The futures market was pointing to a higher open for U.S. equities, but whether the strength can be sustained for the whole session is anybody’s guess.
California governor orders people to stay at home
Foreign currencies rise against the U.S. dollar, but greenback still at 3-year high
Bank analysts trimming economic forecasts
(Friday Market Open) Can the market end higher for two days in a row? The last time the S&P 500 Index (SPX) was able to string together consecutive up days was the middle of last month. Since then, we’ve seen massive moves up and down, but mostly down, as volatility has rocketed up.
The futures market was pointing to a higher open for U.S. equities, but whether the strength can be sustained through today’s close is anybody’s guess. S&P 500 futures (/ES) had a big range overnight, and the volatility could continue into the trading session, especially around the open and close, as today is quadruple witching day. (See more below.)
Investors seemed to be taking some encouragement from the California governor’s order for people in the state to stay at home. While that might not sound like good news, it seems to be a solid step that could slow the outbreak in that state and reduce economic pain in the long term, even if it reduces consumer spending in the short term.
And the improving sentiment also seems to be coming as policy makers around the world have unveiled measures to provide economic relief as the coronavirus continued to spark fears of a meltdown in consumer spending and corporate profits around the globe.
There also seems to be some stabilization of foreign currencies against the dollar, and the easing of the greenback appears to be helping crude prices continue their bounce. In other oil-related news Exxon Mobil (XOM) executives have been buying shares of their company in the open market, perhaps a sign that they believe in the company’s long-term prospects.
Australia has said it will take drastic measures to prop up its economy. The Fed said it will help money market mutual funds, a move that’s on top of two emergency rate cuts. The European Central Bank has announced an expanded asset purchase program while the Bank of England cut its bank rate and announced more bond buying. Meanwhile, U.S. lawmakers and the Trump administration have been working to hammer out a large stimulus package.
The response by central banks and governments may be helping to inject some calm into markets that have seen ferocious selling as the coronavirus spreads around the world. There may also be a sense that the repricing of equities on Wall Street may be reaching some kind of rough equilibrium point despite continued uncertainty about how bad the outbreak could get and how big of a chunk it could take out of global GDP.
There’s another argument that volatility could ease a bit in coming days, although we hardly expect volatility to return to normal levels for some time.
Today is quadruple witching day, which means it’s one of four days a year (once a quarter) when contracts for stock index futures, stock index options, stock options, and single-stock futures all expire.
Traditionally, markets tend to see elevated volatility around these days, so it’s possible that some of Thursday’s volatility—index futures rose and fell 2% above and below the flat line several times throughout the day—could have been related to this phenomenon and that volatility might relax a bit after witching is out of the way.
But the counterargument—that indices have spent so little time at current levels after the sharp selloff that most of the open interest in index options is well above current levels, which might mute the witching effect—could indicate that the hair-trigger price action is more about the current level of uncertainty in the market. On one side you have a virus still making its way across the globe, and on the other side you have central banks and fiscal authorities ready to pull out the big guns.
All reasons aside, Wall Street’s main fear gauge, the Cboe Volatility Index (VIX) was still above 70 yesterday, and though it’s cooled a bit this morning, it probably won’t return to historically normal levels for quite some time. So it might be a good idea to keep trade sizes in check for the foreseeable future.
CHART OF THE DAY: CRUDE’S V-SHAPED RECOVERY? It isn’t just stocks that have been on a wild ride. So have crude oil futures (/CL). After witnessing huge slides amid coronavirus-related demand fears, a price war, and a stronger U.S. dollar, crude moved higher Thursday on news that the U.S. could intervene in the price war and as policymakers around the world have been working to ease the economic pain from the coronavirus fallout. A U.S. Energy Department request to purchase oil for the Strategic Petroleum Reserve also helped prices. Granted, it's a long way up from here—/CL was around $50 per barrel a month ago—but it didn't spend much time down at $20. Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Inflection Point? We’re at a point right now where many economic reports based on backward-looking data have been coming in fairly solid, because the collection periods for the reports haven’t really captured the full effect that the coronavirus fallout is currently having on the economy. But that seems to be changing. Consider yesterday’s weekly jobless claims report, which showed unemployment claims climbing steeply to 281,000 from recent readings under 220,000. It seems that rise could be the tip of the iceberggiven how the virus is affecting the restaurant, retail, travel, and energy industries. We’ll have to watch these weekly statistics to see how job losses are mounting before we get the government’s nonfarm payrolls report next month.
Leading Indicators: One such report that seems to be on the edge of tipping from decent to dismal is the Conference Board’s leading economic index for the United States. The latest report, released yesterday, showed an increase of 0.1% in February, but the organization flatly said that “improvement in the index will not continue into March.” Ataman Ozyildirim, senior director of economic research at the Conference Board, pointed out that a promising-looking recovery in manufacturing will be short-lived because of supply chain disruption and falling demand. “Declines in stock prices, consumers’ outlook on economic conditions, manufacturing new orders, average workweek in manufacturing, and rising unemployment claims will begin to negatively impact the economy,” he said in comments released with the latest numbers. “As a result, the economy may already be entering into a period of contraction.”
Recession Roundup: The Conference Board is not alone in discussing the possibility of an economic contraction in the United States, but how deep and long such a contraction might last is up for debate. In a Reuters poll following Sunday’s emergency Fed rate cut, the probability among analysts of a domestic recession over the next 12 months rose to 80% from 30% two weeks prior, although not all of the respondents thought there would be a technical recession of contraction for two quarters in a row. Meanwhile, JP Morgan Chase (JPM) has lowered its gross domestic product (GDP) estimates for the first two quarters to -4% and -14%, and Goldman Sachs (GS) has predicted a second quarter US GDP contraction of 5%. S&P Global said the economy could contract by 1% in the first quarter and 6% in the second quarter. Meanwhile, Bank of America (BAC) economists said U.S. GDP would fall 12% in the second quarter.
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