- Equities turn red after would-be miracle drug Remdesivir fails clinical trial
- Euro dives as EU drags feet on recovery fund, disagrees on debt sharing
- Yen pares gains on reports BoJ will ramp up stimulus next week
- Oil extends bounce, but rebound likely fragile
Virus-drug disappointment bites stocks
A rally in global stock markets faltered yesterday, with the S&P 500 giving up early gains to close practically flat and futures pointing to more pain on Wall Street today, following headlines that leading experimental drug Remdesivir failed its first clinical trial. This drug was heralded as a potential miracle treatment in recent weeks amid reports that early findings were encouraging, so the disappointment dashed hopes for a swift medical solution that cures markets too.
While several other clinical trials of potential therapies are currently underway, this was the most high-profile and most promising one in market circles, so a key upside risk for stocks seems to have been taken off the menu for now.
This is starting to resemble a short-term top for stock markets, and with good reason if one looks at how scary incoming economic data are. Indeed, global PMIs cratered to record lows yesterday, signaling that the world economy is about to enter a recession that could make 2008 look like child’s play in terms of depth and perhaps even duration when factoring in the risk of lasting damage to consumer psychology.
Yen climbs, euro slammed as EU can’t get its act together
Beyond stocks, the cautious sentiment was reflected in the defensive Japanese yen, which outperformed most of its peers despite reports that the Bank of Japan will expand its already-massive stimulus program at next week’s meeting. The central bank is set to scrap the limit on the amount of government bonds it can buy and double its purchases of corporate bonds, but admittedly, it’s doubtful how much real impact these will have.
In euro land, the single currency was pummeled by the inability of EU leaders to deliver a concrete stimulus plan. The meeting ended with the heads of state agreeing to set up a recovery fund, but leaving out crucial details like its size, when it will be set up, and how it will be financed – all of which has been tasked to the Commission to ‘study’. This was a huge disappointment as the market wanted swift action, not a plan to make a plan.
All this highlights once again how weak the Eurozone’s institutional structure is. Every time there’s a crisis, the EU is consistently slow to act and notoriously divided on how to deal with it, which ultimately generates uncertainty, limits the effectiveness of stimulus measures, and puts a lid on potential growth. Put together, these add a risk premium on euro-denominated assets, including on the currency itself.
All told, the outlook for the euro remains grim. The Eurozone is about to experience a massive recession and not only will any massive stimulus take several months to arrive, it probably won’t include a real debt-sharing mechanism to relieve ravaged economies like Italy and Spain when it finally does.
Oil extends bounce after Trump squeezes shorts
Oil prices closed with decent gains yesterday after a tweet by President Trump threatening Iran likely squeezed out many short sellers. Yet, this still doesn’t look like a sustainable bounce, as nothing has changed either on the demand or supply side. The world is still swimming in oil that nobody wants and there’s nowhere left to store it.
The troubles in the oil market are probably not over, and might even worsen heading into mid-May as storage capacity evaporates entirely. However, when we do run out of storage space, that might be the point of ‘peak oversupply’ and perhaps the bottom for oil prices, as production will then have to collapse until it meets demand.