There is a story of immense importance to global markets that’s been buried by headlines of the coronavirus outbreak: the US presidential election. As Bernie Sanders appeared to canter to the Democrat nomination, the risk of an unashamed socialist in the White House was real. Wall Street didn’t like this idea, nor did Silicon Valley. Joe Biden’s success in the last day - and a perceptible shift by the Democrat Party back to the centre for which Mike Bloomberg deserves enormous credit - helped fire US equities yesterday.
Fiscal support in the fight against the Covid-19 outbreak also helped, as the US Congress turned on the taps to underpin the Fed’s 50bps cut. Congress approved an $8bn package, while the IMF has unleashed $50bn to help fight the outbreak. The Fed’s Beige Book survey shows US businesses are already feeling the impact from the coronavirus, with disruption to travel, tourism and supply chains. The survey shows that there is a clear supply shock going on, but also a demand shock. Hence we need a fiscal and monetary response. It helped that the Bank of Canada also cut 50bps. The ECB, albeit with very limited ability to do anything, will be next. The Bank of England will follow. Italy’s deputy economy minister Castelli aid the government is likely to boost its support package to counter the economic impact from the virus to €5bn.
The Reserve Bank of Australia is talking up the prospect of using quantitative easing to boost the economy in a bid to insulate it from coronavirus damage. The central bank reckons the virus could knock half a percentage point off growth this quarter. As central banks approach the zero lower bound, many are looking at Europe and thinking I don’t fancy getting into negative rate territory. The Bank of England would be in a very similar position - it’s just not getting much ammo left to cut, and is clear it doesn’t want negative rates, which leaves QE.
The Dow rallied 1173 points, wiping out Tuesday’s losses, while the S&P 500 rose more than 4%. European equity benchmarks climbed roughly 1.5%. Asian shares have rallied overnight, taking the cue from Wall Street.
OPEC faces a major challenge today as it convenes in Vienna at the start of a two-day meeting to discuss extending and deepening production cuts. IHS Markit said yesterday that it expects global demand to drop by 3.8 million barrels per day in the first quarter compared to 2019. That makes the 1.7m currently off the market look relatively puny – more is needed. Saudi Arabia is pushing for deeper production cuts, but Russia is more comfortable with prices where they are and has yet to agree. OPEC’s joint technical committee has proposed a 600,000 bpd reduction beyond the 1.7m bpd cuts that are in place through to the end of March. Additional voluntary cuts by Saudi Arabia mean about 2.1m bpd is currently off the market. Getting Russia on board is important, but you get the feeling that the Saudis will carry the can for this if they have to. I think Russia will play ball and there is a strong chance that OPEC exceeds expectations, pushing perhaps for a 1.2m bpd reduction for a short period of time. Unlike past OPEC+ deals, there is a feel that this requires more aggressive but more temporary action which could allow the cartel and allies to make a sharper, deeper cut but on a more limited time horizon. They could set rolling 3-month output agreements.
There are signs that oil refiners in China are slowly increasing production, but concern is mounting that demand will start to fall in other parts of the world as the virus spreads. If we see PMIs in Europe and the US collapse in the way they have in China, oil demand forecasts will need to fall further and that will further weigh on sentiment.
WTI crude was trading higher overnight thanks to the bump for equities and in anticipation of the OPEC meeting, but still is largely rangebound around the $47 mark. US crude inventories rose less than expected, data yesterday showed, with a build of 0.8m vs the 2.8m expected, according to the US Energy Information Administration.
Equities
Supermarkets – Tesco, WM Morrison, Sainsbury’s – Tesco is set to price match Aldi on hundreds of items. The move signals a new supermarket price war, which will be problematic for all as margins will undoubtedly come under pressure, albeit it may mean the big four arrest some of their market share decline to the Germans.
Flybe/airlines - a torrid and ignominious end. It’s been teetering for months and even 4 years ago it was a prime candidate to be the next European airline to fail. Covid-19 was the nail in the coffin. The coronavirus is destroying travel demand - it will accelerate the process of failure and consolidation in the European airline sector. European short haul in already in the midst of a multi-year structural shift that involves trimming fat, shedding weaker operators and consolidating. Weaker players - Flybe was the weakest - will struggle with cash flow and those with weaker balance sheets could be in trouble. We’ll also look to see which of IAG (LON:ICAG), Ryanair and EasyJet are able to pick up Flybe’s regional U.K. business.
ITV – as we flagged last week, there is a clear negative impact on ITV ad revenues from the coronavirus as companies dial back on spend. Management say early indications suggest total advertising revenue will be down 10% in April. ITV reports travel advertising deferments relating to the coronavirus. At this stage, management say it is too difficult to assess the further implications of the coronavirus, but it will continue to monitor the situation closely. Q1 ad revenues are seen up 2%.
For the full-year, total external revenues rose 3%, with total ad revenues down 1.5%, which is better than had been previously guided. There has been a lot of talk in the ITV (LON:ITV) updates about Brexit uncertainty but you have to look at the broader economy and say that’s just been a smokescreen, and one that maybe helps mask the structural decline in traditional media spend. Adjusted earnings before nasties fell 10% to £729m. ITV is investing content and can rely less on ads in future – it will need to.
Ex-dividend factors clip 16.5 points from the FTSE 100, and 15.5 points from the FTSE 250.
FTSE Quarterly review - changes take place at close of business on 20th March:
FTSE 100
Inclusions Deletions
Fresnillo (LON:FRES) Kingfisher (LON:KGF)
Intermediate Capital NMC Health
Pennon TUI
FTSE 250
Inclusions Deletions
Biffa 888
Chemring Finablr
Gamesys Galliford Try (LON:GFRD)
Hipgnosis Songs Hunting (LON:HTG)
Impax Env. Markets Intermediate Capital
NMC Health NewRiver REIT
Petropavlovsk Pennon
TUI SIG (LON:SHI)
XP Power Tullow Oil (LON:TLW)