Summary
Major global equity markets gave back some gains last week but remain positive so far for April. The S&P 500 ended the week on a constructive tone, up 1.39% on Friday.
Credit spreads widened most of the week as investors continue to digest and balance the unprecedented support from the Federal Reserve against a poor economic backdrop, mixed earnings and larger-than-expected provisions taken by several U.S. banks.
Oil (WTI) prices went negative early in the week but managed to recover some of their losses, ending the week down 10%.
Safe haven assets were generally mixed aside from gold, which continues it march upwards.
90 S&P 500 companies reported earnings last week, and around 70% had earnings that were better than or in line with consensus analyst expectations (which is around normal). This week is a huge reporting week, with 169 S&P 500 companies reporting quarterly results, including bellwether names like all of the FAANGs+M (note: NFLX reported last week), credit card companies, food/global restaurant companies, and many cyclicals.
Economic data was on the weak side last week, especially manufacturing and services PMI (some flash) which significantly missed consensus expectations in the U.S. and the Eurozone. The Fed and ECB will release policy statements this week, and a slew of other data is coming from the U.S., the U.K., the E.U. and Japan.
The increase in new COVID-19 cases and deaths slowed for the first time last week, hopefully indicating that the current restrictive measures taken by many countries are bearing fruit.
The Global Equity Markets
The world’s major equity markets gave back some of their April gains last week, but remain in the green across-the-board for the month. Volatility also continues to ease, with the VIX closing the week at 35.9, having reached 45.4 on Tuesday following back-to-back losses in the S&P 500.
Most indices have retraced a good portion of their losses since reaching their troughs on or around March 23rd. The retracement ranges from 29% for the FTSE 100 to 52% for the S&P 500, as the chart below illustrates.
The S&P 500 is down 16% since its peak in mid-February and is 12% lower than its close at the end of 2019. It’s been a very fast and sharp recovery in light of the gloomy outlook for corporate earnings and the global economy because of COVID-19. The equity market’s buoyancy is just a reminder of the power of unprecedented amounts of monetary and fiscal stimulus coming from major central banks and governments, which rings true across many asset markets at the moment.
The Global Credit Markets
Non-investment grade rated credit bucked the trend last week, as US high yield spreads widened across the board between 50bps and 60bps. Weak investment grade credit (BBB’s) remained virtually flat, as did European high yield. To help you understand the migration of credit spreads this year, the table below is similar to the one illustrated for equities in the preceding section, and shows credit spread ranges for the year, as well as the retracement experienced off the widest levels.
Although spreads did widen considerably in March and remain well off their lows, they still did not reach levels that were near to those reached during the prior two U.S. recessions, i.e. the “Great Recession” of 2007-2009 or the dot.com bust in the early 2000s.
The unprecedented buying of investment grade bonds, “fallen angel” bonds and high yield ETFs by the Federal Reserve, all related to the wider scope of the Fed’s quantitative easing (“QE”) programme, have provided a floor to the credit markets.
For those investors that buy emerging market debt, I found out this week when preparing a presentation for CFA Bahrain society, that there had been some significant sovereign issuance in April from the GCC countries. This makes perfect sense, as the appetite for very high tier debt is strong at current spread levels and prices vis-à-vis secondary levels are much wider than normal. Since early April, GCC (and oil-rich) countries Qatar (Aa3/AA-), Saudi Arabia (A1/A-), and Abu Dhabi (Aa2/AA) have issued collectively US$24 billion of multi-tranche bonds (five to 40-years), each with an order book in excess of $40 billion, demonstrating the strong investor demand for high tier USD-denominated bonds.
Oil
The fall in oil prices and rather bizarre scenario of negative WTI prices early in the week was covered extensively by the press, so there is little I can add in this update. Overall, the price/bbl for WTI fell 9.7% on the week, to close at $16.50/bbl. I will be writing on oil this week so as to provide more context and offer a better understanding as to why there is so much weakness in the global oil market.
Safe Haven Assets
Setting aside for a moment the unprecedented amount of monetary stimulus unleashed by the Federal Reserve and other central banks, the “normal” expectation would be to see money move from risk assets into safe haven assets when the economic backdrop is challenging, and vice-versa when the economic outlook is favourable. However, in this bizarre world where it seems that most asset prices rise (barring oil and real estate at the moment), it has become rather normal, albeit counter-intuitive, to see safe haven assets and risk assets rally simultaneously. I have been trying unsuccessfully to read the tea leaves in this respect, believing as gold and US Treasuries continue to strengthen, this is signalling equity market weakness. So far, this has not been the case. Dipping slightly the first half of the weak, gold rallied to close at its highest level of the year ($1,732.50/oz) on Friday. The graph below from FRED shows the performance of gold since the 1960s. The huge amount of monetary stimulus in the U.S. to see off the Great Recession, similar perhaps to Federal Reserve’s action now, pushed gold higher and higher from 1Q2009 to 3Q2011. This graph shows that we could be on the way to record prices again for the same reason.
As far as other risk assets, the 30-year US Treasury yield tightened slightly last week but yields on most other maturities more or less moved sideways. The Yen was slightly weaker on the week.
Earnings (focus on S&P 500 companies)
This is a very big week for reporting companies, with 169 S&P 500 companies reporting earnings according to the weekly report from Refinitiv which you can access here. Many bellwether names will be reporting and hopefully providing commentary to allow investors to adjust their outlooks for the 2Q and remainder of 2020. Many eyes will be on the remaining FAANG+M companies, especially to see just what direction advertising spend is taking for the likes of Facebook and Google. We should also get a good feel for consumer food companies (Pepsico, Starbucks, Kellogg, McDonalds), as well as credit card companies (VISA and Mastercard), airlines, cyclicals (Ford, Caterpillar) and under-pressure Boeing.
Some of the companies reporting this week that might interest you include:
Tuesday: Caterpillar, Southwest Airlines, Merck, Pepsico, UPS, Alphabet (Google), Starbucks, Ford
Wednesday: Humana, Boeing, GE, Hasbro, Mastercard, Royal Caribbean, Yum!, Crown Castle, Facebook, Microsoft, Qualcomm
Thursday: American Airlines, Comcast, Dow, Kellogg, Kraft Heinz, McDonalds, Twitter, Apple, Amazon, Angen
Friday: Gilead, MGM Resorts, VISA, Expedia
Through last Friday (April 24th), 122 S&P 500 companies had reported earnings so far for the first quarter of 2020. According to data from Refinitiv, 65% of these companies have reported positive earnings versus consensus, 30% negative and 5% flat. This is more or less in line with the averages, noting of course that analysts have been steadily revising down earnings estimates during the COVID-19 lockdown. In fact, two of the things that are most eye-opening to me are the steady downward revisions to earnings throughout 2H2019 (prior to COVID-19 even appearing on the scene) and the rather shocking expectations at the moment for 2Q2020. On the first point, Refinitiv provides 1Q2020 revisions to growth expectations since mid-2019, and here are the changes:
On July 1 2019: +10.2% growth expected in 1Q2020
On Jan 1, 2020: +6.3% for 1Q2020 (so expectations were already slowing prior to CV-19)
Now (Apr 24, 2020): -14.8% (one-quarter the way through 1Q2020 earnings)
As far as the outlook for the 2Q2020, the degradation is almost unimaginable to me: 2Q2020 consensus earnings are expected to be down 33.3% at the moment (compared to 2Q2019), a considerably worse outlook than just three weeks ago (on April 1st) when estimates were -11.7% for 2Q2020.
For the calendar year 2020, analysts’ consensus expectations are for S&P 500 earnings to decline 17.9%, but for earnings to increase 26.2% in CY2021. Drilling a bit deeper for 2020 – and not surprising perhaps – the best performing sectors are expected to be utilities, information services and healthcare, whilst the worst are expected to be energy, industrials, financials and consumer discretionary.
Economic News
An additional 4.4 million Americans filed for unemployment for the week ended April 17th, bringing the total now to 26 million workers that have filed for benefits over the last five weeks. Existing home sales in the U.S. were in line with expectations for March, but flash manufacturing and services PMI were significantly below expectations. Durable goods orders on Friday were also worse than expected.
Manufacturing (flash), services and retail data released last week in the U.K. were all worse than expected. The Eurozone followed suit, with manufacturing and services flash PMI figures significantly below expectations, showing just how weak the global economy is at the moment. Fear not though, as another wave of stimulus is coming. The European Commission “rubber stamped” the €500 billion fiscal stimulus package approved earlier this month by European Finance ministers and is already discussing a new and significantly larger (expected €1.5 trillion) “rescue fund” for EU member countries. The Bank of Japan released a policy statement today saying it had enlarged and broadened the scope of its QE programme, following the Federal Reserve, by buying commercial paper and corporate bonds. The ECB has loosened its collateral standards for lending to banks to include “fallen angels” and is apparently contemplating further broadening the scope its existing QE programme to include high yield bonds. Following the BoJ this morning, the ECB and Federal Reserve release policy statements and hold press conferences later this week.
As far as economic data this week, keep an eye on the following:
U.S.: There is a boatload of economic data coming from the U.S. this week, including 1Q GDP, manufacturing and consumption data, home sales data and consumer confidence. As mentioned above, the FOMC is also holding a press conference on Wednesday and is expected to hold the Federal Funds rate at the current level.
U.K.: Housing price data and manufacturing data (Markit Manufacturing PMI)
Eurozone: Inflation data for March, 1Q2020 GDP and unemployment for March (as well as constituents Germany, France, Italy and Spain). ECB releases a policy statement and holds a press conference on Thursday
Japan: Housing starts, inflation data, 1Q GDP, unemployment March, industrial production. BoJ released a policy statement today
Friday (May 1) is a public holiday in much of Europe, as countries celebrate May Day.
COVID-19 Update
Below is the hat map from Johns Hopkins university, and you can find the link here.
The table below shows that - for the first time - the absolute number of new infections and deaths related to COVID-19 declined, hopefully signalling the success of the extreme social distancing measures that many governments have adopted.
The challenge that lies ahead for governments is when and how to gradually coax economies out of their hibernation without risking a re-emergence of COVID-19.