“The Bear Market Rally Is Over”: Futures Slide As Dollar Surges, Lifting Bonds

S&P futures slumped lower after Novartis CEO said a coronavirus vaccine may not be available until 2H 2021 and European stocks declined on Thursday as investors worried that the current economic downturn maybe be here for longer than initially presumed after Fed Chair Jerome Powell warned of unprecedented risks from the coronavirus, while waiting the latest American jobless data after another steep sell-off on Wall Street.

“Views are beginning to firm that the 2020 bear-market rally may have run its course,” said Perpetual Investment Management head of investment strategy Matthew Sherwood.

After two sessions of sharp declines, the three main US stock indexes slumped for a third day following a report that President Donald Trump is “looking at” Chinese companies that trade on American exchanges, and are now headed for their worst week since mid-March, as hopes of a quick economic recovery were dashed following sobering comments from Federal Reserve Chairman Jerome Powell and leading U.S. infectious disease expert Anthony Fauci.

Among early movers, Cisco Systems Inc rose 2.5% premarket after beating quarterly revenue and profit estimates, as lockdowns globally boosted demand for its remote-work tools and networking equipment.  Norwegian Cruise Line Holdings, the S&P’s worst performer since the sell-off began in February, rose in the premarket after saying there continues to be demand for cruise vacations, particularly beginning in the fourth quarter. The earnings season is in its final stretch with 448 S&P 500 companies having reported so far. On average, first-quarter earnings are expected to fall 12.2%, according to Refinitiv data.

The Stoxx Europe 600 Index fell, with insurance and auto shares among the biggest laggards. The Stoxx Europe 600 Basic Resources Index fell as much as 2.1%, as tensions between the U.S. and China flare up, while Fed warns about economic risk and Goldman Sachs sees iron ore falling. The big  four diversified miners all fell: Rio Tinto -1.2%, BHP -1.2%, Glencore -3.2%, Anglo American -3.5%.

Earlier in the session, Asian stocks fell, led by energy and finance, with Japan and Australia suffering some of the steepest falls after rising in the last session. The Topix declined 1.9%, with Sawafuji Elec and eRex falling the most. The Shanghai Composite Index retreated 1%, with Chahua Modern Housewares and Sailun Group posting the biggest slides

Emerging-market stocks and currencies weakened after Powell warned of unprecedented risks to the economy if policy makers fail to address the fallout from the coronavirus. MSCI’s measure of developing-nation equities resumed losses after a day of stability, while almost all currencies weakened against the dollar. Mexico’s central bank was forecast to cut its key rate by 50bps to the lowest since 2016 later in the day. Investors are assessing whether financial markets are adequately pricing the economic reality of a pandemic that’s shut down factories and prompted a surge in unemployment across the globe. The extra yield they demand to hold developing-nation debt instead of Treasuries climbed. “The chairman hit a nerve,” Commerzbank strategists including Frankfurt-based Ulrich Leuchtmann said in a note. “His speech provided a reason to allow already existing fears to take their course.”

The rally in global equities from March lows – which was driven by hopes of a pick up in business activity as several U.S. states eased lockdowns put in place to curb the spread of the coronavirus – is showing further signs of stalling this week amid comments from some big-name investors such as Druckenmiller and Tepper that stocks have run up too far amid the economic uncertainty. Fed Chairman Jerome Powell suggested that additional fiscal support could be needed to combat the effects of the pandemic. In that vein, Republicans rejected a $3 trillion stimulus measure drafted by House Democrats, but the draft plan has the seeds for an eventual, smaller compromise.

In FX, the biggest overnight mover was the dollar, which broke out of a descending triangle, jumping to the highest level since April 26. The Bloomberg Dollar Spot Index strengthened for a fourth consecutive session, rising alongside the yen, as souring market sentiment kept haven currencies in demand. The greenback’s advance continued against most of its G-10 peers amid risk-off moves in Asia and Europe after Federal Reserve Chair Jerome Powell warned of economic challenges from the coronavirus pandemic, and took negative rates off the table. “The downbeat message from Powell has contributed to more risk off trading conditions overnight which is also helping to support the U.S. dollar,” said Lee Hardman, currency analyst at MUFG.

Yesterday we explained why the next dollar surge may be only just starting as an avalanche of treasury issuance drains roughly $1 trillion in market liquidity.

The yen and Canadian dollar led gains among Group-of-10 currencies, while the euro hovered after slipping below 1.08 per dollar. The Swedish krona led losses and the Australian dollar weakened a fourth day against the greenback after the nation’s employment plunged by a record in April. The pound fell to a one-month low on weak risk sentiment and speculation over more central bank easing.

In rates, treasuries are bull-flattening for a third straight session, with long-end yields dropping back under 1.30% following solid demand for Wednesday’s 30-year bond auction. Treasuries also benefit from weakness in stocks after Novartis CEO said a coronavirus vaccine may not be available until 2H 2021. Treasury yields lower by more than 6bp at long end with 2s10s and 5s30s both flatter by more than 3bp; 10-year yield drops 4bps to 0.615%. European bonds mostly gained though underperformed Treasuries, amid fears of a lasting downturn. German Bunds are cheaper by 3bp vs. Treasuries, gilts wider by almost 4bp.

In commodities, WTI and Brent front-month futures remain on the front foot after a somewhat choppy APAC trading session, with fresh modest impetus across the complex derived from the latest IEA oil market report – which proved more optimistic vs. its OPEC and EIA counterparts. The agency cut their 2020 demand growth forecast by 690k BPD (vs OPEC’s 2.23mln BPD and EIA’s 2.9mln BPD) while stating that the decline in H1 oil demand is not as steep as originally feared – with an improvement in the balance seen amid deep production curbs and reopening economies, however, IEA Chief Birol stated that he does not believe the recently announced cuts (i.e Saudi, UAE, and Kuwaiti over-compliance) are enough to balance the markets.

To the day ahead now, the data highlight today will likely be the weekly US initial jobless claims. Meanwhile, there’s also be the final German CPI reading for April, Japan’s machine tool orders for April, the Italian trade balance for March and Canadian manufacturing sales for March. From central banks, Bank of England Governor Bailey will be speaking on a webinar, and we’ll also hear from the Fed’s Kashkari, Bostic and Kaplan, along with the ECB’s Vice President de Guindos. Finally, the ECB will be publishing their Economic Bulletin, while the Mexican central bank will be deciding on rates.

Market Snapshot

• S&P 500 futures little changed at 2,813.50
• STOXX Europe 600 down 1.7% to 328.36
• MXAP down 1.4% to 144.70
• MXAPJ down 1.3% to 465.75
• Nikkei down 1.7% to 19,914.78
• Topix down 1.9% to 1,446.55
• Hang Seng Index down 1.5% to 23,829.74
• Shanghai Composite down 1% to 2,870.34
• Sensex down 2.5% to 31,205.67
• Australia S&P/ASX 200 down 1.7% to 5,328.72
• Kospi down 0.8% to 1,924.96
• German 10Y yield fell 1.4 bps to -0.544%
• Euro down 0.03% to $1.0815
• Italian 10Y yield fell 8.7 bps to 1.628%
• Spanish 10Y yield fell 1.7 bps to 0.718%
• Brent futures up 2.6% to $29.96/bbl
• Gold spot little changed at $1,716.54
• U.S. Dollar Index little changed at 100.23

Top Overnight News

• Germany recorded the highest number of new coronavirus cases in five days as the government gradually lifts restrictions on daily life
• The coronavirus is threatening to turn the long- lasting fault line cleaving Europe between its richer north and poorer south into an economic chasm putting its currency at risk
• The Bundesbank is talking to German authorities amid a stand-off over a controversial court ruling that questions the European Central Bank’s bond-buying program, ECB Executive Board member Fabio Panetta said
• A change in the way Bank of Japan Governor Haruhiko Kurodatalks about the possibility of cutting the bank’s negative interest rate may suggest the option is now further down on the list of his favored tools
• Activity is continuing to pick up in funding markets on both sides of the Atlantic, though in Europe pricing remains a sticking point as rates have advanced in high-grade commercial paper
• The outlook for global oil markets has “improved somewhat,” with demand a little stronger than expected and supply reined in by a brutal price crash, the International Energy Agency said
• Roche Holding AG’s coronavirus antibody test was cleared by a U.K. health authority, a boost to Prime Minister Boris Johnson as he seeks ways to gradually relax lockdown restrictions
• While the rest of the world has sheltered at home, Swedes have continued eating in restaurants, shopping, and going to work. The Swedish model trades more disease for less economic damage

Asian stocks traded negatively with global risk appetite dampened by ongoing US-China tensions and ongoing questions about reopening efforts. ASX 200 (-1.7%) was led lower by energy and financials after similar underperformance of the sectors stateside and with participants digesting alarming employment data that showed a near-600k decline in jobs. Nikkei 225 (-1.7%) remained under the influence of a firmer currency and with earnings releases also providing a catalyst for price action including Sony. Elsewhere, Hang Seng (-1.5%) and Shanghai Comp. (-1.0%) were both downbeat as US-China tensions turned up a notch after source reports noted China will soon impose countermeasures on those seeking COVID-19 damages from China and after US President Trump extended the executive order protecting the US supply chain from Huawei and ZTE for an additional year, while the PBoC also disappointed expectations for an MLF announcement and associated 20bps rate cut which both failed to materialize. Finally, 10yr JGBs were initially higher as prices benefitted from the risk aversion and gains in T-notes, but with upside later reversed after a mixed 30yr auction which resulted in lower accepted prices.

Top Asian News

• New Zealand Projects Surging Debt on Historic Fiscal Stimulus
• Russia Outbreak Spreads to Neighbor With Jump in Mongolian Cases
• Australian Equities Drop as Employment Slumps by Most on Record
• Kuroda Hints Cutting Rates May Now Rank Lower in BOJ Toolkit

Europe has taken the downbeat lead from the APAC session (Euro Stoxx 50 -1.9%) as rising tensions between US and China continue to weigh on sentiment, whilst Fed Chair Powell’s heavy downplaying of NIRP does not aid the equity complex. Major bouses see broad-based losses with no real stand-out across major indices. Sectors reside firmly in the red across the board with steeper losses seen in cyclicals (ex-telecoms). The sector breakdown sees Auto and Parts alongside Travel & Leisure as the laggards. Telecommunications reside at the top of the list – losses in the sector are cushioned by earrings from Deutsche Telekom (+0.6%) who topped Adj. EBITDA estimates, confirmed guidance, and said the outbreak is having a limited impact on Co’s financials. Sticking with German earnings, Merck (+1.1%) remains underpinned after topping estimates on all Q1 metrics, whilst guidance printed in-line with analyst estimates. Other earnings-related DAX constituents include: Wirecard (-0.7%), RWE (-0.7%). Elsewhere, Fiat Chrysler (-1.7%) and PSA (-1.1%) are pressured after simultaneously pulling FY20 dividend; the dividend was a component of their merger. Finally, Roche (+0.2%) remains afloat after its COVID-19 antibody test had been approved by Public Health England. Co. is in talks with the NHS and the UK government regarding a phased roll-out of tests as soon as possible. UK government is in negotiations to purchase millions of kits.

Top European News

• Nosediving German Economy Isn’t Just Suffering Amid Virus
• BMW Faces Shareholder Scrutiny Over $1.8 Billion Dividend
• U.K. Virus Fight Boosted by Clearance of Roche Antibody Test
• U.K.’s Housing Revival Plan Seen Unlocking $100 Billion of Deals

In FX, we start with the AUD/NZD: Not quite role reversal, but the pecking order has changed down under to an extent following a near 600k plunge in Aussie payrolls, a marked rise in the participation rate and predictions for more pronounced jobs market pain to come. Aud/Usd has duly pulled back further from 0.6500+ peaks to pivot 0.6450 and Aud/Nzd is losing momentum below 1.0800 even though the Kiwi remains under pressure post-RBNZ on heightened NIRP expectations and the NZ Government boosting its COVID-19 recovery fund to the tune of 20% of GDP. Indeed, Nzd/Usd has now lost grip of the 0.6000 handle ahead of April’s manufacturing PMI.

• JPY – The Yen continues to buck the overall trend and outperform an otherwise strong Dollar, with the DXY looking more comfortable above 100.000 within a 100.420-140 range, as risk-off positioning intensifies and keeps Usd/Jpy capped on advances through 107.00. No adverse reaction to more dovish rhetoric from BoJ Governor Kuroda balanced with the unflinching belief that Japan will not return to deflation and it is not necessary to ease benchmark rates further even though recession will continue in Q2.
• GBP/SEK/NOK – The Pound continues to fall victim to bearish historical patterns and increasingly negative technical impulses as Cable relinquished another round number at 1.2200 to test deeper support ahead of 1.2150 (circa 1.2166) before finding underlying bids, with perhaps some fundamental weakness emanating from BoE Governor Bailey acknowledging that markets are anticipating more QE. Meanwhile, the aforementioned risk aversion has knocked the Swedish Krona out of its stride and back under 10.6000 vs the Euro, but firm crude prices following a less downbeat IEA monthly report in terms of global demand destruction are helping Eur/Nok in a downward trajectory near 11.0000, albeit off Wednesday’s sub-10.9250 two month lows.
• CAD/CHF/EUR – Buoyant oil is also underpinning the Loonie either side of 1.4100 vs its US counterpart in the run up to the BoC’s FSR, while the Franc is back in a bind or divergent position given Usd/Chf holding above 0.9700 in contrast to Eur/Chf edging back down towards 1.0500, as the single currency straddles 1.0800 against the Greenback after light stops were tripped at the big figure, but not larger ones said to be sitting beneath at 1.0775. Note, Eur/Usd is shrouded in a cluster of big option expiries today spanning 1.0750 to 1.0930 – check out the headline feed at 7.23BST for full details and the other major strikes in play.
• EM – Not even the deteriorating mood amidst heightened COVID-19 2nd wave and US-China relations or rising crude costs can dent the Try’s ardour it seems, as the Lira remains above 7.0000 and drawing traction currently from hopes that the CBRT can arrange swap lines with foreign peers..

In commodities, WTI and Brent front-month futures remain on the front foot after a somewhat choppy APAC trading session, with fresh modest impetus across the complex derived from the latest IEA oil market report – which proved more optimistic vs. its OPEC and EIA counterparts. The agency cut their 2020 demand growth forecast by 690k BPD (vs OPEC’s 2.23mln BPD and EIA’s 2.9mln BPD) while stating that the decline in H1 oil demand is not as steep as originally feared – with an improvement in the balance seen amid deep production curbs and reopening economies, however, IEA Chief Birol stated that he does not believe the recently announced cuts (i.e Saudi, UAE, and Kuwaiti over-compliance) are enough to balance the markets. Elsewhere, Saudi Arabia has reportedly cut oil sales by half to the US & Europe, deeper cuts than for Asia, as output has been reduced, according to sources. Shipments to some US and European buyers will fall by 60-70% vs. normally contracted volumes. This comes in the context of Aramco raising OSPs across the regions, lower sales to Europe and the US could be a function of the lower demand from lockdowns. Aside from that, news-flow has been light for the complex – WTI June resides around session highs north of USD 26/bbl (vs. low 25.18/bbl), whilst Brent July similarly sees itself north of USD 30/bbl (vs. low 28.88/bbl). Elsewhere, spot gold remains relatively flat north of USD 1700/oz and around the middle of today’s tight USD 1712-1719/oz range awaiting fresh macro stimulus or Dollar action. Copper prices meanwhile tracked losses across equities alongside the soured sentiment, and reside in proximity to USD 2.400/lb, having tested support at USD 2.3350/lb earlier in the session.

US Event Calendar

• 8:30am: Initial Jobless Claims, est. 2.5m, prior 3.17m; Continuing Claims, est. 25.1m, prior 22.6m
• 8:30am: Import Price Index MoM, est. -3.2%, prior -2.3%; Import Price Index YoY, est. -7.35%, prior -4.1%
• 8:30am: Export Price Index MoM, est. -2.3%, prior -1.6%; Export Price Index YoY, prior -3.6%
• 9:45am: Bloomberg Consumer Comfort, prior 36.9

DB’s Jim Reid concludes the overnight wrap

Yesterday we published Konzept – DB Research’s magazine. You can see it here. The theme of this edition is “Life after Covid-19” where we look at twenty articles covering how the world will be different going forward. We cover macro and micro themes as well as how the post virus landscape will change your life.

One of the lead features concerns whether this virus will end up being deflationary or inflationary. It’s fair to say that this argument splits DB Research like few others. To give you a feel for the debate we included the opposing views across two conflicting articles in the magazine. On this we have this morning launched a podcast (in our Podzept series) where I moderate a discussion between the lead authors. We have Robin Winkler in the red corner fighting for his deflationary views and Oliver Harvey in the blue corner countering with his inflationary views. You can listen here or you can subscribe to Podzept on Spotify, Apple & Google Podcast and Stitcher – simply search for Podzept.

In our monthly sentiment survey you can vote as to whether you think this crisis will be inflationary or deflationary. The survey has many other questions about your views on how the virus is impacting your life and the world around you. We also include market related questions. This link is here and the results will be published over the next few days.

As markets continue to grapple with what “Life after Covid-19” might look like, it was another weak day yesterday, with global equity markets falling further. We just about managed to cope with a downbeat assessment from Fed Chair Powell but couldn’t after additional evidence that the US/China relationship is souring further.

On the latter President Trump initially tweeted that “dealing with China is a very expensive thing to do. We just made a great Trade Deal, the ink was barely dry, and the World was hit by the Plague from China. 100 Trade Deals wouldn’t make up the difference – and all those innocent lives lost!” This was followed by China Global Times headlines saying that China is “extremely dissatisfied” with the possibility of the US sanctioning or otherwise punishing China over the coronavirus epidemic and would look to retaliate and were “mulling punitive countermeasures on US individuals, entities and state officials like Missouri’s attorney general, who filed lawsuits against China in seeking damages over the coronavirus pandemic.” This was all prior to a Bloomberg report saying that the Federal Retirement Thrift Investment Board in the US, a savings plan for federal employees, would not be allocating roughly $50 billion of its international fund to track an MSCI All Country World Index, capturing China. The move was reportedly backed by the President’s administration and some members of Congress.

Adding to the negative US/China news, the high profile founder of Appaloosa Management, David Tepper, called the US stock market the most overvalued that he had ever seen outside of the tech bubble in 1999, calling some tech valuations “nuts”. These comments mirrored those of fellow seasoned investor Stan Druckenmiler the day before. He called the risk-reward of equities the worst he had seen in his career. Tepper also questioned whether there have been misallocations of capital following the actions of the Fed, but also acknowledged that the stock market may not retest the March bottoms.

In terms of the moves, equity indices fell across the board with the S&P 500 down -1.75% and the NASDAQ also down -1.55%. Even though the market rallied nearly one percent in the last 30 minutes of trading this was still the first time in over 3 weeks that we’ve seen the S&P fall by more than 1% for two days in a row, while the VIX index climbed +2.2pts to its highest level in over a week. European bourses also experienced sustained declines, with the STOXX 600 down -1.94% and the DAX losing -2.56%.

Asian markets have followed in tow this morning with the Nikkei (-0.86%), Hang Seng (-1.11%), Shanghai Comp (-0.47%) and Kospi (-1.00%) all down. Elsewhere futures on the S&P 500 are trading flat while yields on 10yr USTS are down -1.1bps. In other overnight news, Saudi Aramco announced a cut in contractual volumes for June loading to at least eight Asian customers, signaling that the country might be adhering to the announced production cuts. WTI oil prices are up +0.55% as we type.

Fed Chair Powell in his hotly anticipated address yesterday warned that the outlook was “both highly uncertain and subject to significant downside risks.” Though Powell’s conclusions will probably come as no surprise, what was notable from his remarks was how he dwelled for some time on the permanent effects that a recession of such a large magnitude can have, commenting that they “can leave behind lasting damage to the productivity capacity of the economy.” So markets certainly had some pretty negative headlines to ponder. When it came to future policy, he said that “we will continue to use our tools to their fullest until the crisis has passed and the economic recovery is well under way”, and that “additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery.”

The main takeaway however was on negative rates, where Powell said that the FOMC’s views hadn’t changed and that it wasn’t something they were looking at. Following the remarks however, Fed funds futures are pricing negative rates in Jan 2021 on Bloomberg’s WIRP page.

With investors moving out of risk assets into safe havens, sovereign debt rallied yesterday on both sides of the Atlantic, with yields on 10yr Treasuries down by -1.3bps to 0.653%, and those on bunds also falling by -2.5bps. Fed Chair Powell’s comments did not seem to have too much influence on yields given 10yr yields did not move until the risk off tone hit all assets slightly later in the US session. There was a tightening in peripheral spreads in Europe, with those on ten-year Italian (-6.3bps), Spanish (-2.8bps), Portuguese (-5.4bps) and Greek (-3.7bps) debt all moving tighter over bunds. And over in the UK, 2-year gilt yields fell to a record low of -0.03%.

Late last night news came out of Italy that the government has approved a €55bn fiscal stimulus package, which will focus on liquidity for small businesses and individual loans. As much as 15 billion will be set aside for companies to pay workers currently on furlough, with additional emergency funds for the unemployed. There will also be roughly €4bn in tax cuts for Italians as well as a €500 bonus for some to use on holiday spending for some. The Italian stimulus plan came alongside news that BoE Governor Bailey said that additional bond purchases would be coming. He acknowledged that it is “pretty clearly” investors expect more QE and that the central bank has kept the option open to do more. There was also a bit more acknowledgment that the BoE are effectively financing the deficit for now and spreading the costs of the pandemic over time. Previously the BoE have been a bit more hawkish on acknowledging that they are effectively financing the government.

When it comes to the short-term path of the economy, economists will be paying close attention to the initial weekly jobless claims report today from the US covering the week through 9 May. This is the first since last Friday’s April jobs report confirmed that the US now has its highest unemployment rate since the Great Depression, at 14.7%, and unfortunately it’s likely that we haven’t seen the worst of that yet. In terms of today’s claims number, the call from our US economists is for a 2.503m reading, which would mark the 6th week in a row that the number has declined, down from a peak of 6.867m in the week to March 27th. However, even if you benchmark it from the pre-Covid total number of nonfarm payrolls, that implies we’re still seeing well over 1% of the workforce making initial claims in a single week.

The economic data yesterday begun with figures that showed GDP had contracted by -2.0% in Q1 (vs. -2.6% expected), which is the largest quarterly decline for the UK economy since Q4 2008. Unsurprisingly, the real damage was evident once the lockdown had begun in March, with a month-on-month decline of -5.8% (vs. -7.9% expected), in contrast to +0.1% growth in January and a -0.2% contraction in February. Furthermore, that’s the worst monthly contraction on record in monthly data that goes back to 1997.

Wrapping up with yesterday’s other data, and Euro Area industrial production fell by -11.3% in March (vs. -12.5% expected), which was the biggest monthly decline since the formation of the single currency back in 1999. Meanwhile US producer prices fell by -1.3% month-on-month in April (vs. -0.5% expected).

To the day ahead now, and the data highlight today will likely be the weekly US initial jobless claims. Meanwhile, there’ll also be the final German CPI reading for April, Japan’s machine tool orders for April, the Italian trade balance for March and Canadian manufacturing sales for March. From central banks, Bank of England Governor Bailey will be speaking on a webinar, and we’ll also hear from the Fed’s Kashkari, Bostic and Kaplan, along with the ECB’s Vice President de Guindos. Finally, the ECB will be publishing their Economic Bulletin, while the Mexican central bank will be deciding on rates.