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Weeks like this offer an alternative lesson: In this fiendishly complex system it’s never one thing, and it can’t always be explained.
Most will say it was the Federal Reserve, and that’s surely a big part of it. Others will talk of virus curves flattening. Some will mention short-covering. A few will cite real money re-balancing, or maybe oil producers coming to their senses or perhaps simply good old-fashioned dip buying.
Whatever the cause, U.S. stocks are leading a market-wide revival in the face of an unfolding global economic crisis. And it was all encapsulated in one of the longest short weeks investors have ever known. Here again, drawing on coverage from across Bloomberg News, is how it was in real time.
‘New Distortions’
Monday 6 April: Oil falls early, and falls hard. The world’s biggest producers had teased a meeting today to agree a potential deal to cut output, but over the weekend the virtual gathering was pushed back. Brent drops as much as 12%. It’s hard to believe, but even that double-digit slide seems tame compared with recent moves, and the spillover to equities is contained.
The latest data suggests death rates from the coronavirus pandemic could be stabilizing in Italy, Spain, France, Germany and New York. President Donald Trump sees signs the outbreak is leveling off. For investors hammered by bad news for more than a month, it is enough. Futures on the S&P 500 rise as they begin trading in Asia and stay up all day, and the underlying gauge follows suit when the cash market opens in New York.
As well as the stabilizing rate of coronavirus spread, the stabilizing markets themselves are a contributing factor. Most investors dislike volatility, so when calm returns it makes gains more likely. The VIX Index, a market-derived gauge of expected price swings on the benchmark U.S. equity gauge, today falls to the lowest level in a month.
Stimulus from central banks and governments has made all this possible. The Federal Reserve has set both the pace and the standard in this regard, and seems to deliver a new support measure daily. Today it’s a program to help speed funds to small businesses.
That kind of step doesn’t necessarily directly boost the major capital markets, but it certainly reinforces the message that policy makers are alert and proactive. The Fed actions, especially its bond buying, have depressed volatility in Treasuries which has in turn calmed credit and soothed stocks.
“Over the course of the past few weeks, we have seen markets return of some semblance of normalcy,” James McCormick (NYSE:MKC), global head of desk strategy at NatWest Markets, writes in a Monday note. “Although policies put in place to settle markets have created new distortions of their own.”
McCormick notes that all the stimulus has flipped a global dollar shortage to an over supply. Yet this will be another day of greenback strength as everyone continues to stock up on the one asset they can count on.
Meanwhile in Europe, Angela Merkel warns the pandemic is the biggest challenge since the European Union was formed, yet stocks pay no attention and close up 3.7%. The leveling off of virus deaths probably helped, but the $34 billion euros ($37 billion) of cash pumped into the financial system in a week by the region’s central bank probably hasn’t hurt.
The deluge of cash from policy makers worldwide is finally settling some nerves in the riskier reaches of the credit market. Corporate debt has been a big worry, because companies are bearing the brunt of the collapse in demand caused by the lockdown needed to contain the virus.
High-grade deals — those which are considered lower risk — have been flooding back in the past two weeks, and even riskier junk debt has been sold. Today brings news of the first new leveraged loan deal in a month.
Calm has also returned to the funding markets in anticipation of the the Fed buying commercial paper starting next week.
The markets are rediscovering some confidence, and maybe even a little hope. Japan’s plan to declare multiple states of emergency, the British Prime Minister being placed in intensive care, U.S. politicians back to bickering over stimulus — nothing can derail it today.
U.S. stocks rally into the close to leave a surreal state of affairs: With 74,000 people dead globally, including 10,000 Americans, and 1.3 million confirmed cases of coronavirus, a gauge of world stocks posts the second-best day in more than a decade.
Reversal
Tuesday 7 April: The buying was frenzied on Monday, so much so that one of the best performing U.S. stocks was a cruise line, an area of business not thriving in the age of the coronavirus. The fervor carries over, and futures for the S&P 500 rise so much that the underlying gauge’s re-entry to a bull market looks a sure thing.
The bull and bear labels are an attempt to capture the general trend or mood of a market, and are typically applied to lengthy periods of gains or declines, respectively. Only this time the rebound has been exceptionally fast and the current bear market exceptionally short, stoking fear it’s just a temporary reprieve.
Read more: A Brief History of Bear-Market Rallies and What Follows
There are rational explanations, of course. The slowing death rates in several major economies, for one.
“A lot of investors had said their trigger for the bottom would be a sign of a slowdown in the rate of increase in new Covid-19 cases,” says Eddie Perkin, chief equity investment officer at Eaton (NYSE:ETN) Vance. “They seem to be implementing that playbook.”
Plus all that stimulus. The Fed has pumped enough dollars into the global system that the U.S. currency should be weakening, and today it’s finally having a miserable day. A weaker dollar tends to help equities, so the move is lending momentum to a market where no one wants to miss the bottom.
The upbeat mood isn’t limited to stocks, and conditions in credit are so strong that Wynn Resorts (NASDAQ:WYNN) Ltd., one of the companies hardest hit by the pandemic, is seeking hundreds of millions in an unsecured deal.
That hunger for cash is the same across vast swaths of the corporate space though, and it’s still causing trouble. As companies stockpile cash banks have to get more of it, and the market for lending between them is still far from normal.
These businesses are battening down the hatches, trying to ensure they can weather the economic storm now commerce and industry has ground to a halt. As that happened, sources of tax revenue for local administrations seized up just when the cash was needed to fight the virus. Enough anxiety is lingering in municipal bond markets that Democrats want the Fed to extend its buying to lower rated debt.
For all the talk of slowing death rates, the numbers are still horribly high and there is no end in sight to the crisis. Fatalities in New Jersey jump. New York state reports its deadliest day yet, just a few minutes before the U.K. — where the Prime Minister remains in intensive care — does the same.
People will claim to know the reason for what happened next, likely pointing at those virus figures. But they came hours earlier. The truth is there was no obvious trigger, except maybe a late slide in oil.
Regardless, heading into the second-half of the trading day risk appetite is riding high and the bull market for the S&P 500 looks assured. The dollar is down. Treasuries are down. The stars are aligned.
Then around lunchtime on Wall Street, the gauge turns. Having opened with a jump of 3.5%, the S&P 500 meets the closing bell in the red. The bull must wait another day.
Beckoning Bull
Wednesday 8 April: The start to the day is inauspicious. It’s the middle of the night on Wall Street when European Union finance ministers conclude an emergency teleconference that lasted more than 16 hours. They have failed to agree a plan to protect the region’s economy from the last effects of the pandemic. They’ll meet again on Thursday.
The divisions are multiple and historic and predictable, but the news knocks European equity futures and the euro lower and when bonds start trading, Italian yields spike. The country’s coronavirus outbreak is one of the worst, and its economy one of the most fragile.
This is more than just an Italian problem, though. The great risk of this outbreak, aside from the death toll, remains the economic halt triggering financial collapse which feeds back into the economy to become a self-sustaining crisis. The Fed, ECB and others have spent trillions of dollars in an attempt to avert such a scenario, and they have been successful. If the world’s largest trading bloc is too slow or its measures are too small, it could become the weak link in the chain.
European stocks, which were closed when their U.S. peers erased gains on Tuesday, slump at the open. Data showing the French economy shrank the most since World War II in the first quarter hardly helps the mood.
That gloomy economic tone contrasts with the one emanating from the U.S., where the White House is developing plans to get the economy back in action. Similar suggestions by Trump in recent weeks have been met with fear, but with evidence of a slowing virus count it gets a warmer reception from investors.
The S&P 500 opens up and stays that way. A record day for deaths for in both New York and the U.K. is quickly shrugged off. Data showing the U.S. is already in recession is a technicality. The virus spreads faster than thought — tell them something they don’t know. The bull is back on.
The good mood extends to the credit markets, even though investment-grade issuance is finally slowing down after back-to-back record weeks. Goldman Sachs Group Inc (NYSE:GS). reckons spreads for in the high-grade space peaked in March, and the Fed actions mean the worst is behind. Sentiment in Europe is hit by the failed EU talks, but investors are keen to put cash to work, and order books for new deals are large.
Corporate demands for cash extend beyond the debt markets, however. Pressure on banks to lend is high, and it’s stoking the cost of funding. Not enough to cause panic, and central bank actions are helping, but this could be a key area to watch if the stress does not ease.
Later in the trading day, a couple of things help cement the risk-on mood. The release of minutes from the Fed’s emergency meeting in mid-March underscores how policy makers saw the need for a “forceful” response to the virus. Markets know that from the response itself, but confirmation is welcome.
“The massive fiscal and monetary stimulus has put a backstop on how far markets will fall,” says Brian O’Reilly, head of market strategy for Mediolanum International Funds. “Unlike previous recession where the authorities were slow to react this time support has been put in place much quicker so it is possible that we have seen the lows of this bear market already.”
Then oil surges late in the session after Algeria and Russia confirm a virtual gathering of major producers scheduled for Thursday will discuss output cuts of 10 million barrels a day.
Even shares in Europe, facing yet another existential crisis, end little changed. The S&P 500 finishes 23% above its March 23 low. According to one of the more popular definitions, it is back in a bull market.
Everything In Play
Thursday 9 April: The long weekend beckons. For the duration of the coronavirus crisis, the last trading day of of the week has almost always seen stocks decline. The markets stop but the pandemic does not, so many investors prefer to trim their exposures before a two-day break. Easter means three or even four days off for many participants.
Play it safe or keep riding the rally that has the S&P 500 up more than 10% this week? It would be a puzzle at the best of times, but Thursday has evolved into a day packed with potentially market moving events. EU finance chiefs are back on the phone together. The world’s major oil producers are finally meeting. Jerome Powell will give a big speech. Plus the small matter of the weekly jobless claims.
Asian stocks had a good session, thanks to the upbeat finish seen on Wall Street a few hours earlier. But S&P 500 futures are rudderless, swinging from gain to loss as the markets weigh it all up. European shares start on the front foot before paring amid a general confidence vacuum. Bonds in the region begin to tick up.
“The market has got ahead of itself essentially pricing in a V-shaped recovery,” reckons O’Reilly. “It will take some time to get back to normality, and the recovery will be more start stop than the market is factoring in.”
That end-of-week pattern is showing signs of returning. It feels technical in nature, rather than headline driven. Virus news is mixed. Spain’s death rate slows, though European nations are still contemplating longer lockdowns to stamp out the disease. The U.K. economy was shrinking even before country’s lockdown began, but Chancellor of the Exchequer Rishi Sunak continues to move fast to cushion the blow.
In a twist worthy of the unprecedented market turmoil unfolding this year, the defining event of the day turns out to be none of those listed above.
At the same moment the unemployment data hits the wire — another 6.6 million Americans claiming benefits in a week — the Fed makes its move, announcing a series of sweeping steps to provide as much as $2.3 trillion in additional aid. These will include programs targeting small and mid-sized businesses as well as state and local governments.
For a few minutes, equity futures swing wildly as the market absorbs both this and the claims. Then the gains begin. The claims were expected, another Fed bazooka was not.
What a contrast to Europe, where the minutes of the latest ECB meeting show some members weren’t even sure about the need for new measures to protect the euro area. Still, the rising tide lifts all boats, and European stocks regain their footing.
The Fed’s benevolence goes far and wide. In a stunning move, it will now take positions in some debt recently downgraded to below investment grade as well as certain collateralized loan obligations and commercial mortgage-backed securities. The credit markets rejoice. The bonds of Ford Motor (NYSE:F) Co., recently cut to junk, lead the surge.
It all means that stocks will end the week in the green. Despite a record number of deaths in New York city, an underwhelming deal to cut oil production and billions in aid getting snarled up in Washington, appetite for risk holds. Investors heading into the long weekend can toast double digit gains in the S&P 500 for the second time in three weeks.
At some point, there may be questions about printing trillions of dollars — undermining the currency and risking inflation — to plow it into financial markets when tens of millions no longer have a job. There may be worries about what it means when one institution is effectively backstopping the global financial system with an increasingly stretched balance sheet.
But it seems that will have to wait. At the time of the closing bell in New York, with the S&P 500 about 21% from its all-time high, there are 1.5 million confirmed infections worldwide, and 93,000 dead.
©2020 Bloomberg L.P.
