,” said Alex Roever, head of interest rate strategy at
JPMorgan. It was clear then, he said, that banks’ ability to step into
misfiring markets and smooth them out “was already challenged.”
When coronavirus hit, stocks plummeted. Investors fled gold-plated bonds for the safety of cash, sparking a race for U.S. dollars. Money-market funds, which lend to businesses overnight, struggled to stay liquid.
This is when banks usually step into their role as the
circulatory system of the markets, scooping up assets, matching buyers
with sellers and making money in the process. Unwilling to give up cash,
and with their trading limited, they couldn’t steady the safest and
most liquid market in the world: the market for U.S. government debt.
Sharp swings in Treasury bond prices in March showed markets at
their breaking point. The 30-year bond had its biggest weekly move
since October 1987. The 10-year bounced between 0.335% and 1.25% inside
of two weeks.
So the Fed stepped in where banks no longer could, buying
Treasurys even faster than it did in 2009—some $720 billion over 10 days
in late March and early April.
The Treasury market stabilized, but others broke down, and the Fed rolled out one Band-Aid after another.
It cut interest rates to near zero, opened up its dollar reserves to
central banks around the world and pledged to buy hundreds of billions
of dollars in public and corporate debt. It intervened to prop up
money-market funds, exchange-traded funds and short-term corporate IOUs.
Over the past six weeks the Fed’s portfolio of securities and
other holdings has grown by more than $2 trillion, to $6.6 trillion. It
is likely to get larger still.
The Fed is “now the commercial bank of last resort for the entire economy,” said Michael Feroli, JPMorgan’s chief economist.
In the 2000s, lighter regulations allowed banks to hold big
positions in, say, corporate bonds or mortgages. They also had trading
desks that wagered with the firm’s own cash. When markets lurched, banks
had both the regulatory freedom and the financial incentive to keep
trading.
It didn’t always end well—trading blowups nearly brought down firms including
Morgan Stanley
and Merrill Lynch—but it added to the overall ecosystem of buyers and sellers, which helped smooth out bumps.
The Dodd-Frank legislation of 2010 shuttered those proprietary
trading desks and limited banks’ ability to take risks even as middlemen
for clients. Today banks dart in and out of positions quickly so as not
to trip risk limits or attract the attention of on-site Fed examiners.
Those same limitations are also clear in lending, banks’ most
basic function and one that is sorely needed now. The U.S. government
has earmarked hundreds of billions of dollars in emergency loans to
businesses whose revenue has fallen off a cliff.
Normally, when the Fed wants to prop up the economy, it cuts
interest rates, making money cheaper, and trusts banks will get that
money out by making new loans.
Over the past decade, more and more lending has moved outside
of banks. New regulations made certain types of loans—to low-rated
borrowers—uneconomic for banks to own, in an effort to discourage a
repeat of the borrowing binge that set off the mortgage crisis. Private-equity firms and hedge funds stepped in, lending directly to companies and buying up consumer loans from a new crop of online lenders.
The result is that many American consumers and businesses get
their credit not from their local bank—which the Fed can press into
service to jump-start the economy—but from institutions that are outside
the banking system entirely.
In leveraged loans, an especially risky type of debt, banks’ share fell from 25% in 2000 to 3% in 2018, according to FDIC data.
Nonbanks like auto makers and car dealerships wrote half of new car loans last year, according to
Experian.
In mortgages, nonbanks like Quicken Loans Inc. and loanDepot.com
made 59% of home loans through the first nine months of 2019, according
to Inside Mortgage Finance.
Many of those loans wind up being sold to banks, and many of
those entities rely on banks for their own funding. But the last mile to
many consumers and businesses runs through institutions that U.S.
regulators have few ways to control.
The rollout of the $350 billion emergency-loan program for
small businesses, passed as part of the $2 trillion coronavirus
stimulus, has been rocky. Congress added $310 billion to the program, called the Paycheck Protection Program, on Thursday.
The government will pay off the loans for borrowers that use
most of the money to keep employees on the payroll, making them fairly
safe for the banks that extend them.
But banks have been concerned about lending too much,
too fast, or to people who are too risky. They worry about
foot-faulting the intake forms, violating arcane money-laundering rules,
or having loans go bad at higher-than-expected rates—all of which could
land them in trouble with regulators, according to bank executives and
experts.
“Banks are not just opening up the fire hose full blast,” said
Darrell Duffie, a finance professor at Stanford University. “The Fed’s
money is getting out there, but it seeps through the system more
slowly.” Write to Julia-Ambra Verlaine at Julia.Verlaine@wsj.com and Liz Hoffman at liz.hoffman@wsj.com
A passenger wears a protective mask at the Wall Street subway station in New York, on Monday, March 30, 2020. Michael Nagle | Bloomberg via Getty Images
U.S.
stock futures were up in early morning trade Thursday as investors took
a breather after the turbulence of the prior three regular sessions. Dow Jones Industrial Average futures were up 105 points, implying an opening gain of about 100 points. S&P 500 and Nasdaq futures also pointed to a positive Thursday open for the two indexes.
The
overnight moves followed a bounce in U.S. equities during normal
trading hours on Wednesday that helped pare the S&P 500′s 4.8% slide
over Monday and Tuesday.
The Dow Jones Industrial Average rose 456.94 points, or 1.99%, to 23,475.82 during Wednesday’s session. The S&P 500 gained 2.29% to 2,799.31 while the Nasdaq Composite closed 2.8% higher at 8,495.38.
Violent
fluctuations in the price of oil have kept markets on edge this week as
a slide in demand the result of the coronavirus and persistent
oversupply keep pressure on crude.
Though West Texas Intermediate crude
is down more than 70% from highs north of $60 per barrel earlier this
year, its bounce on Wednesday pacified investors who worried that the
futures contracts could fall back into negative territory like they did
on Monday.
The contract for June delivery settled up 19% at $13.78
per barrel on Wednesday after President Donald Trump tweeted that he’d
“instructed the United States Navy to shoot down and destroy any and all
Iranian gunboats if they harass our ships at sea.”
WTI contract for May delivery plunged below zero to trade in negative territory on the first day of the week for the first time ever. A day later, the more actively traded June contract fell 43.37% to settle at $11.57. Brent and WTI crude futures were last seen trading up 8% and 3.7%, respectively.
U.S. traders will on Thursday digest the Labor Department’s latest report on jobless claims.
Another 4.3 million workers are expected to have filed
for benefits last week, which would bring the total number seeking
benefits to over 26 million since states started shutting down in the
second half of March in an effort to slow the virus.
The number of cumulative claims rose to 22.025 million over four weeks prior, erasing nearly all of the 22.442 million jobs recovered since the Great Recession. Domino’s Pizza, Eli Lilly and Southwest Airlines will all report earnings on Thursday. Click here for the latest news on the coronavirus.
U.S. stock futures pointed to gains at the open on Wednesday,
following recent weakness in markets aggravated by oil’s massive
decline.
At around 4:10 a.m., Dow futures rose 220 points,
indicating a gain of about 242 points at the open. Futures for the
S&P 500 and Nasdaq-100 also pointed to modest opening gains for the
two indexes on Wednesday.
The West Texas Intermediate contract for June, however, remained in negative territory as it fell around 1% to $11.46 per barrel.
Helping sentiment, Senate Republicans and Democrats passed on Tuesday evening
a $484 billion coronavirus relief package for small businesses,
hospitals and testing. The House could approve the bill as early as
Thursday.
On Tuesday, the Dow Jones Industrial Average
lost about 630 points, bringing its weekly decline to more than 1,000
points. The 30-stock index was dragged down by Merck & Co., which
lost 5.5%, and Boeing, which fell more than 5%.
The S&P 500
also experienced sharp declines, falling more than 3%. The tech heavy
Nasdaq Composite fell about 3.5%, its worst daily performance since
April 1.
The market’s sell-off this week came beside massive
losses in the oil market due to the evaporation of demand. Oil prices
are tanking and spreading to more futures contracts, worrying investors
about the deep economic damage being done by the coronavirus shutdowns.
“This
week investors are realizing that even though the crisis could soon get
better, the negative impacts of having an economy which is essentially
shut down are magnifying at an alarming rate. With no demand even for a
couple months, energy prices go negative as excess oil supplies
balloon,” Jim Paulsen, chief investment strategist at the Leuthold Group
told CNBC.
The June contract for West Texas
Intermediate, which is the more actively traded contract and therefore a
better indication of how Wall Street views the price of oil, settled down 43.4% at $11.57 per barrel. On Monday, crude futures for May fell below zero for the first time in history.
Investors
also digested another batch of corporate earnings showing the economic
fallout of the virus on Tuesday. Shares of IBM fell 3% after reporting a
decline in revenue. Coca-Cola fell 2.5% as the beverage company said global volumes plunged 25% due to the coronavirus pandemic.
Netflix and Chipotle both rose in extended trading on Tuesday following their quarterly earnings report. Netflix reported global
streaming net additions came in a 15.8 million, far higher than the 8.2
million expected. Netflix, which has rallied nearly 35% this year, is
benefiting from the stay-at-home trend. Chipotle saw digital sales surge more than 80% as the revved up online orders during the coronavirus shutdown.
Before the bell on Wednesday, Delta Air Lines, AT&T and Biogen will report earnings.
West Texas Intermediate crude futures for May delivery reversed gains to trade in negative territory again on Tuesday, one day after plunging below zero for the first time in history. The contract expires today, which means that thin trading volume has contributed to the wild price action.
The
June contract for WTI, which is more actively traded, slipped more than
18% during morning trade, falling to $16.73 a barrel. It had dipped
below $15 earlier in the session, before paring some of those losses.
The contract for July delivery fell roughly 10% to $23.68.
The May
contract last traded at negative $6.25 per barrel, which means
producers would effectively pay traders to take the oil off their hands.
On Monday it fell below zero for the first time in history. However, as
contracts approach expiration, trading volume is typically thin, so
longer-term contracts can be more indicative of how Wall Street views
the price of oil.
Meanwhile, international benchmark Brent crude traded
15.5% lower at $21.60 per barrel. Earlier in the session Brent traded
as low as $18.10, its lowest level since Dec. 2001.
“Oil futures
continue to defy gravity,” Louise Dickson, Rystad Energy’s oil markets
analyst, told CNBC in an email. “This moment is of course historical and
could not better illustrate the price-utopia that the market has been
in since March, when the full scale of the oversupply problem started to
become evident but the market remained oblivious,” she added.
The
front part of the oil futures ‘curve,’ which is the May contract that
expires on Tuesday, was hit the hardest since it applies to fuel that’s
set to be delivered while most of the country remains on lockdown thanks
to the coronavirus. The only buyers of oil futures for that contract
are entities that want to physically take the delivery like a refinery
or an airline. But demand has dropped and storage tanks are filled, so
they don’t need it.
And as storage continues to fill, some are
warning that prices could trade at extremely depressed levels for the
foreseeable future.
“We expect extremely weak fundamentals to
persist for at least the next month,” Deutsche Bank analyst Michael
Hsueh wrote in a note to clients Monday. “Continued pressure on
infrastructure may result in negative pricing at some point again before
the end of May, on the current trajectory,” he added.
The
coronavirus pandemic has led to unprecedented demand loss. The
International Energy Agency warned in its closely-watched monthly oil
report that demand in April could be 29 million barrels per day lower
than a year ago, hitting a level last seen in 1995. And with places to
store the crude quickly filling, some argue that prices could stay lower
for longer.
“Even as OPEC++ oil production cuts are set to kick
in May 1, and supply and inventories should tighten significantly in
2H′20, the next 4-6 weeks are seeing severe storage distress, likely to
drive wild price realizations and unusual disconnects, including
supercontango and negative prices,” Citi analysts led by Eric Lee wrote
in a note to clients Monday.
The spread between the May and June
contracts — known as the front month and second month — is now the
widest in history, which Bernadette Johnson, vice president of strategic
analytics at Enverus, described as “insane.”
“That’s a very
strong signal that there are bottlenecks in the physical market and
people are having a hard time placing barrels,” she said. - CNBC’s Michael Bloom contributed reporting.
Stock futures pointed to big losses for a second day on Tuesday as oil prices continued their unprecedented wipeout.
Futures
on the Dow Jones Industrial Average dropped more than 450 points and
indicated a loss at the open of more than 500 points. S&P 500
futures lost 1.5%. Nasdaq futures also pointed to a lower open.
Traders
were focused on the strange happenings with oil futures once again,
which raised concern about deep losses for the energy industry hitting
the U.S. economy even further. On Monday, the May contract for oil
futures expiring Tuesday fell to zero and then went to an actual
negative price, meaning producers would pay for someone to take the oil
off their hands. The bizarre move has to do with the fact that because
of the coroanvirus shutdowns, big buyers of oil like refineries don't
need any more oil because their tanks are nearly filled.
That May contract remained deep in negative price territory on Tuesday.
More
concerning to traders on Tuesday was the selling now occurring in later
month contracts for oil futures. The more actively traded June oil
contract was down nearly 20% to $16.44 Tuesday morning. That contract expires on May 19.
The United States Oil Fund, an exchange-traded security for the retail investors which buys oil futures, tanked 19% to just $3.02 in premarket trading.
Major oil stocks like Exxon Mobil were hit again in premarket trading. Exxon was down 4%.
Not helping sentiment were shares of IBM, which slipped 3.7% in premarket trading after the company reported a 3.4% decline in revenue in the first quarter from a year ago amid the spread of coronavirus. Coca-Cola, Netflix, and Chipotle are on deck to report earnings on Tuesday.
Stocks
dropped on Monday to start another likely volatile week, with the Dow
falling nearly 600 points, as an unprecedented plunge in oil prices
weighed on investor sentiment.
Late Monday, President Donald
Trump said he would sign an executive order to temporarily suspend
immigration to the United States to protect jobs "in light of the
attack from the Invisible Enemy." Millions of Americans have filed for unemployment benefits as the coronavirus pandemic shuts down economic activity in much of the country.
Trump's tweet did not provide specifics on what the order would entail.
Earlier Monday, the Senate failed to reach a deal on
the next package to rescue an economy and health care system ravaged by
the global pandemic. However, a vote is set up as soon as Tuesday
afternoon to replenish a key small business aid program.
Investors
continued to monitor the coronavirus pandemic and the country's plan to
reopen the economy. Signs have emerged that New York is past the worst
of its outbreak. Georgia on Monday rolled out aggressive plans to reopen the state's economy, calling for many businesses to reopen their doors as early as Friday.
Stocks
enjoyed their first back-to-back weekly gains since early February as
investors grew more optimistic that the pandemic is easing off. The
S&P 500 is now about 17% from its record high on February 19,
cutting about half of its losses during the coronavirus sell-off.
"Market
volatility remains intense, as subtle changes in the tone of the news
drives dramatic shifts in investor sentiment," said Mark Hackett,
Nationwide's chief of investment research. "Markets rallied sharply last
week on hope that the worst of the outbreak is behind us. This optimism
is likely to face headwinds, as the reopening of the economy is heading
for an intense debate."
A
man wears a protective mask as he walks on Wall Street during the
coronavirus outbreak in New York City, New York, U.S., March 13, 2020. Lucas Jackson | Reuters
U.S. stock futures traded lower early Monday morning as investors weighed the latest coronavirus news along with a sharp decline in U.S. crude prices. Dow Jones Industrial Average futures fell 137 points, pointing to a Monday opening drop of around 107 points. S&P 500 and Nasdaq 100 futures also pointed to a lower Monday open for the two indexes.
Stock futures followed the decline of U.S. oil prices. The May contract for West Texas Intermediate plunged about 19% to $14.79 per barrel on weak demand outlook and storage capacity issues. WTI’s June contract slid over 6% to $23.43 per barrel.
The
market was coming off its first back-to-back weekly gains in more than
two months. Stocks got a jolt after a report last week said patients
with severe virus symptoms were quickly recovering after using
remdesivir, a Gilead Sciences drug. The Dow, S&P 500 and Nasdaq all
rose more than 2% last week.
Last week’s gains also put the S&P 500 and Dow more than 30% above their intraday lows set on March 23.
New York Gov. Andrew Cuomo said Sunday the state is “past the high point”
of new cases, noting the infection rate has fallen along with
coronavirus-related hospitalizations. Cuomo added New York will roll out
antibody testing this week. In New Jersey, Gov. Phil Murphy said Saturday: “We’re flattening the curve.”
In Washington, Treasury Secretary Steven Mnuchin said the administration and Congress were close to striking a deal on a second round of loans for small businesses. A $349 billion rescue loan program ran out of money on Thursday.
“The
equity markets and bond markets in the US are telling me that my
relatively optimistic outlook for the global economy is also what the
markets are starting to price in,” Stephen Jen, co-founder of SLJ Macro
Partners, wrote in a note. “There is now light at end of the tunnel.”
“While
nobody should be under the illusion that the virus will be eradicated
soon, it is important to the equity markets that we have gone through
most of the known ‘rolling apexes,’ through mitigation measures,” Jen
said.
But while the market may be pricing in an improvement in the
virus outbreak, recent economic data has been dismal. Over the past
month, 22 million jobs have been lost, weekly unemployment claims numbers from the Labor Department showed.
The number of coronavirus related deaths have also risen to more than 165,000 globally, according to Johns Hopkins University. In the U.S., the death toll has risen to over 41,000.
Futures contracts tied to the major U.S. stock indexes recovered
earlier losses and pointed to opening gains ahead of key jobless claims
data. In early Thursday morning trading, Dow Jones Industrial Average futures rose 227 points, implying an opening gain of about 228 points. S&P 500 and Nasdaq futures also pointed to higher opens Thursday.
Earlier, Dow futures had fallen more than 100 points.
The
overnight moves followed a slump during the regular trading session on
Wednesday as gloomy economic data and anemic bank earnings fueled
concerns over the coronavirus’s impact on the U.S. economy.
The Dow Jones Industrial Average dropped 445.41 points, or 1.9%, to 23,504.35 during Wednesday’s session. The S&P 500 slid 2.2% to 2,783.36 while the Nasdaq Composite closed 1.4% lower at 8,393.18.
Central to Thursday’s session will be the Labor Department’s report on last week’s initial jobless claims, which economists polled by Dow Jones expect to total 5 million.
The
jobless figures have proved a key retrospective gauge for those
tracking the ailing health of the U.S. economy, with last week’s 6.61
initial claims. Last week’s print brought total claims over the three weeks prior to more than 16 million, implying that about 10% of the U.S. workforce had filed for unemployment benefits over that time.
Traders
cited a plunge in March retail sales as a principal weight on equities
on Wednesday. The worse-than-expected data showed retail sales during
the month of March plunged a record 8.7%, the largest one-month decline since the department began tracking the series in 1992.
Manufacturing in the New York area also slumped by its biggest margin ever to a historic low, surpassing the levels seen in the throes of the Great Recession.
Energy stocks remain under pressure after U.S. oil fell to its lowest level in more than 18 years on
Wednesday. The slide in West Texas Intermediate crude futures followed
reports of the largest inventory build on record as well as a bearish
report from the International Energy Agency. WTI slipped 1.19% to settle
at $19.87, a price not seen since Feb. 7, 2002.
The Dow and
S&P 500 remain more than 20% and 17.9% below their respective
all-time highs set in February as marketplace jitters over the spread of the novel coronavirus and an uncertain vaccine timeline foster volatile trading on Wall Street.
Despite
the recent dismal economic data, some market strategists pointed to a
slowdown in the daily number of new U.S. coronavirus cases and the
flattening in the net number of hospitalizations in New York state as
evidence that markets may trend upward in the coming weeks.
JPMorgan’s
Marko Kolanovic said Wednesday evening that such improvements in
health-care data could encourage state governments to take “baby steps”
to reopen certain economies as soon as next week.
Kolanovic, the global head of quantitative and derivatives strategy at JPMorgan, reiterated his forecast that the U.S. equity market could reach new all-time highs as soon as the first half of 2021 if the economy is set to recover later that year.
Better
health-care figures mean “we think it’s gonna be possible to reopen it
sooner. We think within a week from now, you will start seeing some
limited moves,” he told CNBC’s “Fast Money.”
“It’s going to be
limited: I’m talking baby steps,” he added. “But that tells us that by
the summertime, we may more substantially recover. And sometime next
year — maybe the second half of next year — the economy reaches the high
watermark. Which means that the market could reach a high watermark in
the first half of next year.”
Stock futures ticked lower Wednesday evening as President Donald Trump again advocated for a gradual reopening of the U.S. economy during a press conference.
The
president said that there are also public health costs the result of
keeping state economies closed. Lost income and benefit coverage, the
president said, can also lead to significant and negative health
outcomes.
“There has to be a balance. You know, there’s also death
involved in keeping [the economy] closed,” Trump said from the White
House. “We have to get back to work.”
“With all of that being
said, we’re going to start with states and with governors that have done
a great job. And they’re going to open it up as they see fit,” he said.
