Washington Whipsaw: Euphoria Follows Disappointment After Fed Announces New Moves

“Whipsaw” might be too gentle a word to describe the action in pre-market trading early Monday.

We went from disappointment after a Senate stimulus vote failed last night to an incredible piece of news this morning that the Fed has stepped up with a new package. Suddenly, major indices moved higher an hour before the opening bell. Index futures had been locked limit down early on in the session.

 A “mark of this market” has been initial euphoria on good news, but inability to keep the momentum.

The Fed’s announcement this morning of new asset purchases “in amounts needed to keep the market functioning” and with no cap provided the euphoria, but there’s no way to tell if this improved sentiment will last. The important thing to see is do we keep the early upward momentum, and that’s been the challenge lately.

We’re also still waiting on the Senate. Not that a stimulus package is necessarily a panacea. Germany is preparing a big stimulus, but that hasn’t helped markets in Europe on Monday. The latest word early Monday is that the Senate is close to an agreement, according to media reports.

People often flock to the so-called “horsemen of risk” like volatility, gold, and bonds at times like these. Now the dollar seems to be getting some of that trade, too (see more below). Having the dollar this high means commodities like crude could have a very hard time rallying much from here.

Bonds got a bid after the Fed news this morning, sending the 10-year yield back below 0.7%. However, gold continued to look strong.

Earlier on in this downturn, there was a lot of focus on possible support and resistance. That’s not really the case now. While it would be nice to see the stock market establish some trading ranges, it’s hard to say if there’s any definite support or resistance because recent moves have been just so big. You just want to see a set range and be able to say, we’re trading in here for a while. That might give people a little confidence.

Still, there’s no reason to believe volatility will dissipate anytime soon. It did appear to ease a bit, however, after the Fed announcement. Cboe volatility index futures (/VX) recently were down nearly 6% and trading below 60 after being up above 70 earlier Monday.

Eye on Earnings with Two Key Reports This Week

We’re in an earnings trough here, with the main earnings season still weeks away. That means attention is likely to stay firmly on coronavirus this week. It probably would, anyway, but in earnings season at least there’d be the distraction of company reports to monitor. 

Earnings season could give investors a sense of just how much damage the balance sheets might suffer this year. Here and there, companies might offer better than expected guidance, perhaps providing the market a brief injection of hope. Unfortunately, earnings for Q1 and Q2 aren’t likely to provide much in the way of positives to ease the sting, analysts say.

Some analysts believe these earnings seasons could be “throwaways,” because any decent Q1 numbers might be discounted as not incorporating the full impact of the crisis. The Q2 numbers, when they bow starting in July, might be so bad due to the crisis that they’re basically written off. Many analysts see Q3 as the first potential quarter of economic recovery, but that’s a big if because no one knows how long this microscopic virus might continue beating up the world’s economy like a rented mule.

That said, this week does bring two company reports worth a glance. Micron Technology Inc. MU and Nike Inc. NKE both open the books, and it’s not so much the results people will necessarily zone in on. Instead, investors should consider paying close attention to the earnings calls to get a sense of what executives have to say about the environment they face in the key industries of retail and technology. 

Both could provide a glimpse into the situation in China, for instance. Things seem to be getting better there, at least from a virus caseload standard. Still, some Americans don’t completely trust what Beijing has to say. The words of executives running companies that have Asian operations and sell products there are more likely to resonate with investors. Are things improving from a consumer standpoint in the Chinese market? That’s a question for NKE, which has closed stores in the Western world but has re-opened many in Asia. 

MU sells to a long list of technology firms, many of which have operations in China. It also runs operations of its own in China, Taiwan, Singapore, and Japan. Its chips are used in electronic products sold throughout the region. The earnings call from MU could provide a close-up view of the crisis as seen through the eyes of a crucial company in a crucial industry. 

NKE is scheduled to report Tuesday afternoon, while MU reports Wednesday after the close. Apparel maker lululemon Athletica Inc. LULU also reports this week. So does homebuilder KB Home KBH.

Data-wise, this week includes February durable-goods orders on Wednesday and February consumer spending and income data on Friday. But the “main event,” as MarketWatch calls it, may be weekly jobless claims data on Thursday, which is expected to show a “monumental jump” as employers prepared for shutdowns.

Playing Hot Potato

The last hour each week has been a barn burner so far this year, and Friday’s was no exception. Stocks lost ground quickly and sank to new lows for the session in the final minutes. It seems like few people wanted to hold on going into the weekend with things so volatile and headline-driven.  

When all the carnage is calculated, last week was the worst since the deepest depths of the 2008 financial crisis. The S&P 500 Index (SPX) shed nearly 15% of its value, and is down almost 32% from its all-time high close posted just over a month ago. The SPX is also on pace for its worst monthly performance since 1940. 

It’s technically a little positive, however, that the SPX managed to finish the old week above 2300 after slipping below that big round number very late in the session. The session low of 2295 also was just above the low for the week of 2280, so there’s that.

It’s hard to smear any lipstick on what was a pig of a week. The SPX finished on Friday at its lowest level in more than three years. Crude sank 25% over five sessions and hit lows last seen in early 2002 when the U.S. was recovering from the Sept. 11 attacks.

One way to potentially track sentiment is to check the oil gauge, though it’s starting to get hard to tell if crude is driving stocks or vice versa. Crude’s steep losses appeared to help put pressure on stocks last Wednesday and Friday, and its gains on Thursday might have given stocks a little fuel. Crude prices can provide clues into economic activity. 

With much of the global economy basically shut down, crude fell more than 8% Friday to erase part of Thursday’s big gains as California shut down and other states including Illinois and New York followed suit. That in itself could slam oil, but a lot of the weakness in oil and across the commodity sector late last week also might have reflected strength in the dollar. Traditionally, a firmer greenback pressures commodities, and on Friday that relationship shined through (see chart below).

Something to Lean On? Where could the market end up finding some significant footing? Barron’s asked several analysts, and the consensus was that we’re near levels that could constitute technical support. Though all of the analysts responding mentioned the 2300–2350 level in the SPX as a place where the market might try to make a stand, they also cautioned that stocks have blown through every technical support level on the way down. There’s no guarantee of this trend ending, either. One analyst said if 2300 is taken out, the next place for possible support is well below current levels, near 2000–2100.

Dollar Domination: One apparent early victor in this extra-round boxing match between the virus and the global economy appears to be the U.S. dollar. On Friday, the dollar index climbed above 102, a nearly three-year high which hints that investors apparently seek the perceived safety of the greenback in these tough times. 

That’s not necessarily a terrible thing, because it implies that at least some investors believe the U.S. has the means to weather this storm. A strong dollar could also potentially improve domestic buying power here. However, it’s probably going to be very tough on overseas economies buying dollar-denominated goods like crude and copper. It also could mean even more pressure on U.S. companies with big international customer bases. 

Buying Local: It sounds like the Fed is going to be scooping up some municipal bonds as part of a program to expand Fed purchases to non-traditional areas as part of the response to this crisis. If things work as the Fed hopes, this money would give local governments a liquidity lifeline at a time when investors seem to be shying away from anything but the most defensive assets. With cities and other local governments likely to take huge hits from closed businesses not being able to pay taxes and lack of tourism, it makes some sense for the Fed to try and grease the money flow so cities can keep the lights on and streets paved.