The US stock indices extended their advanced for the fourth session over five, recording gains past 3% on Monday, amid healthcare stocks rallied on hopes that a vaccine could curtail the spread of the coronavirus and signal the end of the containment measures that have catastrophic implications for the global economy.
Technology stocks were among the best performers with solid gains in Microsoft (+7%), Intel (+5.96%) and Apple (+2.85%) shares. Boeing lost another 6% as US Air Forces announced additional deficiencies in the aerial fuel system of a plane built by the company.
The Chinese manufacturing PMI improved to 52 in March, confirming that the activity picked up following weeks of drastic slowdown due to the coronavirus outbreak. That has been a relief for investors globally.
WTI crude recovered 5% to $22 a barrel, but the market is flooded with oil that no one needs right now. A joint action from oil producer countries to lower production could encourage a certain recovery in oil prices. But any supply-side intervention should be sizeable to match the historical decline in demand, with an estimated 5 million barrels decline in daily oil demand only due to grounded planes globally.
Most Asian indices advanced but gains remained timid. Stocks in Hong King and Shanghai gained 0.28% and 0.12%, while Nikkei slid 0.89% and the ASX 200 gave back 2.02% after yesterday’s 7% on stimulus measures.
European futures hint at a mixed open on Tuesday. The FTSE 100 is expected to open on a negative note, while Eurostoxx futures point at a flat start. News that the coronavirus outbreak could be approaching its peak in Europe should curtail the selling pressure.
The White House on the other hand is discussing additional fiscal aid measures worth $600 billion, on top of the historical $2 trillion rescue package just signed a couple of days ago.
Huge amount of helicopter money sprayed on economies to put a floor under the growth slowdown will have long-term implications for debt levels, not only in the US but everywhere in the world.
Now, many of us are wondering whether the governments can extend their debt ad infinitum. The answer is tricky. The US is better positioned compared to most countries for doing so, given that the US government bonds are considered as the ultimate safe haven and the activity on US treasuries prove that the appetite for the US sovereigns remain solid even with the colossal new debt adding to the countries already high level of debt. The US 10-year yield remains a touch below 0.70%, near historically low levels.
But not all countries are under lucky stars. In fact, the rating agencies have already started downgrading countries’ and companies’ credit ratings last week. The UK saw its credit rating lowered at AA- at Fitch and South Africa was cut to junk at Moody’s.
General Electric, British Airways and Lufthansa are among companies who saw their credit ratings slashed due to coronavirus-led damages.
Lower credit ratings have a direct impact on governments’ and companies’ ability to contract debt. Because they are considered riskier, the cost of issuing debt for countries and companies with lower credit ratings is more costly. The lower the rating, the costlier the funding by debt. On top, the collateral value of lower grade debt is lessened, which is a major let down for investors as they must decrease the total amount invested if they hold riskier bonds on their portfolios.
In the FX markets, the US dollar index retreated below the 100 mark as stocks gained globally, but the increased anxiety in the credit markets should continue giving some support to the greenback.
The EURUSD slipped below the 1.10 mark and is poised to extend losses as the preliminary inflation read should confirm a decline to 0.8% y-o-y in March from 1.2% printed a month earlier. German import prices fell 0.9% m-o-m in February and worse is yet to come. Eroding inflation could revive the European Central Bank (ECB) doves. Offers are eyed below the 200-day moving average, 1.1053.
Sterling remains offered below 1.25 against the greenback. The UK’s fourth quarter growth figures showed no surprise. The British economy stagnated last quarter, and recession is knocking on the door amid the coronavirus outbreak will further hit the British economy that has been already wrecked by Brexit uncertainties.