March 30th, 2020

Daily Market Commentary

Canadian Headlines

  • Oil demand is getting hammered at a faster pace than anyone had predicted and landlocked crude production in the U.S., Russia and Canada is most vulnerable, according to Goldman Sachs Group Inc. Consumption will drop by 26 million barrels, or 25%, this week as social-distancing measures to contain the coronavirus now impact 92% of global GDP, analysts including Jeff Currie and Damien Courvalin said in a note. There’s been at least 900,000 barrels a day of announced shut-ins at the wellhead, with the true number likely higher and growing by the hour, they said. “The ultimate magnitude of these shut-ins, which is still unknown, will likely permanently alter the energy industry and its geopolitics,” the analysts said. Landlocked crude prices are heading into negative territory and will eventually create an inflationary oil supply shock because so much production will have been halted, they said.

World Headlines

  • European equities slipped on Monday, with banking shares tumbling after a number of lenders decided to postpone their dividends, eclipsing recent optimism that policy stimulus should mitigate economic damage from the coronavirus. The Stoxx Europe 600 Index was down 0.5% at 11:16 a.m. in London. The benchmark index, which posted its best weekly gain since 2011 last week, fell as much as 2.4% earlier in the session. Banking shares were down 3.1%. The FTSE Italia All-Share Banks Index sank as much as 7%.
  • U.S. stock index futures erased earlier losses and resumed gains in a volatile session as China added new stimulus to its economy and concerns over the coronavirus kept mounting, while oil sank. Contacts on the S&P 500 expiring in June were up 0.3% as of 10:40 a.m. in London. They fell as much as 3.1% and had also climbed 1.7% after China’s rate cut on seven-day reverse repurchase agreements. As part of the stimulus, the People’s Bank of China injected 50 billion yuan ($7.1 billion) into the banking system.
  • Japanese stocks dropped after a rise in the number of new daily coronavirus cases in Tokyo over the weekend but pared much of their loss in afternoon trading. Electronics makers and banks were the biggest drags on the Topix index, which pared an intraday decline of as much as 67 points to 24 points. Some 17.5 points of the drop was due to more than 1,500 stocks trading without rights to the next dividend. The Nikkei 225 Stock Average also slipped but managed to close above the 19,000 level for a second straight day. Tokyo found 68 new cases of the virus on Sunday, the most yet for a single day, according to a report by local broadcaster NHK.
  • Oil slumped to a 17-year low as coronavirus lockdowns cascaded through the world’s largest economies, leaving the market overwhelmed by cratering demand and a ballooning surplus. Futures in London fell as much as 9.4% to the lowest since November 2002, while New York crude briefly dipped below $20 a barrel. The huge oversupply is further collapsing the oil market’s structure, and there may be more weakness to come as the world quickly runs out of storage capacity.
  • Gold edged lower after its best week since 2008 amid investor caution on policies aimed at mitigating the impact of the coronavirus pandemic. Bullion’s muted trading comes after the gold market was thrown into turmoil last week as the health crisis disrupted supply chains, creating a squeeze in futures as sellers’ capacity to meet commitments to deliver the metal was curtailed. Volatility has spiked this month as, in addition to the supply squeeze, some investors sold the metal to raise cash to cover losses elsewhere. The U.S. dollar has also emerged as a preferred haven, heading for its best month since late 2016, amid concerns over liquidity and funding conditions across markets.
  • President Donald Trump abruptly abandoned his ambition to return American life to normal by Easter, heeding advice from the government’s top doctors that re-opening the U.S. economy in two weeks risks greater death as the coronavirus outbreak accelerates. In a stark shift from two weeks of measured optimism, the president said his guidelines for Americans to practice “social distancing” would remain in place until at least April 30, and he warned that 100,000 or more people may die.
  • Spain reported fewer deaths on Monday after three days of record fatalities. President Donald Trump abandoned his ambition to return American life to normal by Easter after a top scientist suggested as many as200,000 could die in the U.S. More regions went into lockdown, including the Thai tourist hot spot of Phuket and Moscow’s 12.7 million residents were ordered to stay in their homes. Economic sentiment in the euro area plunged the most on record and Germany’s government advisers predicted the country could have its worst recession since 2009.
  • Investors withdrew money from exchange-traded funds that buy emerging market stocks and bonds last week. This was the sixth straight week of outflows. Outflows from U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $1.2 billion in the week ended March 27, compared with losses of $2.93 billion in the previous week, according to data compiled by Bloomberg. So far this year, outflows have totalled $7.92 billion.
  • Strategists at JPMorgan Chase & Co. have concluded that most risk assets — a universe that typically includes stocks and credit — have seen their low points for the recession that’s gripped economies around the world. Conditions that JPMorgan had set for market stabilization and revival have largely been met, with recession-like pricing, a reversal in investor positioning and extraordinary fiscal stimulus, strategists led by John Normand wrote in a note Friday. Coronavirus infection rates remain a “wild card,” as they remain high even if they’re “slowing” in the U.S. and Europe.
  • The German government’s economic advisers predict that the coronavirus pandemic will give the nation its worst recession since the global financial crisis. Even if most business and movement restrictions are lifted in mid May, allowing the economy to recover through the summer, output is expected to shrink by 2.8% this year, according to a report by the German Council of Economic Experts. If restrictions last longer or production is further halted, the economy could contract by as much as 5.4%. Either outcome would be the deepest downturn since 2009.
  • European officials warned against loosening lockdowns after the coronavirus outbreak claimed more than 3,000 lives in Spain and Italy over the weekend. Strains in health-care systems increased as Spain said its intensive-care wards are stretched beyond capacity and a German public-health leader said the country may face a ventilator shortage. An ally of Chancellor Angela Merkel said public life in Europe’s biggest economy will be restricted for at least several more weeks. With France, Italy and Spain calling for pooled euro-area financial resources to stem the economic cost and Germany opposed, finance ministers are expected to discuss the way forward this week. Yet they can only do so much as governments in Europe’s largest economies implore people to stay home.
  • All it might take to shut down the mighty economic engine of Tokyo is a few dozen more mystery cases or a jump in infections into the hundreds rather than the thousands seen elsewhere in the world. Japan has remained relatively free of the pandemic that has turned New York into a ghost town and shuttered economies in Europe, but there is growing concern that an acceleration of infections in Tokyo will prompt authorities to tell people to stay at home and for restaurants and shops to close.
  • China’s central bank cut the interest rate it charges on loans to banks by the biggest amount since 2015 as authorities ramp up their response to the worsening economic impact from the coronavirus pandemic. The People’s Bank of China reduced the interest rate on 7-day reverse repurchase agreements to 2.2% from 2.4% when it injected 50 billion yuan ($7.1 billion) into the banking system, according to a statement Monday. The central bank said this will keep liquidity sufficient to help the real economy. The first cut to a PBOC policy rate since February is in line with a pledge by the Communist Party’s leadership on Friday to increase support to the economy through increased sales of sovereign debt, as domestic and international demand slumps due to the pandemic. The step brings the PBOC closer in line with the stance of global peers, who have loosened policy dramatically in recent weeks.
  • Economic sentiment in the euro area plunged the most on record after the furious spread of the coronavirus forced businesses in vast parts of the region shut and prospects dwindled that life will return to normal any time soon. The European Commission reading — following similarly downbeat reports out of the region’s biggest economies — comes at the end of a quarter that saw the outlook for the world and its economy thrown into disarray. New Year hopes that a calming in trade tensions would allow growth to stabilize have given way to panic in markets about a recession even greater than that experienced after the 2008 financial crisis.
  • Airlines worldwide raised more than $17 billion in bank loans in March to shore up their finances amid the coronavirus outbreak. U.S. carriers were the most active, borrowing $12.5 billion, according to data compiled by Bloomberg. Delta Air Lines Inc. is the top borrower this month, obtaining $5.6 billion, followed by Singapore Airlines Ltd., which secured a S$4 billion ($2.8 billion) bridge loan, and United Airlines Holdings Inc., which raised$2.5 billion. The airlines have borrowed new loans or drawn down on existing credit lines that they typically didn’t use before the health crisis. Companies in all industries globally have raised more than $230 billion from commercial banks since early March in response to the virus.
  • The Bank of Japan purchased 201.6b yen of ETFs today, matching the record amount it purchased on March 19, March 23 and March 26 as it steps up efforts to calm markets amid the coronavirus outbreak.
  • The biggest U.S. banks have been quietly discouraging some of America’s safest borrowers from tapping existing credit lines amid record corporate drawdowns on lending facilities, according to people familiar with the behind-the-scenes conversations. For Wall Street, it’s not an issue of liquidity so much as profitability. Investment-grade revolvers — especially those financed in the heyday of the bull market — are a low margin business, and some even lose money. The justification is that they help cement relationships with clients who will in turn stick with the lenders for more expensive capital-markets or advisory needs. That’s fine under normal circumstances when the facilities are sporadically used. But with so many companies suddenly seeking cash anywhere they can get it, they’re now threatening to make a dent in banks’ bottom lines.
  • Australia has unleashed a record A$130 billion ($80 billion) jobs-rescue plan, pledging to subsidize workers’ wages as the coronavirus outbreak wreaks havoc on the economy. The package will see the government pay wage subsidies of A$1,500 every two weeks per employee to help struggling businesses keep people in work, Prime Minister Scott Morrison told reporters in Canberra on Monday. The announcement brings total fiscal and monetary stimulus to buttress the economy to A$320 billion, or 16.4% of gross domestic product. In a sign of how quickly things are deteriorating, Morrison had as recently as last week rejected the need for a U.K.-style wage subsidy, saying it would take too long to implement.

*All sources from Bloomberg unless otherwise specified