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Wall Street betting big on best-case scenario – Politico

Wall Street betting big on best-case scenario  Politico

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Markets bet on the best-case outcome — Markets ended mixed on Monday but for the most part investors appear to be betting that reopening will go well and the worst of the coronavirus crisis is over. And with so much Federal Reserve support, why would you not jump into the stock market?

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This is a big gamble given Covid-19 case rates are still going up in some states that are reopening and we are still only testing around 300,000 per day, nowhere close to enough, according to most experts. And the virus has now hit the White House itself. We aren’t going to know how this bet pays off for several weeks.

Here’s what it depends on, per JPMorgan’s Michael Cembalest: “Infection second waves, if they occur, will not overburden state healthcare systems to the point that governors of reopening states end up re-imposing lockdowns.

“If lockdowns persist in other states, additional Federal and state assistance will be forthcoming to offset the hit to household incomes and delinquency rates. … The employment, consumer spending and manufacturing ‘elasticity’ to reopening will be high. One example: over 95% of all unemployed respondents to the April BLS employment survey described their layoff as ‘temporary’ rather than ‘permanent.’”

MM SIDEBAR — The 95 percent figure was heartening. But just because people SAY they expect to get their jobs back doesn’t mean they will. And a lot has to go right in this scenario.

Citigroup’s David Bailin and Steven Wieting: “Investors are anticipating a fairly swift recovery, a return to ‘normal’ in the global economy. … Yet, there is a doubt in everyone’s mind. A big one. … COVID-19 is in 212 countries and, over time, without a vaccine, will infect 30 to 60 percent of populations globally.

“Absent coordination on economic and health policy, the disease will rebound, first in pockets and then in larger clusters until there is a place, perhaps a city or a business, which cannot function given the level of disease and the impact on its health system. This alone will frighten confident markets.”

The tough road ahead for the Fed — Our Victoria Guida: “The Fed … has poured trillions of dollars into the financial system over a matter of weeks. But soon it must do even more to confront the long-lasting economic wounds that will be left in the wake of the pandemic. Returning the U.S. to robust growth after the lockdown is lifted will mean dealing with mass unemployment, permanently shuttered companies and a buildup of mountains of debt for both households and businesses.

“The current Fed chief, Jerome Powell, may shed more light on the central bank’s strategy for dealing with the immediate crisis on Wednesday, when he is scheduled to speak at the Peterson Institute for International Economics. He’s likely to disappoint investors looking for a detailed road map of the Fed’s future plans for the economy.

GOOD TUESDAY MORNING — Email me on and follow me on Twitter @morningmoneyben. Email Aubree Eliza Weaver on and follow her on Twitter @AubreeEWeaver.

The Senate Banking Committee at 10 a.m. holds a remote hearing on “Oversight of Financial Regulators” featuring the Fed’s Randy Quarles, Comptroller Joseph Otting, FDIC Chair Jelena McWilliams and NCUA Chair Rodney E. Hood … NFIB small business survey at 6 a.m. expected to drop to 83.5 from 96.4 …

FED TO STARTS INDIRECT CORPORATE BOND BUYS — Also via Victoria: “The New York Federal Reserve announced … that the Fed will begin making indirect investments in corporate bonds on Tuesday, with direct purchases under its emergency facilities expected to begin in ‘the near future.’

“The central bank on Tuesday will begin buying exchange traded funds tied to corporate bonds under its secondary market facility, which will eventually also buy existing corporate bonds on the open market. The Fed is also setting up a primary market facility that will buy newly issued debt directly from corporations.”

TRUMP’S ‘MISSION ACCOMPLISHED’ MOMENT — Our Nancy Cook: “On the day the U.S. death toll from coronavirus topped 80,000, President Donald Trump stood in the White House Rose Garden for a ‘mission accomplished’ moment …

“It was a pronouncement incongruous with the widespread anxiety among employers across America about whether enough testing exists to reopen their workplaces. It was also incongruous with the internal turmoil spreading on Monday inside the West Wing, where officials were scrambling to prevent the virus from crippling the most famous and supposedly safest office in America — one that already featured ample testing capacity for anyone who meets with Trump or Vice President Mike Pence.”

BLOOMBERG ON RE-OPENING — Via Mike Bloomberg op-ed: “States that are reopening their economies even as cases of Covid-19 are still rising are threatening their own residents and the whole country.

“But they are also running into two challenges that all states will face: Employees don’t want to return to work if they fear exposure to coronavirus on the job, and employers don’t want to get sued if their workers or customers end up sick. Both concerns are reasonable, and both could further cripple the economy unless Congress steps in.”

BIDEN/TRUMP CAMPS CLOSE ON CASH — Our Marc Caputo and Alex Isenstadt: “Trump’s political operation narrowly outraised Joe Biden in April, according to fundraising totals released Monday. The Trump campaign and Republican National Committee raked in $61.7 million, they said late Monday, while Biden and the Democratic National Committee announced they took in $60.5 million.”

TREASURY TO OPPOSE INSURANCE LEGISLATION — Our Zachary Warmbrodt: “The Treasury Department is signaling that it will oppose legislation that would rewrite existing insurance contracts to include coverage for the Covid-19 outbreak. In a letter to lawmakers, Treasury targeted state-level proposals that would require insurers to retroactively cover the pandemic.

“The bills, including a measure being considered in the District of Columbia, are being pushed by legislators because insurers are rejecting business interruption claims filed by firms forced to shut down amid social distancing orders. Insurers argue that in many cases they didn’t intend to cover losses tied to viral outbreaks.”

MNUCHIN OPEN TO EASING PPP RULES — Also via Zach: “Treasury Secretary Steven Mnuchin … said he was willing to work with Congress to relax restrictions on government-backed small business loans, amid growing complaints that the rules are unworkable for many employers.

“In an interview on CNBC, Mnuchin showed a greater openness than he had in recent days to reconsidering the guidelines for the Paycheck Protection Program … But the Trump administration’s top economic official also made clear he believed it would take action by Congress to make changes. One of the restrictions Mnuchin appeared willing to redo was the requirement that businesses spend at least 75 percent of a loan on payroll costs if they want the loan to be forgiven.”

HYDROXYCHLOROQUINE SHOWS NOT BENEFIT — Our Sarah Owermohle: “A decades-old malaria medicine touted by the president as a coronavirus treatment showed no benefit for thousands of patients hospitalized in New York. There was also no noticeable advantage for patients that took the drug paired with the antibiotic azithromycin, according to hotly anticipated research published Monday in the Journal of the American Medical Association.”

RISK TO THE STATES — EPI’s Josh Bivens: “The revenue shortfall facing state and local governments stemming from the collapse in economic activity … could reach nearly $1 trillion by the end of 2021. And even at the end of 2021, recent economic projections indicate that unless more relief and recovery is passed, the unemployment rate could still sit at just under 10%.”

MARKET VOLATILITY RECEDES TO LOWEST LEVEL SINCE FEBRUARY — WSJ’s Gunjan Banerji: “Market volatility has abated after a painful stretch of turbulence, flashing a green light for some funds to buy U.S. stocks. The Cboe Volatility Index, or VIX, fell Friday to 27.98, its lowest level since Feb. 26. That was before the stock market suffered its most volatile month in history in March and the VIX jumped to a fresh record high, topping its prior peak hit during the global financial crisis. The options-based gauge tends to rise when markets are falling as investors reach for options contracts to protect their portfolios.”

WALL STREET TURNS MIXED — AP’s Stan Choe: “Major stock indexes erased much of their early losses, leaving the market mixed at the end of trading Monday. Companies whose fortunes are most closely linked to how well the economy is doing took the biggest losses, including banks, energy and basic materials companies. The S&P 500 wound up with a gain of less than 1 point, having come back from early loss of 0.9 percent. Far more stocks fell than rose in the index. Technology companies continued their steady march higher, sending the Nasdaq up 0.8 percent. Health-care stocks also rose, and came closer to erasing their losses for the year.”

FIRST LOOK: CONSERVATIVE GROUP PUSHBACK — A letter going out today from NTU, R Street, AFP, ATR and others argues “against the inclusion of credit reporting language in what House Dems are set to release for a Phase 4 package this week.”

PNC PULLS BLACKROCK STAKE — WSJ’s Dawn Lim and Orla McCaffrey: “BlackRock Inc.’s largest shareholder, PNC Financial Services Group Inc., said it is exiting its stake in the firm, ending a lucrative years-long wager on the world’s largest money manager.

“PNC Financial Services Group Inc. currently owns a roughly 22% stake in BlackRock. PNC bought BlackRock in 1995 for roughly $240 million, but its stake shrank over the years. PNC got a steady stream of fees and profits from the asset manager’s robust growth in the last decade as BlackRock sucked up a growing share of money flowing into index and exchange-traded funds.”

HOUSE NOT BACK UNTIL FRIDAY — Our Heather Caygle and Sarah Ferris: “The House won’t return until Friday at the soonest as senior Democrats continue haggling over the details of their latest multitrillion-dollar coronavirus relief bill.

“Speaker Nancy Pelosi had initially hoped to vote on the coronavirus relief measure this week but the legislation isn’t expected to be finished until Tuesday at the earliest, according to multiple senior Democrats and aides with knowledge of the discussions.”

ECONOMISTS EXPECT RECOVERY TO BE MORE OF A ‘SWOOSH’ — WSJ’s Paul Hannon and Saabira Chaudhuri: “Until recently, many policy makers and corporate executives were hoping for a V-shaped economic recovery from the coronavirus pandemic: a short, sharp collapse followed by a bounce back to pre-virus levels of activity.

“Now, however, they expect a ‘swoosh’ recovery. Named after the Nike logo, it predicts a large drop followed by a painfully slow recovery, with many Western economies, including the U.S. and Europe, not back to 2019 levels of output until late next year — or beyond.”

AS BANKS STUMBLE IN DELIVERING AID, CONGRESS WEIGHS ITS OPTIONS — NYT’s Emily Flitter and Emily Cochrane: “When the federal government agreed to funnel $2.2 trillion in emergency aid to Americans devastated by the economic shutdown, the nation’s banks were given a central role.

“There were three main prongs of relief for taxpayers and American businesses, all routed through the banks in various ways: stimulus checks, a $660 billion package for small businesses and unemployment benefits. Confronted with an unprecedented crush of need as millions of Americans lost their livelihoods, the banks stumbled in ways big and small.”

FED POLICYMAKERS NEGATIVES ON NEGATIVE RATES — Reuters’ Ann Saphir: “U.S. Federal Reserve policymakers say they will do what it takes to cushion an economy crushed by the widespread lockdowns aimed at slowing the coronavirus spread, but there’s one thing they probably won’t do: take interest rates below zero.

“‘We must do all we can so that economic activity can resume once it is safe to do so and focus our efforts on returning to prosperity as quickly as possible,’ Chicago Fed President Charles Evans told a meeting of the Lansing Chamber of Commerce, held via Zoom. Rates will stay near zero for ‘quite some time,’ he said.”

QUARLES SAYS MORE MAY BE ASKED OF THE FED BEFORE THE CRISIS ENDS — Bloomberg’s Alister Bull: “Federal Reserve Vice Chairman for Supervision Randal Quarles said financial strains triggered by the coronavirus have eased but ‘the storm’ is not over and further steps may be needed to shelter the U.S. from the pandemic.

“‘We at the Federal Reserve are seeking to play our role responsibly and effectively,’ Quarles will tell the Senate Banking Committee in testimony scheduled for Tuesday, according to a text of his prepared remarks posted on the Fed’s website. ‘The tools we have are ones no country should ever hope to need; the hour of their use is one no country should ever hope to face.’”

ALMOST 4M MORTGAGE BORROWERS IN FORBEARANCE — Reuters: “Almost four million mortgage borrowers have had their payments paused or reduced as the novel coronavirus outbreak continues to strain household balance sheets, a survey from the Mortgage Bankers Association showed on Monday.

“The share of mortgage loans in forbearance rose to 7.91 percent from 7.54 percent from April 27 to May 3, the industry lobbying group said. The number of new requests for relief fell relative to the prior week for the fourth consecutive survey period, MBA said.”

TRANSITIONS — Kimberly Burham has joined the Pew Charitable Trusts as a senior officer in their public sector retirement systems division and will focus on state and local pensions, revenues and the impact of the macroeconomy. She previously was managing director of legislation and special projects at the Penn Wharton Budget Model.

Katherine Knight starts today as the Department of Transportation’s deputy director of public affairs. She was previously the Association for Advanced Life Underwriting’s vice president of communications.

Source: politico.com

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