(A look at the day ahead from Sujata Rao, deputy editor for markets and financial services, EMEA. The views expressed are her own.) “You will get business failures on a grand scale,” was the warning last night from St Louis Federal Reserve President James Bullard. Yet he stressed he did not see negative interest rates as a good option for the United States. Expect his boss, Fed Chairman Jerome Powell, to repeat that message tonight.
Yet there are signs the Fed might eventually be forced down that path. Fed funds futures are pricing in rates of about a basis point below zero by April 2021. Recall also yesterday’s data showing U.S. consumer prices dropped by the most since the 2008-9 financial crisis even as food prices rose 2.6% — the largest advance since February 1974 -– raised stagflation worries. And one more central bank, the Reserve Bank of New Zealand, has just signalled it was open to negative rates.
There may be grand failures on other fronts – Wall Street fell more than 2% on Tuesday and the VIX volatility index jumped after U.S. infectious disease expert Anthony Faucci warned prematurely reopening the economy could cause more deaths. Indeed, as people across the world returned to work, so it seems did the coronavirus. New cases are cropping up in places such as South Korea that had thought they had vanquished the outbreak.
This morning, European shares are down more than 1%, following dismal Asian sessions. U.S. equity futures have given up earlier gains while Treasury yields are down, following the biggest one-day fall in a month on Tuesday. The dollar is holding below three-week highs.
Aside from the virus, a U.S. Democratic bill mooting another $3 trillion-plus coronavirus relief package has been rejected by Senate Republicans and rumblings against China continue. The Trump administration is pressing a board overseeing federal pension funds to freeze plans to invest in certain Chinese companies.
And more reminders, if any were needed, of the miserable economic data and company earnings worldwide: UK gross domestic product plunged a record 5.8% in March, Japan’s service sector touched another record low in April and companies such as Commerzbank, ABN Amro and luxury carmaker Aston Martin are out with pretty bad first-quarter numbers.
Commerzbank and ABN again highlight the loan losses issue; the former made provisions of 326 million euros, versus 78 million euros a year ago. ABN Amro’s totalled 1.1 billion euros versus 478 million euros a year back. We’ll hear today from the European Central Bank Vice President Luis de Guindos and Chief Economist Philip Lane — the German constitutional court ruling that’s convulsed euro markets is likely to get a mention.
On the European corporate front, luxury firms are bleeding — carmaker Aston Martin said sales dropped over a third in the first quarter. Salvatore Ferragamo’s core profits plunged by 82.2%. L’Oreal has given up on share buybacks and a planned dividend increase in 2020.
The picture is mixed for travel and leisure. TUI said that it needed to cut its fixed cost base by 30% and thousands of jobs in order to survive. But we have a return-to-service plan by Ryanair, which will resume 1,000 flights a day from July. In M&A, Alstom is sticking to the terms of a deal to buy the rail division of Canada’s Bombardier for up to 6.2 billion euros. Exor will retain control of Bermuda-based reinsurer ParnerRe after French insurer Covea walked away from its planned $9 billion purchase of the Bermuda-based reinsurer. Emerging-market equities are up around 0.2% thanks to a healthy lead from Asia, where South Korean stocks gain 1% and Indian stocks roared 2.5% higher, cheering the government’s $260 billion stimulus, roughly 10% of GDP.
With the dollar off three-week highs, currencies also marked gains, led by the Mexican peso’s 0.8% rise thanks to plans to reopen industries such as mining and autos. Turkey’s lira is treading water data shows the March current account deficit wider than expected and ex-New York Fed President William Dudley poured more cold water over the prospect of Turkey getting a Fed swap line. DIARY New Zealand cbank meets UK BRC retail sales - April Q1 GDP/ industrial output, trade, construction-March Swedish inflation April Turkey current account March European corporate events Jernomino martins, TUI, Commerzbank US corporate events – Cisco
Editing by Larry King