Monday March 23rd

23-03-2020

Stock futures surge into the green after being ‘limit down’ overnight as Fed announces limitless asset purchases

U.S. stock index futures surged on Monday, erasing steep overnight losses after the Federal Reserve unveiled new measures to keep markets working properly. Wall Street awaited Washington lawmakers to agree to an economic stimulus and rescue plan to cushion the blow from the coronavirus outbreak. As of 8:46 a.m. ET, Dow Jones Industrial Average futures were up more than 300 points, or 1.9%. S&P 500 futures were up by about 2.1%. Nasdaq 100 futures traded 2.6% higher. The SPDR S&P 500 ETF was off by 2.3% in premarket trading. One of the measures taken by the Fed were an an open-ended asset purchase program, which the central bank will run in the “amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy.” “While the Fed’s actions are an enormous help, the only way the markets are going to find sustainable improvement is when the economy is allowed to come back to life, or at least there is a real path in place for how that is going to happen,” said Paul Hickey of Bespoke Investment Group, in a note. Overnight, futures hit their “limit down” levels, falling 5%. Downside limits to futures contracts are implemented to ensure orderly market behavior once trading hits a certain threshold. No trades below that level are allowed. A fiscal stimulus bill failed a key procedural Senate vote Sunday as Democrats warned the measure did not do enough to help impacted workers and instead offered too much for company bailouts. House Speaker Nancy Pelosi had signaled she was not on board with the Republican version of the stimulus plan, saying: “From my standpoint, we’re apart.” On a positive note, Senate Minority Leader Chuck Schumer, D-NY, said disagreements over the bill could be overcome in the next 24 hours. A spokesman for Schumer later added the senator and Treasury Secretary Steven Mnuchin had a “productive meeting.” Traders were waiting for any signs of a compromise as negotiations continued into the night. National Economic Council Director Larry Kudlow said Saturday an economic stimulus package will total more than $2 trillion, noting it will be equal to roughly 10% of U.S. economic output. Last week, President Donald Trump signed a $100 billion bill that expanded paid leave in the U.S. Mnuchin said Sunday that financing programs to stimulate the economy could be worth $4 trillion, noting these efforts will include coordination with the Federal Reserve to provide businesses with necessary liquidity. “When this started, this was a bit unique to the airline industry since we had shut down most of airline travel,” Mnuchin said. “This liquidity facility is a broad-based liquidity facility working with the Fed.” Boeing shares rose 4.7% in premarket trading, outperforming the market, as Goldman Sachs made a bold call Sunday evening, telling clients the company had enough cash to survive the coronavirus downturn and that air travel would eventually return. The shares are off 70% this year. David Kostin, chief U.S. equity strategist at Goldman Sachs, said the difference between a fast or a prolonged recovery in the stock market will come down to three factors: How quickly the virus is contained, whether businesses will have ” access to enough capital and liquidity to last the 90 to 180 days,” and whether fiscal stimulus can stabilize growth forecasts. “If short-term shutdowns lead to business defaults, closures, and permanent layoffs, the damage to corporate earnings growth could persist well after the virus is contained,” Kostin said in a note. Economists at Goldman Sachs wrote Friday they expect a 24% contraction for the second quarter after a 6% drop in the first quarter. Morgan Stanley economist Ellen Zentner said in a note Sunday she expects a historic 30% contraction in the second quarter. “Suffice to say that the economy entered a unique, sudden-stop recession in March,” wrote Prajakta Bhide, strategist at MRB Partners. “If there is no concrete evidence of meaningful progress toward controlling the epidemic in the next eight weeks, there will be no basis for people and businesses to feel safe to begin to normalize economic activity.” The outbreak has led the New York Stock Exchange to close its trading floor and temporarily move to all-electronic trading beginning Monday. NYSE expects trading to proceed as normal. “Things will get worse before they get better and the markets will continue to reflect that reality,” said Marc Chaikin, CEO of Chaikin Analytics, in a note. “This means that a bottoming process will take more time and probably inflict more damage to equities.” Last week, stocks suffered their biggest one-week decline since the financial crisis in 2008, with the S&P 500 dropping more than 13%. Those losses put the broad market average more than 32% below its record set on Feb. 19. Last week ended with all 11 S&P 500 sectors closing more than 20% below their respective 52-week highs. The S&P 500 is on pace for its worst monthly performance since 1940. Investors have also been rattled by a sharp decline in crude prices. West Texas Intermediate futures fell 29.3% last week, their biggest weekly fall since January 1991. U.S. crude is also more than 66% below its most-recent 52-week high. The steep losses in crude are forcing investors to sell other assets such as stocks or bonds to cover the losses in their energy positions. Crude futures briefly fell more than 8% Sunday night before clawing back most of those losses. Oil prices reversed losses on Monday, jumping as much as 4% after the Federal Reserve pledged aggressive asset purchases to support markets. The move higher comes after U.S. West Texas Intermediate crude posted its worst week since 1991. WTI rose 1% to trade at $22.86 per barrel. In a volatile session for the contract, prices were down 6% in early trading before rising as much as 4% following the Fed’s announcement. International benchmark Brent crude traded 3% lower at $26.15 per barrel. Stocks in Asia Pacific saw sharp drops on Monday as fears over the economic impact of the global coronavirus outbreak continue to weigh heavily on investor sentiment. South Korea stocks saw substantial declines, with the Kospi falling 5.34% to end its trading day at 1,482.46. Hong Kong’s Hang Seng index dropped 4.86% to close at 21,696.13. Mainland Chinese stocks were also lower on the day, with the Shanghai composite down 3.11% to around 2,660.17 while the Shenzhen composite shed 4.259% to approximately 1,631.88. The Shenzhen component also dropped 4.52% to 9,691.53. The Nikkei 225 in Japan bucked the overall trend regionally as it jumped 2.02% to close at 16,887.78, while the Topix index edged 0.68% higher to end its trading day at 1,292.01. Gold prices fell on Monday as investors stockpiled cash, with a rising numbers of coronavirus-led national lockdowns threatening to overshadow stimulus measures from global central banks to combat the economic damage. Spot gold slipped 0.3% to $1,492.63 per ounce, after rising as much as 3.1% in the previous session on a wave of stimulus. U.S. gold futures climbed 0.7% to $1,496.70 per ounce. “The overall concern here is how much more gold do investors need to sell to cover living expenses - it’s a psychological thing where people continue to sell for cash,” said Stephen Innes, chief market strategist at financial services firm AxiCorp. Another concern is the possibility of central banks having to sell gold to buy dollars as the greenback continues to strengthen, he added.