Summary
Global equity markets continued their march upwards last week, closing the month firmly in positive territory. The Nikkei 225 was the star performer, as a new round of fiscal stimulus equal to 21% of Japan’s GDP is included in the supplementary budget announced last week.
Credit markets rallied for the second week running, with spread compression in high yield leading the way.
Gold was slightly weaker and U.S. Treasuries were flat on the week. The U.S. dollar is continuing to weaken as investors look to other markets with more upside and / or take more risk as the “risk on” sentiment broadens across markets. Oil (WTI) rose another 6% and has now more than tripled in price since its early April lows.
Economic data was mixed again last week, but as bad as some of the data is, it is more or less in line with expectations. The ECB holds a press conference on Thursday with the possibility that the scope of QE is broadened in the Eurozone.
Cases of COVID-19 continue to increase whilst deaths decrease, with the ongoing caveat that how such data is calculated varies from location to location. Most states and countries are continuing their gradual reopening.
Global Equity Markets
The global market indices I track were all in the green last week, closing out the month in positive territory.
As we have seen time and time again during this remarkable recovery phase, global equity markets shook off a host of bad economic news. The hour to hour variability felt more severe but nonetheless, the outcome was the same. The S&P 500 closed above 3,000 on Wednesday for the first time since March 5th. However, the S&P 500 performance was overshadowed last week - and for the month of May - by the Nikkei 225, which was up 7.3% last week and 8.3% for the month. The strong recovery in the Japanese market is at least partially in response to Japan’s draft supplementary budget released last Wednesday which contained ¥117.1 trillion of fiscal aid (21% of GDP) in various forms to support the economy and assist people, companies and municipalities during the COVID-19 crisis. The S&P 500 and the Nikkei 225 are only 5.8% and 7.5%, respectively, off of their 2019 closing levels, reflecting both countries’ strong monetary and fiscal responses to the CV19 economic crisis. In contrast, the European equity market indices have not recovered nearly as swiftly, with the FTSE 100 and STOXX Europe 600 still remaining 19.4% and 15.8%, respectively, off their 2019 closing levels. This reflects the more fragile state of the U.K. and E.U. economies. The E.U. in particular is plodding along ever so slowly trying to get consensus on a unified fiscal policy to aid the zone which might or might not happen, and in any event, is probably weeks away if it does finally pass. I discuss this in more detail in the “Economic Data” section of this update. As the rhetoric between the U.S. and China continued to escalate over a host of topics ranging from “blame” for the pandemic to the status of Hong Kong, the markets in both Hong Kong (Hang Seng) and Shanghai came off their mid-week highs. Although both markets still finished higher week-over-week, it should be noted that the Asian markets were closed when #POTUS announced the revocation of Hong Kong’s special status on Friday afternoon U.S. time. The resiliency being seen in the U.S. equity markets seems to have drifted into the Chinese markets, too. We will have to wait until Monday’s open to see if the decision by POTUS is deemed good or bad for the market, although I suspect since the Phase 1 trade agreement remains intact, it will be viewed, relatively speaking, as good news for both the U.S. and China. Credit Markets For the second week running, credit rallied across the board, this time including the weakest corporate category of CCC. Spreads in the non-investment grade (i.e. high yield) arena contracted the most, although there was further spread compression in the weak investment grade (i.e. BBB) corporate category, too. Even though the rally in credit spreads took a bit longer to gain steam compared to the flying equity markets, credit investors have clearly now taken comfort in the equity market resiliency and in seeing the Federal Reserve start to make good on its purchases of corporate bonds and high yield ETFs. This optimism has led to a rapid and significant compression in spreads during the last two weeks. However, there is little doubt that there will be a wave of corporate delinquencies, defaults and bankruptcies over the coming months in the weaker rated high yield categories, so as with equities, investors in corporate credit will need to choose and stick with the “winners”. Safe Haven Assets Safe haven assets moved slightly on the week, generally weaker in the first half of the week before regaining strength as the week came to a close and more uncertainty was introduced in the market. Gold closed down slightly w-o-w at -$1,730.35/ounce but rallied from its mid-week lows, whilst the yield on the 10-year UST closed at the same level as the week before. One safe haven asset that is steadily losing momentum in the U.S. dollar as measured by ICE US dollar index. The U.S. dollar has fallen (against a basket of currencies) from 100.466 mid-month to close Friday at 98.344. This fatigue might suggest that the U.S. equity markets have had their run and now it’s time to broaden into non-U.S. equities that have not recovered as quickly. The general “risk-on” sentiment characterising the equity and credit markets is also working against safe haven assets at the moment, causing investors to move out of U.S. dollars into riskier currencies. Oil This commentary feels repetitive but oil rallied again last week, with WTI closing at $35.32 / barrel, a level not seen since oil prices collapsed in early March. I suppose it is logical that the same factors driving the equity markets - a view that the worse is behind us and businesses will recover from here - is also increasing optimism as far as demand for oil. It’s hard to say for sure what has driven the remarkable recovery, but it is clear now - looking back - that a play in oil in April around the 21st (ignoring the negative price on April 20th) would have put the equity market recovery to shame. WTI prices have increased 3.5 times in only 28 trading days, from $10.01/barrel on April 21st to $35.32/barrel on Friday. Earnings The link to the weekly earnings update for the S&P 500 from Refinitiv is here. 489 S&P 500 companies have now reported earnings for the first calendar quarter of 2020. 1Q20 earnings and expected 2Q20 consensus earnings remain more or less in line with those reported last week. 1Q20 earnings are expected to be down 12.6% (vs 1Q19) and 2Q20 consensus earnings are expected to be down 42.8% (vs 2Q19). No sectors are expected to have positive earnings growth in 2Q20 although information technology (-8.0%) and utilities (-3.0%) are expected to be the best relative performers, and – not surprisingly – energy the worst (-156.4%). The forward 4Q P/E ratio for the S&P 500 rose to 23.6x last week, as prices continued to increase whilst earnings continued to decline. Economic Data Although the economic data released last week in the U.S. was generally poor, it was mixed to slightly better than consensus expectations in most cases. The second revision of 1Q20 GDP was released, which was -5.0% (annualised). 2.1 million additional Americans filed for unemployment for the first time, bringing the 10-week total to nearly 41 million Americans. However, there was some good employment news in that continuing claims fell to 21.2 million for the week ended May 16th, compared to 25.8 million expected as Americans ease back into work. The coming week has a number of releases for May, including manufacturing and non-manufacturing PMI data, as well as the unemployment rate (consensus 19.6%) and non-farm payrolls (10 million) for May, which will be released on Friday. PMI data for the U.K. and the Eurozone will be released on Monday (manufacturing) and Wednesday (services), as will some housing data in the U.K. and unemployment in the Eurozone for April (not May - consensus 8.2%). The ECB will give its rate decision and hold a press conference around midday on Thursday, and much of the focus is likely to be on the potential broadening of scope of the current QE programme. As an aside, the preliminary inflation figure for May in the Eurozone was 0.1%, bringing the economic bloc closer to deflation. However, much of the weakness was energy-price driven, as core inflation was 0.9% for the month. In the U.K., Chancellor Rishi Sunak is apparently working with the Prime Minister on a new fiscal stimulus package to be released in the coming weeks, as unemployment is expected to reach 10%. The thinking now is shifting towards funding the gradual recovery of the U.K. economy, not forgetting of course that the small matter of a post-BREXIT trade deal remains unfinished business. The U.K. and E.U. are trying to reach general agreement on a trade deal by the end of this month but it is looking increasingly unlikely, yet another cloud hanging over the U.K economy at the moment. The European Commission announced that it was working on a €750 billion fiscal stimulus package for member states, to be split between €500 billion of grants and €250 billion of loans. The “recovery fund” would be available based on each country’s need related to CV19. Interestingly, the issuance of bonds on behalf of the E.U. is being discussed to fund this ambitious but much-needed programme, an approach that seems to have Germany, France and others on board, but will likely run into resistance from the “frugal four” (as discussed in last week’s update). As with most things in the E.U., this is certain to take many months and will not be available on a best-case scenario until early 2021. The Euro and European stocks rallied on the news, demonstrating that it’s “better late than never.” COVID-19 COVID-19 continues to rage on, with Brazil and Russia now the countries with the most cases (but not deaths) behind the U.S. - see map below from Johns Hopkins.
As I mention frequently, how cases and deaths are tracked is suspect in some countries, and certainly the methodology for tracking cases and deaths differs country to country. The good news though is that the curve seems to be flattening for now. The table to the left shows he trajectory of new cases and deaths globally from CV19. As it depicts, the numbers of cases are continuing to increase each week, but deaths are fortunately declining.
Conclusion The trends seem to favour continued market strength market in spite of on-going issues with the pandemic, heightened tensions between China and the U.S., and new concerns around growing protests in the U.S. and a few other countries regarding the death of George Floyd at the hands of Minneapolis police.