Risk assets rebounded sharply on early signs of a slowdown in COVID-19 infections.
But economic data continued to highlight the significant repercussions of the pandemic.
- Global equity markets got off to a strong start to the week on hopes of a slowdown in the number of COVID-19 infections and fatalities in several global hotspots including Italy, Germany, Spain, France and New York, while China ended its lockdown of Wuhan, the original epicentre for the outbreak.
- Hopes of further stimulus measures to help ease the economic slowdown that is likely to ensue also seemed to support sentiment.
- The sectors which have been worst hit since the pandemic began performed strongly, as investors selectively bought stocks that were indiscriminately sold off during March. This led to small caps outpacing large caps, while value outperformed more expensive growth companies.
- Over the last five trading sessions, the S&P 500 rallied hard and is now up 23% since its 23 March low, largely due to a raft of stimulus measures and optimism over the US economy reopening for business; this followed reports that President Trump is planning to unveil a second task force that will focus on just that, after having expressed an eagerness to move quickly.
- European equities also rose over the course of the week, buoyed by hopes that country lockdowns may soon be eased, despite earnings downgrades continuing at pace.
- Several businesses have revised dividend payout policies in addition to abandoning guidance for 2020. It was reported that UK listed companies could cancel as much as £650bn in dividend payments, which could potentially cause solvency issues for pension funds that need to meet income requirements.
- Japan’s government declared a state of emergency for Tokyo and six other major cities after an alarming rise in the number of infections. The move grants local authorities the power to urge people to stay at home, but account’s for more than 40% of Japan’s population. However, the stock market decided to focus on President Abe’s substantial stimulus package ($992bn) which led equities to recover nearly all the prior week’s entire losses.
- Despite most equity markets closing the week in the green, trading remained highly volatile with significant intraday swings. Markets are expected to remain highly volatile until there are clear signs that the pandemic is fading.
- The relief rally has also been evident in other asset classes such as copper and oil.
- Oil prices rallied after Opec + outlined plans to cut oil production by 10m barrels per day, with another 5m expected to come from other nations.
- There was encouraging stability in fixed income markets, as government bond yields rose driven by the risk-on sentiment and increased supply.
- In credit markets, ratings agencies continued to downgrade ratings, citing fragile liquidity and rising leverage ratios.
- The US Federal Reserve revealed an even larger stimulus package and pledged $2.3tn to bolster local governments and SMEs in order to keep markets liquid and functional to help the US get through the pandemic. The programme encourages banks to offer 4-year loans to companies of up to 10,000 employees and to lend directly to state governments and more densely populated counties and cities to help them respond to the crisis.
- The US central bank also announced the expansion of its Primary and Secondary Market Corporate Credit Facilities to include BB- rated or above.
- However, the latest economic data appeared to justify the Fed’s aggressive action as the number of Americans filing for unemployment benefits was much higher than expected. US initial jobless claims rose by 261,000 to 6.6m, coming in above expectations of 5.3m.
- On a political note, Bernie Saunders withdrew from the Democratic race, leaving Trump and Biden to face each other at November’s presidential election.
- In the UK, the ONS reported that the economy expanded 0.1% in the three months to the end of February, but there are fears that the economy could contract by between 15% and 25% in the second quarter if the lockdown continues.
- The Bank of England confirmed that it had agreed to directly finance extra spending imposed on the government by the Covid-19 crisis, allowing the Treasury to raise funds outside the bond market.
- The Eurozone’s two biggest economies, Germany and France, have sunk into historic recessions as the economic and trade slowdown is set to wipe out years of growth in just months. Germany’s economy is predicted to contract by almost 10% in the second quarter – the sharpest decline since records began in 1970 and twice the size of the biggest drop in the 2008 financial crisis. Meanwhile, the Bank of France confirmed that GDP contracted 6% during the first three months of the year and revealed that the spread of the pandemic is knocking 1.5% off French growth for every two weeks that it continues.
- ECB chair Christine Lagarde asked for a strong fiscal response and solidarity to the coronavirus pandemic, but the EU’s finance ministers initially failed to reach an agreement on a €500bn stimulus package.
- Japan announced a JPY108.2tn ($992bn) stimulus package equal to 20% of GDP. The package is set to include JPY6tn of cash payouts to households and small businesses, and JPY39tn to enable deferred social security and tax payments.
The Week Ahead
|Wednesday||US retail sales; US industrial production|
|Thursday||Europe industrial production; US housing starts|
|Friday||China Real GDP; China industrial production; China retail sales; Japan industrial production|
|FTSE All Share
|Dow Jones Industrial
|FTSE Eurofirst 300
|MSCI Asia ex Jap $
|MSCI EM $
|MSCI World $
|UK Gov 10 yr
|US Gov 10 yr
|German Gov 10 yr
|Japan Gov 10 yr
|Brent Crude ($/bbl)
|$ per £
|€ per £
|¥ per $
Source: FE Analytics, Financial Times, JP Morgan Asset Management
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