Summary
Global equity markets improved dramatically last week, with the S&P 500 leading the charge by increasing 12.1% during the holiday-shortened week. The three-week recovery off the March 23rd lows seems to be gaining momentum even as more and more banks warn that investors should be cautious jumping back in, suggesting that the coronavirus-induced economic slowdown is far from over. The message from safe-haven assets is mixed at best, with gold rallying last week.
Credit markets also rallied across the board last week, with the best improvement in spreads occurring in the high non-investment grade ratings category (BB). At the other end of the spectrum, the least improvement in spreads occurred in the weakest non-investment grade category (CCC), which remains under pressure as companies in this rating category are the most vulnerable to the current economic stoppage.
Additional stimulus measures were approved in both the U.S. and Europe last week. In the U.S., the Federal Reserve passed a new $2.3 trillion round of stimulus measures increasing the size and scope of its asset purchases and loans, especially for states, larger municipalities and small & middle sized companies (SMEs). In Europe, the finance leaders of the EU countries finally approved a fiscal stimulus package of €540 billion available for member states to tap in order to support their workers and businesses during this economic stoppage. Economic data releases this week are rather light.
Bernie Sanders dropped out of the Democratic race for Presidential candidate, leaving Joe Biden as the likely nominee. As bizarre as it sounds given the circumstances, Wisconsin held its primary last Tuesday with results expected this week. PM Boris Johnson was released from the hospital on Sunday.
According to Johns Hopkins University, the U.S. now has more cases of (526,391) and deaths from (20,457) COVID-19 than any other country in the world. The state of New York is the world’s epicentre of COVID-19 cases at the moment, with 181,026 cases reported. The next highest location is Spain, with 166,831 cases reported. Deaths seem to be stabilising and the curve flattening in beleaguered Italy and Spain, whilst unfortunately, both the U.S. and U.K. seem to still be in the growth phase.
OPEC+ agreed to production cuts on Sunday of 9.7m barrels/day, or roughly 10% of global supply. Oil prices rallied overnight in response.
The Global Equity Markets: The global equity markets are digging themselves out of a deep hole, clawing back some of the severe losses experienced through the third week of March. The on-going recovery broadened and gained steam last week, with all major exchanges realising significant gains throughout the week. Here’s how the year has shaped up so far.
The markets have indeed rebounded significantly since their March 23rd lows. The best performer has been the S&P 500, which is up 24.7% in only three weeks, followed by the STOXX 600 (+18.6%), the FTSE 100 (+17.0%), and the Nikkei 225 (+16.9%).
The superior performance of the S&P 500 – illustrated in the graph to the left - vis-à-vis the other indices since March 23rd - makes sense in that the fiscal and monetary stimulus in the U.S. has been much greater than in the other three markets so far.
As far as the signals coming from safe haven assets, gold rallied, the Yen was stable and US Treasuries sold off but only modestly last week. The fact that safe haven assets largely and on average stood their ground during a week with a record rally in equities should concern investors. COVID-19 Update: Below is the most recent heat map from the World Health Organisation (WHO), followed by a table showing the change in cases and deaths over the last few weeks.
According to data tracked by John Hopkins University, the U.S. now has three times the cases of COVID-19 as the next country (Spain, 166,831), and has also become the country with the most deaths (20,457 versus 19,899 in Italy). However, according to Worldometer, the U.S. is much lower in terms of deaths/million people (62) than Italy (322), Spain (363), France (212), the U.K. (145) and several other countries. Although COVID-19 has affected every U.S. State, New York very much remains the epicentre of the virus with more cases of COVID-19 (181,026) in the state alone than in the next highest country (Spain, 166,831). There is discussion of the curve beginning to flatten in the U.S. and the U.K., some welcome news, but this still seems not entirely clear. Currently, around 2,000 people are dying from the coronavirus in the U.S. each day, and 900 are dying in the U.K. each day. Economic Data: Another 6.6 million people filed for first time unemployment benefits in the U.S. last week, bringing the total to nearly 17 million Americans in only three weeks (which is circa 10% of the U.S. workforce). As large parts of the U.S. economy remain in lockdown, the Federal Reserve stepped up again on Thursday with an additional $2.3 trillion of monetary stimulus largely directed towards small businesses, states and large municipalities. Concurrently, a plan to lend another $250 billion to SME’s failed in Congress on Thursday, with Democrats not supporting the additional dose of fiscal stimulus because they felt it was insufficient. In any event, it is crystal clear that the U.S. has rolled out “the mother of all stimulus” packages to soften the economic effect of a shuttered economy. As I posted on LinkedIn a couple of days ago, there is a contrarian view to this unprecedented amount of stimulus in the U.S., perhaps best articulated by Chamath Palihapitiya of Social Capital. The 3 minute clip of Mr Palihapitiya’s interview Thursday on CNBC is worth watching and you can find it here. It should be clear that this quantum of stimulus measures comes with costs that might not be visible for years, even though the focus at the moment is very much on the present, i.e. getting past the pandemic. As far as economic data this week in the U.S., retail sales as well as industrial and housing data will be released for the month of March. In Europe on Thursday, the EU finance ministers finally reached an agreement on a €540 billion fiscal stimulus package for the economic bloc. The programme includes a €100 billion loan plan for unemployment benefits, €200 billion in loans for smaller businesses, and access to €240 billion in loans for Euro-area countries to draw on from the European Stability Mechanism, or ESM. Southern EU members – especially harder-hit coronavirus countries Spain and Italy – were pushing for the EU to issue bonds (referred to in the press as Corona-bonds) on behalf of the block to assist the worst-affected countries, but northern European countries rejected this form of debt mutualisation. (To date, EU member states have never been fully aligned on issuing bonds at the EU level in which each member state is effectively liable for the entire obligation, reflecting the aversion of the richer northern EU members to effectively subsidise the relatively poorer southern European countries.) My understanding is that the recently-approved €540 billion package now has to be quickly approved by each member state. This week is also light in terms of economic data in Europe, with inflation data to be released for the Eurozone. Credit Markets: The corporate bond market rallied across the board last week in response to very positive sentiment all week in the equity markets. In addition, the high yield market received an additional boost by the Fed’s announcement of a new round of monetary stimulus on Thursday which I mentioned in the section above. On the corporate side, the Fed agreed to selectively expand its secondary asset purchase programme to include high yield ETFs, as well as select CLO and MBO securities (a la TALF in 2008). In addition, the Federal Reserve agreed to expand its primary and secondary market facilities to include bonds of “fallen angels” meaning those companies that were rated investment grade at March 22nd but have subsequently been downgraded to “junk” (so long as the bonds are still rated Ba3/BB- or higher). This includes the likes of Ford, Occidental Petroleum, Macy’s and Delta Airlines. As mentioned in the previous section, Congress will likely approve an additional round of fiscal stimulus focused on loans to small & middle sized companies in the coming days. Although high yield has rallied across the board, the most pronounced improvement in credit spreads since the beginning of the month has - not surprisingly - been in the BB category. Spreads on bonds for companies rated Caa/CCA and below on the other hand, representing the weakest and most vulnerable companies, have not improved as much. For reference as of the close on Thursday, the average yield in the U.S. high yield corporate market was 8.42% (spread of +7.96%), and the average yield in the European corporate high yield market was 6.06% (spread of +6.58%) (source: ICE BofA Indices, from FRED). To provide you with some perspective, the lowest yields in the U.S. and European corporate high yield markets year-to-date were 5.02% (February 21st) and 2.40% (February 20th), respectively. Oil: OPEC+ finally reached an agreement on Sunday evening to reduce oil production by 9.7 million barrels/day, or roughly 10% of daily supply, through the end of June. The U.S. and other non-OPEC+ states are not party to these reductions but will likely see their countries’ production fall anyhow because of market dynamics, meaning that producers with uneconomic lifting costs (including many U.S. shale producers) will mothball production or eventually go out of business. Overall, the expected reductions due to the quota reductions and market forces could result in up to 20 million barrels/day being taken off the market. Oil prices rallied overnight in response to the agreement by OPEC+ members. For context, recall that daily production in 2019 was 100.4 million barrels/day. The reduction in supply will of course assist the supply side of the oil equation, but it does little during this economic stoppage to address the demand side which will continue to suffer until the global economy begins to reopen. This milestone agreement regarding production quotas was largely championed by President Trump. Politics: Three important political events happened this week, two in the States. Firstly, Bernie Sanders officially withdrew from the race for Democratic presidential nominee, ceding the nomination unofficially to Joe Biden. Of course, the run in to the US presidential election has been largely overshadowed by the COVID-19 pandemic, and exactly when the presidential election will return front and centre remains to be seen. Certainly, it will be interesting to see how the election plays out on the coming months. Secondly, in spite of the informal restrictions in place on social distancing, Wisconsin held its primary last Tuesday with the results expected this week. Underneath this bizarre event is, of course, partisan politics, which I have read involve the potential increase in the use of postal votes (which is simple, secure, and available without incident in the U.K.). Apparently, the Republicans are resisting postal voting in spite of the pandemic because they feel it will put the party at a disadvantage in the upcoming election. And lastly, to the relief of many Brits, PM Boris Johnson seems to be over the hump as far as his recovery from COVID-19 after spending 10 nights at St Thomas’ Hospital in London, including three nights earlier last week in ICU. Mr. Johnson was released from the hospital on Sunday to continue his recovery at his home.
It should be another interesting week in the global equity and credit markets, as the COVID-19 pandemic continues. Thank you for subscribing to emorningcoffee.com, and don’t forget to follow me on Twitter. As always, I am open to comments or suggestions on the website generally and specific blog posts, and encourage you to provide comments directly on the posts or to me privately via email.