March 25, 2020 / 9:24 AM / 10 days ago

Daily Briefing: Up day on stock market seesaw

After the biggest one-day rise on the Dow Jones since 1933 (!), look for more gains today as Wall Street futures are heading up again.

An employee sews masks at Kaas Tailored in Mukilteo, Washington, U.S., March 24, 2020. REUTERS/Lindsey Wasson

The U.S. Congress finally came through with a $2 trillion spending package that will include things like unemployment benefits and loans for businesses but also $1,200 for citizens under a certain income threshold.

JPMorgan flow tracker Nikolaos Panigirtzoglou reckons there are pending equity market inflows of up to $800 billion — from those who went short or just fled equities — and now it looks like some of that money is being unleashed.

Veteran investor Bill Ackman just told clients he has taken off credit hedges to reinvest the money into stocks.

Of course the mood remains fragile. U.S. stock futures and Asian markets have seesawed after last night’s scintillating ride on Wall Street and it all depends on the march of the coronavirus across continents.

Still today looks like an “up” day on the seesaw with MSCI’s world stock index up more than 1% at a one-week high. The dollar has faded further after falling 0.6% on Tuesday against a basket of currencies and is down 0.2% -0.3% to the yen and euro respectively.

Clearly, the funding logjam is continuing to ease – the euro-dollar swap spread, a key measure of dollar demand overseas, has narrowed to around 3 basis points versus 10 bps on Monday and 85 bps a week ago.

Possibly even more importantly, the brutal volatility has started to ease, with euro dollar one-month volatility now at 10%, having been as high as 13.5% on Tuesday. 

There have also been steep falls these past couple of days in the VIX, the so-called fear gauge of Wall Street, which is at two-week lows. If vol keeps falling it should encourage more investors to come out of hiding and put on a few bets.

Earlier in Asia, Chinese shares leapt another 2%-plus and Japan's Nikkei is up another 7%, shrugging off the postponement of the Olympics, possibly driven by aggressive pension fund buying which is also prompting hedge funds to cover short positions.

An Omega clock, which was previously used as a countdown clock for the Tokyo 2020 Olympic Games, after the announcement of the games' postponement in Tokyo, March 25, 2020. REUTERS/Issei Kato

Yields are ticking higher on bond markets – U.S. 10-year yields are up another 3 bps. Possibly the normal bond-equity correlations are starting to return?  

European bourses are opening around 1% higher but looking at single companies, the struggle is real: Thyssenkrupp says it is to cut 3,000 jobs at its steel unit by 2026.

Equinor slashed investment and spending as part of a $3 billion coronavirus package and Renault has suspended car production in Latin America. More dividends cuts are coming too, with Lagardere suspending its market guidance and saying it plans to slash dividends.

One of the worst hit sectors, airlines, are begging for rescue as coronavirus damage soars to $250 billion. For a range of companies, ratings downgrades, debt defaults, mass layoffs and even – gasp – cuts to CEO bonuses loom.

The biggest worry might be emerging markets. EM shares are up 3.5% this morning and a currency index is up 0.25% after immense recent falls.

The fact remains though that there are massive movement restraints across many emerging economies – India's 1.3 billion people are in total lockdown – where governments are for the most part unable to replicate advanced peers' fiscal spending bazookas to mitigate the pain.

While the dollar remains relatively strong, developing countries’ main earners — commodities, tourism, goods exports — are all in trouble

Countries are of course taking steps to ease liquidity in their own markets – the South African central bank has started its own bond buying programme and South Korea has temporarily loosened capital flow rules to ease the dollar crunch.

So this morning the rand is up 0.8%, the Turkish lira has firmed a similar amount after the central bank there too acted to provide banks with cheap funding and the rouble has been lifted by oil’s bounce. South Korea’s won advanced as much as 1.8%, its strongest level in more than a week.

— A look at the day ahead from EMEA deputy markets editor Sujata Rao. The views expressed are her own —

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