Dow Futures Higher As Coronavirus Concerns Wrestle Central Bank Support Bets

Global stocks climbed higher Monday as investors bet on near-term rate support from the Federal Reserve following a record plunge in China factory activity and the ongoing spread of the coronavirus.

The Monday Market Minute

  • Global stocks rebound, but pare gains, on hopes of near-term central bank support, following unscheduled statements from both the Bank of Japan and the Federal Reserve.
  • The Bank of Japan said it would "strive to stabilise markets", while the Fed promised to "act as appropriate" amid the ongoing coronavirus spread.
  • China's factory activity plunged the most on record last month, teeing up the possibility of recession in the world's second-largest economy.
  • Coronavirus cases top 87,000 worldwide, with new infections - and two deaths - recorded in the United States. 
  • European Commission President says coronavirus risk level has risen from "moderate" to "high" with 2,100 cases in 18 member states.
  • Benchmark 10-year bond yields fall to a record low 1.03% in overnight trading, while CME Group futures suggest a 100% chance of a March rate cut from the Fed.
  • U.S. equity futures suggest fresh opening bell declines on Wall Street, following the worst one-week decline since the global financial crisis,  ahead  of February ISM manufacturing data at 10:00 am Eastern time.

U.S. equity futures pared earlier gains Monday, swinging more than 700 points from an overnight surge that lifted global stock markets from their worst week since the financial crisis, and bond yields continue to tumble and officials warn that the coronavirus remains a significant risk for the world economy.

Weekend data from China suggests factory activity in the world's second-largest economy -- and the epicenter of the burgeoning coronavirus pandemic -- came to a screeching halt last month as businesses remained closed and workers were encouraged to stay home as infections surged. 

Both the official February manufacturing reading, which plunged a record 14.3 points, and the private Caixin/Markit PMI tally, indicate the kind of slowdown that suggests not only first quarter weakness, but the real potential for recession over the first half of the year. 

The the Organisation for Economic Cooperation and Development, in fact, said Monday that global growth could slow by half a percentage point, to 2.4%, a rate that would mark the weakest expansion since 2009. A broader coronavirus spread, the OECD warned, could take that tally to just 1.5%.

With supply chains in the Asia region silent and factories barely sputtering, and stock markets reeling from their steepest one-week decline since the global financial crisis, the Bank of Japan issued an emergency statement that indicated it would "monitor developments carefully, and strive to stabilise markets and offer sufficient liquidity via market operations and asset purchases."

The statement followed similarly unscheduled comments from Federal Reserve Chairman Jerome Powell, who pledged late Friday that the central bank would "act as appropriate" given that "the coronavirus poses evolving risks to economic activity."

"The Federal Reserve is closely monitoring developments and their implications for the economic outlook," the statement added. "We will use our tools and act as appropriate to support the economy."  

Goldman Sachs analysts said the comments could signal a 50 basis point rate cut from the Fed, even before its March 18 meeting, while economists at the bank warn "recession risk is real, even if it is not our base case scenario", as U.S. cases of the virus rise to 75 and officials confirm at least two people -- both in Washington state -- have died.

CME Group futures now suggest a 100% chance of a 50 basis point March rate cut, compared to 0% only a week ago, and are fully pricing in further cuts between now and the end of the year.

Near-term support, be it in the form of targeted asset purchases or rate cuts, allowed stocks to find a floor on Monday morning, following another lurch lower in overnight futures trading, while igniting bargain-hunting bids for oil and other beaten-down assets.

U.S. equity futures, however, now suggest a 140 point opening bell gain or the Dow Jones Industrial Average, which lost 3,583 points last week, while those linked to the S&P 500 are indicating a 12 point bump for the broader benchmark.

Much of the market's direction, however, could depend on movements in fixed income markets, and especially for benchmark 10-year Treasury note yields, which hit a record low of 1.03% in overnight trading before the Bank of Japan statement.

In fact, at one stage in the overnight session, futures prices implied a sub 1% yield on the notes, suggesting cash continues to pour into fixed income assets 

Global oil prices, however, were marked sharply higher in early Monday trading as investors reacted to both the possibility of near-term central bank stimulus and the chances of deeper production cuts from OPEC members when the cartel meets later this week in Vienna.

Brent crude futures contracts for April delivery, the global benchmark, were last see seen $1.01 higher from their Friday close in New York and trading at $50.71 per barrel, while WTI contracts for the same month were seen $1.36 higher at $45.57 per barrel.

European stocks also found a bid  in early Monday, following last week's rout, but the Stoxx 600 fell 0.5% after European Commission President Ursula von der Leyen raised the region's coronavirus threat level to "high", from "moderate" and said 2,100 cases had been reported in 18 member states.

Britain's FTSE 100, meanwhile, rose 0.4% on the strength of basic resource and energy stocks, as well as a statement from the Bank of England that it "continues to monitor developments and is assessing its potential impacts on the global and U.K. economies and financial systems."

Overnight in Asia, Japan's Nikkei 225 managed to end the session 0.95% higher, even as the yen held near a 20-month high against the U.S. dollar, as investors bet on targeted purchases of either stocks or exchange traded funds by the Bank of Japan.

The region-wide MSCI ex-Japan benchmark, meanwhile, was seen 1.18% higher heading into the final hours of trading.