PrefBlog

Two Trillion bucks are on the way:

Stocks on Wall Street rose on Wednesday as investors sized up a $2 trillion coronavirus rescue package intended to shore up the American economy, but the gains faded late in the day as debate over the bill continued without a vote in the Senate.

The legislation would be the biggest fiscal stimulus package in modern American history, and more than double the size of the roughly $800 billion stimulus package that Congress passed in 2009, during the last recession.

The S&P 500 climbed more than 1 percent, adding to a 9.4 percent gain on Tuesday that had come as investors anticipated that Democrats and Republicans would reach a deal over the plans.

Some of the companies expected to benefit from government help led Wednesday’s gains. Boeing was up more than 20 percent, helping lift the Dow Jones industrial average. American Airlines and Carnival Corporation both jumped more than 10 percent.

But there are always some who are convinced of a vast conspiracy to do them out of what is rightfully theirs:

A last-minute dispute over jobless aid was delaying a final Senate vote expected on Wednesday to approve sweeping legislation to deliver $2 trillion in government relief for an economy battered by the coronavirus pandemic.

Four Republican senators said they believed the bill, which would provide a substantial expansion of unemployment insurance, could lead to layoffs and incentivize workers to collect unemployment payments rather than take a job. They argued that because the unemployment benefits would in some cases be greater than people’s regular wages, some employers and employees would decide that layoffs were preferable. The senators said they would object to fast-tracking a vote until their concerns were addressed.

“If this is not a drafting error, then this is the worst idea I have seen in a long time,” said Senator Lindsey Graham, Republican of South Carolina. “We need to create a sustainable system.”

We all know someone like Lindsey Graham, eh?

And it was a good day for Canadian markets:

Canada’s main stock index climbed on Wednesday after the country’s legislators approved a $27-billion stimulus bill to help people and businesses deal with the coronavirus pandemic. The bill also includes $55-billion in the form of tax deferrals.

The Toronto Stock Exchange’s S&P/TSX composite index closed unofficially up 568.15 points, or 4.52%, at 13,139.23. It rose as high as 12,906.28 before paring gains late in the session.
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Ten of the index’s 11 major sectors were higher, led by an 8-per-cent jump in the heavyweight energy sector and a 6.7-per-cent increase in financial stocks.

Of course, all the disruption is leading to shortages of vital supplies:

Sales of gold bars and coins have been soaring since the outbreak of the novel coronavirus and dealers are struggling to keep up with demand. While orders pour in, the supply has tightened considerably because of government lockdowns, grounded airlines and decisions by several bar and coin producers to close down for safety reasons.
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The U.S. Mint recently sold out of its popular Silver Eagle coin after sales soared by nearly 300 per cent in March. The Perth Mint in Australia, the country’s official supplier of coins and bars, said demand was so strong it no longer had any gold bars in stock and only a limited supply of gold and silver coins.

Last Friday, the Royal Canadian Mint suspended production of its coins and other products for at least two weeks because of the virus. In a statement, CEO Marie Lemay cautioned that while officials had a plan to resume “modified production” next month, they anticipated “a longer suspension of production and shipping for our numismatic collectable coins as we prioritise the support of trade and commerce.”

The Fed’s support of the corporate bond market had some multiplier effect:

• The world’s biggest credit ETF took in $1.06 billion on Monday as traders rotated back into corporate bond bets, Bloomberg reported.
• The iShares iBoxx $ Investment Grade Corporate Bond ETF ended the day up 7.4% after the Federal Reserve announced it will begin buying corporate bonds and credit ETFs amid the coronavirus’s hit to economic activity.
• Monday’s inflows were the second-biggest in the ETF’s history, according to Bloomberg.
• The influx of investor cash follows record retreats from investment-grade and high-yield debt funds in the week ended March 19, according to Bank of America.

TXPR closed at 441.57, up 8.13% on the day. Volume today was 4.14-million – and this enormous figure is well below the average of the past three weeks.

Today’s enormous gain, coupled with yesterday’s, means we have recouped all the lost ground since … um … March 16. The total return version of the index is now down only 24.86% on the month to date, so that’s pretty good, eh?

CPD closed at 8.74, up 7.90% on the day. Volume was 402,477, above average but nothing special in the context of the past 30 trading days.

ZPR closed at 6.92, up 9.84% on the day. Volume of 1,439,516 didn’t even make the top three of the past 30 trading days.

Five-year Canada yields were up 3bp to 0.79% today.

PerpetualDiscounts now yield 6.81%, equivalent to 8.85% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.87%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed dramatically to 500bp from the 570bp reported March 18. But we’re still way over the old record set on November 26, 2008 when trouble with the BCE buyout caused a short-lived spike in PerpetualDiscount bid yields, moving the Seniority Spread to 445bp.

I’m not reviewing suspect quotes today, as has been the case for the past while. I’m saving my sarcasm for less turbulent times.

Today the markets celebrated hopes of a great big bail-out:

Stocks soared on Tuesday on expectations that Congress was close to producing a stimulus bill to stabilize America’s faltering economy and offer lifelines to industries on the brink of collapse because of the coronavirus.

A plan to bail out companies and send checks of up to $1,200 to Americans had been stalled since Sunday over objections by Democrats. But on Tuesday, top Democrats and Trump administration officials said they were optimistic about finalizing an agreement on a roughly $2 trillion plan.

The S&P 500 had its biggest daily gain since 2008, rising more than 9 percent. Stocks in Europe climbed, led by Germany, where stocks rose more than 10 percent.

… and in Canada …:

Canada’s main stock market rallied on Tuesday, rebounding from an eight-year low the day before, as hopes rose that global stimulus measures will ease the economic impact of the coronavirus pandemic.

The Toronto Stock Exchange’s S&P/TSX composite index surged 11.96%, or 1,342.59 points, to 12,571.08, after hitting its lowest intraday level since October 2011 at 11,172.73 on Monday. Since peaking in February, the index has tumbled about 30%. Tuesday’s percentage gain for the Canadian index was its biggest since July 1979, based on Refinitiv Eikon data.
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Suncor Energy Inc. cut its 2020 production outlook and suspended share repurchases for the year following the decline in crude oil prices and due to the economic impact of the virus outbreak. Still, its shares rallied 13%.
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The Canadian dollar was little changed at about 1.45 to the U.S. dollar, or 68.97 U.S. cents. The currency, which last Thursday hit a four-year low at 1.4669, traded in a range of 1.4375 to 1.4532.

Canadian government bond yields rose across the curve in sympathy with U.S. Treasuries. The 10-year was up 3.7 basis points at 0.855%.

As mentioned yesterday, the Fed has announced the Primary Market Corporate Credit Facility and the Secondary Market Corporate Support Facility. There are calls for the BoC to do the same:

The mad scramble for cash amid the coronavirus panic is putting enormous strain on the Canadian corporate bond market, which the country’s largest companies rely on for a steady source of financing.

While high-quality credit typically serves as a safe haven in the midst of an economic shock, corporate bonds have plummeted alongside stocks over the past few bewildering weeks.

The iShares Canadian Corporate Bond Index ETF (XCB) – the largest of its kind – fell by a staggering 23 per cent in just 11 trading days, before a market-wide bounce on Tuesday clawed back a portion of the fund’s losses.
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To help restore order, the Bank of Canada may follow the U.S. Federal Reserve’s lead and intervene in the corporate credit market for the first time in its history.

“To draw a line and support investment-grade debt, that’s the kind of bold move that can inspire confidence. That will create some semblance of rationality,” Mr. Mamdani said.

Last week, the Bank of Canada opened that door, giving itself the authority to buy and sell corporate and municipal debt, “for purposes of addressing a situation of financial system stress that could have material macroeconomic consequences,” according to a regulatory notice from March 18.

But in the real world:

A source familiar with the data confirmed that the government received an estimated 929,000 Employment Insurance claims in the week of March 16-22 – a week in which a dramatic escalation of social-isolation requirements across the country forced many businesses to either sharply curtail their operations or shut down entirely.

Those EI filings represent roughly 5 per cent of all employees in the country – and imply that the national unemployment rate may have nearly doubled in just seven days.

The numbers of layoffs could surge again in the coming days, as the country’s two most populous provinces, Ontario and Quebec, will institute new rules requiring businesses deemed non-essential to close their doors as of midnight Tuesday night.

TXPR closed at 408.38, up 3.996% on the day. Volume today was 4.63-million – and this enormous figure is merely about average of the past two weeks.

CPD closed at 8.10, up 3.18% on the day. Volume of 325,281, above average but nothing special in the context of the past 30 trading days.

ZPR closed at 6.30, up 3.11% on the day. Volume of 500,507 was the lowest since March 6.

Five-year Canada yields were up 5bp to 0.76% today.

I’m not reviewing suspect quotes today, as has been the case for the past while. I’m saving my sarcasm for less turbulent times.

Update, 1:47am: A deal has been reached on the US stimulus package:

The legislation, which is expected to be enacted within days, is the biggest economic stimulus package in modern American history, aimed at delivering critical financial support to businesses forced to shut their doors and relief to American families and hospitals reeling from the rapid spread of the disease and the resulting economic disruption.

Struck shortly before 1 a.m., it was the product of a marathon set of negotiations among Senate Republicans, Democrats and President Trump’s team that nearly fell apart as Democrats insisted upon stronger worker protections and oversight over a new $500 billion fund to bail out distressed businesses.

The deal was struck after a furious final round of haggling between Senator Mitch McConnell, Republican of Kentucky, Steven Mnuchin, the Treasury secretary, and Senator Chuck Schumer, Democrat of New York, after Democrats twice blocked action on the measure as they insisted on concessions.

S&P overnight Futures are down 1.12% as of 1:34am; we’ll see what the next few updates look like!

American banks are issuing dire warnings:

• Goldman Sachs economists on Friday forecast an unprecedented 24% hit to U.S. second-quarter GDP, following a 6% decline in the first-quarter, due to coronavirus; the bank also expects unemployment to surge to 9% and full-year GDP for 2020 to fall 3.8% on an annual average basis.
• Bank of America warned late on Thursday that a recession due to the coronavirus pandemic is already here: “Jobs will be lost, wealth will be destroyed and confidence depressed,” the bank’s U.S. economist, Michelle Meyer, wrote in a note, as the Bank of America also forecast the economy to “collapse” in the second quarter, shrinking by 12%, with GDP for 2020 taking a 0.8% hit.
• Morgan Stanley warned investors of the same thing: “Global recession in 2020 is now our base case,” the firm’s chief economist, Chetan Ahya, wrote in a recent note, predicting global economic growth to slow to 0.9% this year—the lowest level seen since the 2008 crisis.
  Deutsche Bank predicts that the U.S. economy will contract by 12.9% in the second quarter, with the coronavirus-driven declines set to “substantially exceed anything previously recorded going back to at least World War II,” according to a note Wednesday.

• UBS similarly sees a “massive contraction” of almost 10% in second-quarter GDP, while also predicting a deep recession in the first half of 2020 due to the coronavirus pandemic.
• But: Most of the economists at the big banks listed above still predict the economy will rebound later in 2020, or by 2021 at the latest.

And pension plans are looking sick again:

Canadian pension plans have seen their funding crater in recent weeks amid falling interest rates and a meltdown in stock markets, leaving some with shortfalls just weeks after being fully funded.
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Consulting firm Mercer Canada Ltd. said its pension health index closed 2019 at 112 per cent — a reading that suggests the plans were over-funded, with more assets than obligations — up 10 percentage points over the course of the year. It was 103 per cent on Feb. 29, but had fallen to 89 per cent on Monday, March 16.

Aon PLC said its measure of pension solvency in Canada, which approached record highs in the fourth quarter of 2019, declined from 102.5 per cent on Jan. 2 to 95.8 per cent on Feb. 28, then to 90.6 by Friday, March 13.

So the Fed is ramping up its efforts:

The Fed pledged to buy as much government-backed debt as needed to restore normal functioning in the markets for housing and Treasury bonds. It announced that it would buy longer-dated corporate debt, including the riskiest investment-grade bonds, for the first time in its history. And it promised to unveil more — including supports for small businesses — in the days and weeks to come.
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The central bank, which restarted its massive bond-buying program eight days ago, said it would expand well beyond the “at least” $700 billion in Treasury and $200 billion in mortgage-backed securities it initially committed to buying. Instead, officials will buy bonds “in the amounts needed to support smooth market functioning” — including buying government-backed debt tied to commercial real estate.
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One of them, the Primary Market Corporate Credit Facility, is open to investment-grade companies and will provide bridge financing of four years, according to the Fed’s release. The Fed will create a special purpose vehicle that will both purchase bonds from eligible issuers and extend loans.
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The other program, the Secondary Market Corporate Support Facility, will purchase already-issued debt, which has become hard to trade, including by buying exchange-traded funds that bundle bonds together. The Fed said that together the programs were intended “to support credit to large employers.”

The markets were unimpressed:

The Toronto Stock Exchange’s S&P/TSX Composite index was unofficially down 623.32 points, or 5.26%, at 11,228.49.

The Canadian death toll from the virus outbreak jumped by more than 50% on Sunday, and impatient officials threatened to punish people refusing to take precautions to fight the spread of the highly contagious illness.

Nine of the index’s 11 major sectors fell.

The energy sector dropped 3.8% as crude prices fell.

The financials sector slipped 7.9%. The industrials sector fell 3.7%.

The materials sector, which includes precious and base metals miners and fertilizer companies, added 5.4% as gold prices rose.

Based on the latest available data, the Dow Jones Industrial Average fell 575.58 points, or 3%, to 18,598.4, the S&P 500 lost 65.55 points, or 2.84%, to 2,239.37 and the Nasdaq Composite dropped 16.37 points, or 0.24%, to 6,863.14.

The Dow at one point traded below its closing level on Nov. 8, 2016, effectively erasing all the gains since the election of Donald Trump as U.S. president.

The pan-European STOXX 600 index lost 4.30% and MSCI’s gauge of stocks across the globe shed 3.81%.

Emerging market stocks lost 5.61%. MSCI’s broadest index of Asia-Pacific shares outside Japan closed 5.75% lower, while Japan’s Nikkei rose 2.02%.

Which might well have been considered good news in some quarters:

Brookfield Asset Management Inc. chief executive officer Bruce Flatt says his company is moving away from private assets and buying publicly traded debt and stocks – including its own – in the recent market carnage.

“We have switched our focus for investments to the listed stock markets. … There are some stocks and debt starting to trade at a large discount to intrinsic value and we are focused on these,” Mr. Flatt said in a shareholder letter released Monday.

But there is bad news in other quarters:

Consensus continues to grow among government leaders and health officials that the best way to defeat the virus is to order nonessential businesses to close and residents to confine themselves at home. Britain, after initially resisting such measures, essentially locked down its economy on Monday, as did the governors of Virginia, Michigan and Oregon. More than 100 million Americans will soon be subject to stay-at-home orders.

Relaxing those restrictions could significantly increase the death toll from the virus, public health officials warn. Many economists say there is no positive trade-off — resuming normal activity prematurely would only strain hospitals and result in even more deaths, while exacerbating a recession that has most likely already arrived.
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Officials have said the federal government’s initial 15-day period for social distancing is vital to slowing the spread of the virus, which has already infected more than 40,000 people in the United States. But Mr. Trump and a chorus of conservative voices have begun to suggest that the shock to the economy could hurt the country more than deaths from the virus.

On Monday, Mr. Trump said his administration would reassess whether to keep the economy shuttered after the initial 15-day period ends next Monday, saying it could extend another week and that certain parts of the country could reopen sooner than others, depending on the extent of infections.

“Our country wasn’t built to be shut down,” Mr. Trump said during a briefing at the White House. “America will, again, and soon, be open for business. Very soon. A lot sooner than three or four months that somebody was suggesting. Lot sooner. We cannot let the cure be worse than the problem itself.”

TXPR closed at 392.69, down 7.77% on the day. Volume today was 4.57-million – and this enormous figure was the lowest of the past five trading days.

CPD closed at 7.85, down 8.40% on the day. Volume of 546,111 was third-highest of the past 30 trading days, trailing March 13 and March 16.

ZPR closed at 6.11, down 6.72% on the day. Volume of 1,706,900 was third-highest of the past 30 trading days, behind March 20 and March 9.

Five-year Canada yields were down 4bp to 0.71% today.

I’m not reviewing suspect quotes today, as has been the case for the past while. I’m saving my sarcasm for less turbulent times.