Wednesday, April 1, 2020

US Stocks Suffer a Thrashing, But Hope Prevails

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What’s happening: US stocks closed lower on Tuesday, with the Dow recording the steepest first-quarter decline in its 124-year history.

What happened: US stocks have suffered a beating in the first quarter of this calendar year, as markets succumbed to coronavirus-triggered fears and went into a freefall. During the first three months of 2020, the Dow recorded the worst first-quarter decline in its history and the worst downturn since the fourth quarter of 1987. With most stocks nearing a bottom, investors are hopeful of an uptick going ahead. Also, looking at historical data, returns are expected to improve in the longer term, despite the immediate woes.

Why it matters: Gripped by fears of a recession due to the coronavirus pandemic, equity markets have plummeted through the first quarter. The Dow has shed 23% in the quarter, while the S&P 500 has declined more than 20%. Meanwhile, investor sentiment has been relatively positive for tech stocks, given an increase in demand for technology to support work from home. This is the reason that the tech sector index, Nasdaq 100, is down only 14% in the quarter.

COVID-19, which was firstly identified in Wuhan, China, has infected over 860,000 people globally and resulted in around 42,000 deaths. Business shutdowns and lockdowns are still in place in countries around the world to control the spread of the pandemic. These moves have brought economies to a standstill and ignited fears of a recession, forcing investors to get out of risky assets and move to safe-haven options.

The market’s bearish trend could continue in the near term due to the current crisis. In the longer term, however, the expectations are of a recovery, as has historically been the case following such massive declines in US stocks. In the past, when the Dow declined by a magnitude close to what it has in the current quarter, the index gave returns of around 12% in the following quarter and about 23% returns in the year. Historical trends are similar for the S&P 500 and Nasdaq 100.

What the near term may hold: Investors are hoping for the current crisis to end soon. US stocks may open lower today, as President Donald Trump warned American citizens of a tough two-week period ahead with experts projecting between 100,000 and 240,000 deaths in the country from the COVID-19 pandemic. The current death toll in the US stands at around 4,000, with a total of 189,000 cases.

What to watch: Markets await a basket of economic reports from the US, including manufacturing PMIs, construction spending and ADP report. The IHS Markit manufacturing PMI is expected to decline to 49.2 in March, from 50.7 in February. The ISM manufacturing PMI is projected to fall to 45 in March, from 50.1 in February. Analysts expect construction spending to increase 0.5% in February, versus a 1.8% rise in January. The ADP employment is likely to show that 150,000 jobs were lost in March, versus an addition of 183,000 jobs in February.

The Markets Today

     

Crude oil will be in focus today, ahead of the US EIA’s (Energy Information Administration) report scheduled for release later in the day.

Context: WTI crude oil futures closed slightly higher Tuesday, after China disclosed strong manufacturing numbers and President Trump discussed plans with Russia to stabilize the oil market. However, oil prices recorded the biggest quarterly percentage drops in history.

Details: Crude oil lost more than half its value in March, following a decline in oil demand due to travel bans and business closures with the global spread of the coronavirus pandemic. Oil prices were also impacted by oversupply due to the price war between Russia and Saudi Arabia. On Monday, crude oil had closed at its lowest level since 2002.

For the quarter, WTI crude prices lost 66.5%, falling 54.2% last month. Brent crude reported a 65.6% decline for the quarter.

The White House said on Monday that President Trump had spoken with Russian President Vladimir Putin in an effort to stabilise the energy markets. While both Presidents agreed to work jointly to combat the virus, there was no indication of Russia backing down from the war with Saudi Arabia.

May WTI crude rose 1.9% to settle at $20.48 per barrel on the NYMEX on Tuesday. In the European session, crude was trading down by 1.2% at $20.23 per barrel.

Meanwhile, April gasoline declined 59% for the month, while May natural gas slipped 2.6% in March.

Late Tuesday, the API (American Petroleum Institute) reported an increase of 10.5 million barrels for the week ended March 27. Gasoline stockpiles rose 6.1 million barrels, while distillate inventories fell around 4.5 million barrels.

What to watch: Investors will be keeping an eye on the EIA’s report on crude inventories. Domestic crude stockpiles are expected to increase by 4 million barrels in the week ended March 27, while gasoline inventories are likely to grow by 2 million barrels. Distillate supplies are expected to increase by 1 million barrels.

Other Market: European indices were trading lower at 9:00am GMT, with the FTSE 100, German 30 and French 40 up 4%, 3.2% and 3.7%, respectively.

Support & Resistances
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market snapshot

     

Futures at 0400 (GMT)

News shaping
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What else to watch today

     

South Africa’s total vehicle sales, Brazil’s industrial production, manufacturing PMI, federal tax revenues and balance of trade, Mexico’s business confidence and manufacturing PMI, Russia’s GDP, Canada’s manufacturing PMI as well as the US MBA mortgage applications.