Markets May Have Found What They're Looking For
(Bloomberg Opinion) -- The global stock market rallied on Monday for the fourth time in five days. The MSCI All-Country World Index is up 15.9% since March 23, led higher by gains in the U.S. Does this mean the carnage is over? Nobody can say for sure, and for every Wall Street firm saying yes, there’s another warning that the worst is yet to come. Yet, there was a lot to like about how markets gained at the start of the week.
What was most encouraging about the latest action is that it came despite a slew of news that, one would think, would be negative for riskier assets. Yes, the news out of Abbott Laboratories that it has developed a coronavirus test that can tell if someone is infected in as little as five minutes did a lot to boost sentiment. But that’s where the optimism mostly ends. Over the weekend, top infectious disease expert Anthony Fauci said U.S. coronavirus deaths alone could reach 200,000, prompting President Donald Trump to extend nationwide social-distancing recommendations until April 30. The deadly and widespread nature of the pandemic was hammered home with the news that a longtime senior Wall Street executive died of virus complications. Risk sentiment not only overcame that news, but also more fundamental issues such as a broad gain in the dollar and another big decline in oil prices, this time to an 18-year low. A rising dollar and plunging oil prices had contributed almost as much to the equity market sell-off in the early days of the coronavirus pandemic as the expanding virus itself. The point here is that the market rallied in the face of negative news, which many suggested would be a prerequisite for stocks to regain their footing.
There’s more to it than just the dollar and oil. The equity strategists at Bloomberg Intelligence note that in recent days, “reactions to earnings downgrades and buyback suspensions also turned positive, perhaps indicating most bad news is already in the price.” More specifically, they point out that stocks of companies that pared their earnings-growth targets did better over the past week than those with a higher bar, suggesting a considerable amount of negativity is reflected in prices.” When historians looks back on the stock market during this time, it’s possible that March 30 could be seen as a pivotal moment.
A RUN ON BANK LOANSBloomberg News reports that the biggest U.S. banks have been discouraging some of the safest corporate borrowers from tapping existing credit lines to see them through the coronavirus pandemic. The issue isn’t that banks don’t have the funds, but that offering revolving lines of credit to investment-grade borrowers is a low-margin business. Lenders provide the service more for relationship purposes, hoping those customers will tap the banks for more profitable work over time. Based on the latest weekly data from the Federal Reserve, this issue could potentially be a drag on bank earnings as more companies seek to ensure they have cash on hand. Commercial and industrial loans outstanding surged by $176.2 billion, or 7.41%, to $2.55 trillion in the latest weekly period, Fed data released late Friday showed. That’s by far the most in any week going back to 1973. The good news is that big lenders are perceived to be better capitalized than at any time in history, which diminishes the possibility of a bank collapse. Still, that doesn’t mean their earnings won’t take a hit. That may help explain why the KBW Bank Index’s 40.1% plunge this year is more than double that of the S&P 500 Index’s 18.7% drop.
CONSUMER CUSHION?Almost everyone agrees that the U.S. economy is headed into a recession, and may already be in one. How deep and long-lasting the contraction is depends on a host of factors, not the least of which is the financial health of consumers. In that regard, the prognosis is mixed. On the downside, 25% of U.S. workers make less than $600 a week, and delinquency rates on all types of consumer loans are the highest in about six years, according to Deutsche Bank strategist Torsten Slok. Meanwhile, household borrowing accelerated to a 4.1% increase in the fourth quarter, reaching $16.15 trillion, Fed data released earlier this month showed. On the other hand, household wealth surged, rising $3.15 trillion to a record $118.4 trillion, indicating Americans were in generally healthy financial shape prior to the pandemic. Looked at another way, U.S. household debt as a percentage of disposable income has come way down since the financial crisis, falling to 96.7% from 133.6% in 2007. And in another encouraging sign, savings as a percentage of disposable income has jumped to 8.1% from 2.2% in 2005. No doubt the pandemic will take a toll on consumer finances, but the data may mean that consumers also rebound much faster than expected.
EM BEATS G-10In times of crisis, markets resort to predictable patterns. That means fleeing anything viewed as risky, such as emerging market currencies, and jumping into assets deemed safe, such as the currencies of Group of 10 economies. But globalization and the rise in importance of certain developing-nation economies have made such knee-jerk reactions obsolete. Some new research from Standard Chartered strategists Ilya Gofshteyn and Steve Englander found that currencies of “good EMs” tend to outperform those of “bad G-10s” in a time of crisis, and have done so this year. They identify “good EMs” as most of the universe of major emerging-market currencies less the Turkish lira, Brazil real, South African rand, Indian rupee and Indonesian rupiah. In many ways, this makes sense. Many emerging-market economies are in much better fiscal shape than developed nations, having stockpiled dollars for the proverbial rainy day. At $3.13 trillion, the foreign-exchange reserves for the 12 largest EM economies excluding China is up from less than $2 trillion in 2009, according to data compiled by Bloomberg.
TEA LEAVESA big week for U.S. economic data kicks off Tuesday when the Conference Board releases consumer confidence data for March. As with other measures of March that have already been released, this one is unlikely to be encouraging. The headline number is seen tumbling to 110 from 130.7 in February. The real number to look at, though, will be the one that looks at how consumers feel about the future. That part of the survey hadn’t reached the heights of the one that measures how consumers feel about the current situation. This may help explain the elevated savings rate noted above, as consumers socked away money for the tougher times they knew would ultimately hit even before the coronavirus. If that number fails to fall as much as the present situation reading, it could help further underpin investor sentiment on the idea that the economic rebound, when it comes, will be impressive.
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This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Robert Burgess is an editor for Bloomberg Opinion. He is the former global executive editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis.
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