US futures rise, Europe stocks drop; dollar dips

Bloomberg

Caution hung over markets on Wednesday, with European stocks falling following a late drop on Wall Street, and US
equity futures edging higher alongside Asian benchmarks. Treasuries climbed, while oil futures slipped.
Declines in travel and auto shares pulled the Stoxx Europe 600 Index lower, as corporate earnings continued to underscore the devastating impact of the coronavirus pandemic. The world’s largest container line, A.P. Moller-Maersk A/S, said the fallout from Covid-19 will drive volumes down by as much as 25% this quarter, while ABN Amro Bank NV reported its first loss since 2013.
S&P 500 futures fluctuated before turning higher after the underlying index sank more than 2% late Tuesday after downbeat comments from regional Federal Reserve chiefs and caution from the top US infectious-disease official, Anthony Fauci, about reopening the economy. The dollar steadied versus its biggest peers.
Oil retreated from a five-week high.
Equity investors are debating whether the rally from March lows has gone too far, with veteran investor Stan Druckenmiller saying the risk-reward calculation for stocks is the worst he’s seen in his career. Data on the virus’s spread is being weighed against the constant news flow of attempts
to kick-start industries. Tesla Inc. can begin preparing to reopen its only US car plant as soon as next week, a California authority said.
Fed Chairman Jerome Powell may offer fresh cues on the outlook for world’s largest economy, and for monetary policy.
The New Zealand dollar tumbled after country’s central bank boosted its asset purchase program and indicated openness towards negative interest rates.
While the Stoxx Europe 600 Index fell 1.3% as of 9:40 am London time, Germany’s DAX Index declined 1.5%.
The Bloomberg Dollar Spot Index was little changed and the euro was little changed at $1.0844.
While the British pound increased 0.2% to $1.2281, the Japanese yen strengthened 0.2% to 106.97 per dollar. The yield on 10-year Treasuries gained less than one basis point to 0.67% and Germany’s 10-year yield fell two basis points to -0.53%.
While Britain’s 10-year yield decreased three basis points to 0.224%, New Zealand’s 10-year yield dipped 12 basis points to 0.626%. West Texas Intermediate crude fell 0.5% to $25.65 a barrel, gold weakened 0.1% to $1,701.64 an ounce and iron ore climbed 1.4% to $88.50 per metric ton.

Investors dumping stocks for bonds
The Federal Reserve’s dive into corporate debt aligns the US central bank with money managers around the world pivoting towards America Inc.’s bonds and away from its shares. Exchange-traded funds investing in credit saw $2.4 billions of inflows in past week, compared to outflows for equities.
Funds targeting American stocks posted $9.3 billion of outflows in the period ending May 6, the most in six weeks, according to a Bank of America note citing EPFR Global data. The six-week inflow for high-yield bonds hit a record $32 billion.
It’s the “follow the Fed” mantra in action as investors fresh from the first-quarter turmoil seek safety higher up in the capital structure.
“We decided to reduce our global equity exposure in favour of global investment grade corporate bonds,” said Greg Perdon, chief investment officer of Arbuthnot Latham & Co Ltd. “We have preference for bonds that are going to benefit from central bank intervention. Investment grades might not have much of an upside, but they have a floor.”

The Fed facility beginning today is designed to purchase eligible credit ETFs — likely including an unprecedented bid for high-yield securities — as part of its emergency stimulus program to combat the coronavirus fallout.