(Bloomberg) — U.S. stock index futures surged, with contracts on the S&P 500 rising as much as 4.8% and reaching exchange-enforced bands that prevent further gains, after President Donald Trump said he will seek a payroll tax cut and “very substantial relief” for industries that have been hit by the coronavirus outbreak.
A day after spending most of the previous overnight session pinned to a lower boundary that barred further selling, the March S&P 500 contract reached 2,879, the so-called limit up level established each day by the Chicago Mercantile Exchange. CME rules keep it from rising further.
Trump, speaking at a White House news conference, said he plans to announce “very dramatic” actions to support the economy at a press conference on Tuesday following discussions with lawmakers.
“Looks like it includes a possible payroll tax cut,” said Matt Maley, an equity strategist at Miller Tabak & Co. “We might need to see more details before any rally gains any sustainability, but this should at least stabilize things overnight.”
Earlier, S&P 500 futures had dropped as much as 1.9%, bringing the plunge since a February record to more than 20%. Dow Jones Industrial Average contracts also briefly fell more than 20% from the all-time high. The S&P 500 Index tumbled 7.6% during Monday’s cash session after an oil price war broke out in markets already rattled by the spreading coronavirus.
Investors fled risk assets on Monday with virus cases surging. The U.S. announced more deaths, Italy struggled to lock down its financial hub and the World Health Organization warned the threat of a pandemic is “very real.” The velocity of the drawdown in American equities is threatening to end the bull market that just logged its 11th anniversary.
Added to the uncertain impact of the virus on the economy is the crashing oil price that threatens to upend politics and budgets around the world, exacerbate strains in high-yield credit and add pressure on central bankers trying to avert a recession. It typically would have proved a boon to consumers, but the coronavirus is increasingly keeping them at home.
The market meltdown is forcing equity investors to confront worst-case scenarios they normally delegate to colleagues in credit: which companies can survive a slowdown, and which are teetering toward extinction?
The urgency of the assessment is a sign stock managers have entered survival mode as credit spreads spike. Companies with strong balance sheets have generated “extraordinary returns” on a relative basis since the S&P 500 peaked on Feb. 19, according to Goldman Sachs Group Inc.’s chief U.S. equity strategist, David Kostin. Their weaker counterparts have gotten trounced.
“Markets will continue to see this extreme volatility with falls on worries about the economic outlook on the back of coronavirus and its flow on, but occasional sharp rallies on stimulus plans and signs of hope,” said Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors.
–With assistance from Vildana Hajric.
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