Weekly Market Pulse - Week ending March 27, 2020
For the week ending March 27, 2020
- TSX rallies. S&P/TSX Composite gained 7.05% last week. Equity markets quickly rebounded even as COVID-19 cases more than doubled to 592,844. Additional monetary stimulus being introduced by central banks, alongside government fiscal packages globally, supported markets. The Government of Canada 10-year yield fell 13 basis points ending the week at 0.74%.
- Bank of Canada announces more stimulus. The BoC made another unscheduled rate cut, slashing rates by an additional 50 basis points to 0.25%, citing the spread of COVID-19 and its consequences on the economy as well as the abrupt decline in oil prices. The BoC also launched two new programs: 1) Commercial Paper Purchase Program (CPPP) to alleviate strains in short-term funding markets, and 2) purchase of Government of Canada debt market in secondary markets, with a minimum of $5 billion per week until the economic recovery is well underway.
- Federal government announces more fiscal aid. Prime Minister Justin Trudeau unveiled new measures to aid small businesses by introducing wage subsidies, availability of loans through banks and credit funding agencies, and additional tax deferrals.
- Gold and Loonie shine. As U.S. real yields fall back into negative territory, gold gained 11.2% to end the week at US$1,654.10/oz. As gold rallied, the U.S. dollar pared some of its gains. USD/CAD dropped 2.7%, ending the week at 1.3985.
- Oil slips. WTI crude oil fell 4.95% ending the week at US$21.5/barrel, marking a 17-year low. The price of Canadian heavy crude oil Western Canada Select, remains at a significant discount to the global benchmark and closed the week at US$5.06/barrel. For many producers, it now costs more to transport a single barrel of Canadian crude than the price of the commodity itself.
S&P/TSX Composite Daily Index Change
U.S. & International Markets
For the week ending March 27, 2020
- U.S. markets rebound. The S&P 500 (C$) gained 10.3% following the announcement of unprecedented stimulus measures. The U.S. Treasury 10-year yield fell 17 basis points ending the week at 0.67%.
- U.S. drops $2 trillion fiscal package. President Donald Trump signed the $2 trillion emergency aid package after back and forth negotiations between Democrats and Republicans. The fiscal package will aid workers and businesses affected by the economic disruption caused by COVID- 19.
- U.S. Federal Reserve announces “unlimited QE”. The coronavirus effects on the economy forced the Fed to take further action, announcing it would purchase Treasury securities and agency mortgage-backed 1,500.00 1,000.00 500.00 0.00 -500.00 -1,000.00 S&P/TSX Composite Daily Index Change 1,342.59 securities “in the amounts needed to support smooth market function and effective transmission of monetary policy”. The Fed had previously announced it would purchase $500b of Treasuries and $200b of agency MBS. Other announcements by the Fed: 1) established Primary Market Corporate Credit Facility to support credit to large employers, 2) established Secondary Market Corporate Credit Facility to provide liquidity for outstanding corporate bonds, 3) established Term Asset- Backed Securities (ABS) Loan to enable issuance of certain ABS, 4) expects to announce Main Street Business Lending Program to support lending to SMEs, and 5) reduced pricing and expanded permitted securities on certain previously established facilities.
- U.S. jobless claims hit record. U.S. initial jobless claims spiked to 3,283k during the week ending March 21, compared to 282k the previous week. This unprecedented surge shows the economic devastation of the coronavirus as non-essential businesses close and claims increased in all 50 states.
- U.S. PMI plunges further. The March IHS Markit Flash US Composite PMI dropped to 40.5 from 49.6 in February. The fall was largely driven by a steep decline in Services Business Activity which dropped to 39.1 from the previous reading of 49.4. The Manufacturing portion held up much stronger at 49.2 from 50.7. Surveyed firms showed signs of business activity contraction following escalation of the coronavirus outbreak. Companies reported lower customer demand and noted a drop in new business, while reducing workforce numbers at the fastest pace since December 2009. Looking ahead, firms were still generally optimistic that business activity would pick up over the next year.
- Eurozone PMI drops sharply. The March IHS Markit Flash Eurozone Composite PMI plummeted to a low not seen since 1996 with a reading of 31.4, from 51.6 in February. Both manufacturing output and services activity fell as the widespread disruptions from the coronavirus hit demand for both goods and services. The Services PMI dropped to 28.4 from the previous reading of 52.6, while the Manufacturing PMI held up better at 39.5 from 48.7. New orders contracted at the fastest rate yet recorded as cross border trade flows seized up and expectations of future output deteriorated to an all-time low. Firms reported having lowered prices in an attempt to boost sales and reduce inventories. The slumping sentiment prompted the largest monthly cull in employees since July 2009.
- Eurozone consumer confidence drops. The Flash Eurozone Consumer Confidence Indicator dropped 5 points to -11.6, with the indicator now being below its long-term average of -11.0. Only approximately 15% of the survey responses were collected after strict confinement measures taken by some countries, so the final release will be important to watch.
- ECB lends additional support. The ECB expanded its Pandemic Emergency Purchase Programme (PEPP) introduced just a week prior. ECB President Christine Lagarde said there are “no limits” to the central bank’s commitment while the economy faces the coronavirus as the ECB removed various constraints on its purchases. The PEPP will now include bonds with shorter maturities, removed a constraint on sovereign bond- buying to a third of each of its member state’s debt, and could continue into 2021.
DJIA Daily Index Change
S&P 500 Daily Index Change
Canada joins the QE club. Among the numerous policy measures announced by the Bank of Canada in recent weeks, the most notable was their announcement last Friday to start purchasing at least $5 billion per week in Government of Canada bonds. This equates to about 1% of GDP per month. In response to the 2008 Financial Crisis, the Bank of Canada brought interest rates down to 0.25% (present-day levels) but held off on unconventional monetary policy measures such as Quantitative Easing, despite most other developed economies doing so. While this certainly increases our debt burden in the years to come, there is an immediate need to cushion the economic impact from the double whammy of both the COVID-19 pandemic and crashing oil prices. Despite the increase in both monetary and fiscal stimulus, Canada would still likely have one of the lowest debt/GDP ratios across developed nations.