Equity markets finished down sharply for the week amid ongoing Coronavirus concerns as the S&P fell 14.95% on the week, its largest weekly loss since October 2009. Investors started the week off on the wrong foot as Monday’s session was the S&P 500’s third worst session ever, falling 11.98% only behind the 1987 crash (20.47%) and Black Monday (12.94%). Markets were led lower by Real Estate, Energy, Financials, Industrials and Utilities as all 11 sectors finished down on the week. Treasuries continued to see large volatile swings amid the Fed’s monetary policy actions. However, investors continued to see the curve steepening. The 3M T-bill yield finished slightly negative on the week, while the 10Y yield closed below 1% after crossing above that threshold earlier on Wednesday and Thursday’s sessions. Despite falling 2.1% over the five days, gold outperformed broader markets, closing lower for a second straight week as USD strength and investors had to sell what has worked to offset other losses weighed on the commodity. The Dollar strengthened significantly across major crosses on the back of surging international demand and a flight to safety as the DXY index finished up over 4% on the week.
As COVID-19 continues to spread, one of the major causes of volatile markets continues to be the ambiguity surrounding its economic impact. Whether that be overall global GDP, U.S. GDP, or corporate earnings, analysts, economists and investors alike continue to struggle with their discount rates and how large of a contraction we will ultimately see. Over the past week we have seen a number of large financial institutions cut their GDP growth estimates to reflect a larger than originally expected drawdown in Q2. Goldman Sachs sees a Q2 drop of 24%, JP Morgan says they expect a 14% contraction, First Trust anticipates a 10% decline and Bank of America noted a 12% drop. Despite the less than promising outlook, most would agree that there is a high level of uncertainty surrounding these estimates as the scope of policy responses, infection trends, and length of business closures will all affect the final reading. Additionally, almost all experts agree that the second half of 2020 should be extremely robust as supply chains and businesses are restored back to normal, ultimately resulting in a slight contraction year-over-year.
The Energy sector was once again one of the primary losers as Oil was whipsawed. West Texas Intermediate crude hit its lowest levels since 2002 on Wednesday, as it closed down 28.7% on the week and is now off 63% to start the year. The ongoing broader weakness comes as Saudi Arabia and Russia continue to engage in a price war as demand continues to falter from containment of the Coronavirus. To complicate matters further, Russian Energy Minister Alexander Novak said he does not see a reason to return to the negotiating table as Saudi continues to blame the country for walking away from the OPEC+ output pact. Tensions between the two countries remain high with Saudi Arabia announcing they will continue to pump at elevated levels of around 12.3mbpd in the coming months despite their previous all-time high being just shy of 11.1mbpd.
Source: Bloomberg With a second half rebound being portrayed as more likely than not, many continue to expect earnings expansion will continue into 2021, creating a potential buying opportunity for those with longer investment horizons. To go along with this theme, activist investor Bill Ackman said on Monday he has made a “recovery bet” on the economy by investing $2.5B in equities and has taken all hedges off through shorts in both the equity and credit markets.
U.S. Equities extended declines to start the week on Monday, led by Energy, Financials, Real Estate, Utilities, Health Care, Materials, Industrials and Consumer Staples, all of which underperformed the broader market. With continued selling pressure, equity indexes fell to their lowest levels since November of 2016, as the S&P and Dow have now tumbled 30.75% and 31.61% to start the year amid ongoing global economic uncertainty. Stocks failed to rally after the Fed went above and beyond their normal duties, announcing before markets opened that they would buy unlimited amounts of Treasury bonds and mortgage-back securities to keep borrowing costs near all-time lows. After already announcing drastic measures taken earlier this month, the central bank said it would now lend against student loans, credit card loans, and would buy bonds of larger employees. This move, as well as others, is anticipated to write a new chapter for the central bank as it pushes them into unchartered territory by providing support directly to U.S. employers, municipalities, and households which has always been left to those who set fiscal policy.
Late Tuesday evening, Republicans and Democrats reached a historic deal coming to a conclusion on a fiscal stimulus package that would support American corporations and citizens. After falling short twice, a $2T stimulus bill was agreed upon in the Senate, making it the largest rescue package in American history.
The deal’s key provisions include:
- Payments of $1,200 directly to middle class and lower income levels
- $600/week payments for any worker laid off during the pandemic
- More than $150B for the healthcare system
- Authorization of the Federal Reserve to send $60B to schools and universities and would relieve student debt
- A national requirement for states to allow early voting and voting by mail in cases of a national emergency
While we have all continued to see negative economic headlines such as:
- Goldman Sachs estimating a 24% plunge in U.S. real GDP in the second quarter
- Federal Reserve Bank of St. Louis President, James Bullard, said he is forecasting the U.S. unemployment rate to hit 30% in the coming months
- NY confirmed infections have soared past 15,000
- The International Olympic Committee is likely postponing the 2020 Summer Games to 2021, according to USA Today
We also want to again focus on the positive headlines that do not seem to receive nearly as much attention. These headlines help tell the other side of the story; ones that investors are not seeing or hearing nearly as often. While the year has gotten off to an unexpected and turbulent start, one thing remains true—Americans remain resilient, and, just as we have done in the past, the country will overcome this crisis. There will be a vaccine created, and this too will become a moment in history where heroes are made and stories are shared. New innovative ideas will emerge helping to propel the American economy forward, providing us with even greater technology and efficiencies. While the volatile selloff has not discriminated, we have continued to see green shoots emerging which include:
- Breadth continuing to hit some of the most oversold levels ever
- Volatility indices hitting their highest levels ever
- Corporate insiders buying at the fastest pace since October 2008
- Put/Call ratios continuing to remain elevated, illustrating investor sentiment
- Valuations becoming extremely attractive
- Volume on levered ETFs spiking as the selloff has accelerated
- Deleveraging in mutual funds
- Margin deficits being erased/covered
- New deaths in Italy slowed for a second straight day
- Milan region experiencing lowering trend for new Coronavirus cases
- Human drug trials started in Seattle last week with a potential vaccine being approved as early as 2020
- Due to imbalances of portfolios (equities underperforming, fixed income outperforming), minimum $850B in stocks will have to be bought in order to keep multi-asset exposure evenly balanced
THIS WEEK INTERNATIONAL:
Europe: The Euro STOXX Index ended the week down 1.8%. Defensive sectors such as telecommunication, utilities, consumer staples and healthcare outperformed the index, while financials, automotive and energy companies plummeted.
EU governments have endorsed the suspension of the EU budget rule by using the general escape clause of the Union’s fiscal framework. EU commission’s press release states that “the use of the clause will ensure the needed flexibility to take all necessary measures for supporting our health and civil protection systems and to protect our economies, including through further discretionary stimulus and coordinated action, designed, as appropriate, to be timely, temporary and targeted, by Member States.”
Draft law for the German rescue fund suggests that Germany will deploy about €600 billion to bring immediate financial relief to many distressed industries as the Coronavirus amplified already weak fundamentals in several industries across the country.
Last week, Italy became the deadliest center of the COVID-19 pandemic. In fact, the Italian hospital system has been overwhelmed with the surge in hospitalization requests from contaminated patients. The country is receiving help from other countries, including inbound doctors from China and face masks from Czech Republic. Germany is reportedly in favor of a loan plan for Italy from the Euro area’s bailout fund.
APAC: The Shanghai Composite Index closed the week down 4.91%, dragged by real estate that plunged 6.5%, as well as communication and utilities that combined for a 10.8% decline. China hit an important milestone last week by announcing no new local infection for 3 consecutive days. Subsequently, Jiangsu education authorities announced that the province will start reopening schools on March 30th. However, Beijing Municipal Education Commission said that it is still too early to consider.
According the People’s Bank of China Deputy governor, Chen Yulu, “Economic indicators will likely show significant improvement in the second quarter and the Chinese economy will return to potential output level rather swiftly”. He added that “based on payments, deposits and loan data since March, China’s real economy is improving somewhat due to earlier targeted monetary policies”.
In Japan, the Nikkei 225 dropped 5.04% last week; financials, industrials and auto manufacturers led the sell-off. To kick off the week, the Bank of Japan decided to ramp up its risky asset purchasing program by announcing more purchases of ETFs and REITs. Additionally, a new operation to support corporate loans was announced to provide liquidity to the market.
Meanwhile, the Japanese government is reportedly preparing a stimulus package of more than $270 billion to support industries impacted by the Coronavirus outbreak. The Yen/U.S. Dollar pair ended the week higher amid investors’ hunt for a safe haven in this volatile environment.
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