Global assets seesawed as uncertainty over the outlook for the global economy persisted.
The Bank of England expects the UK economy to slump in 2020 but rebound in 2021.
- The cautious reopening of several economies helped support equity markets last week as countries such as Spain, Italy, and India tentatively eased lockdown measures, allowing some businesses to reopen. Elsewhere Austria has reopened stores, while Denmark has already sent children back to school. In the US, more states have begun the process of restarting their economies.
- At sector level, there remains a clear preference for companies with sound business models and strong balance sheets that are expected to survive the current economic storm. Technology continued to highlight its resilience and has played a major role in helping equity markets reclaim much of their coronavirus-related losses. On Wall Street, the tech-heavy Nasdaq has retraced all its losses and now sits in positive territory for the year.
- There is an increasing divide developing between rebounding equities, reflecting hopes of a second half economic recovery and seemingly oblivious to a raft of dire economic data releases, and other asset classes such as commodities, government bonds and wide risk premiums in high yield credit which indicate far less optimism.
- The US Treasury market highlighted that the economic damage of COVID-19 will require very low rates for a long time as the yield on the two-year note and the five-year note both hit a record low of 0.129% and 0.293%, respectively. The Treasury also plans to significantly increase the proportion of borrowing through longer-term debt, reviving 20-year bonds, as it details how it will fund the government’s $3tn-plus stimulus measures.
- In Europe, government bonds also had to grapple with Germany’s constitutional court challenging the ECB to justify its bond-buying programme. While the court found that the ECB’s purchases of public sector debt were legal, it asked that it reviews whether they were “proportionate” in pursuit of its monetary policy objective.
- Tensions between the US and China flared after US secretary of state, Mike Pompeo claimed that the coronavirus pandemic originated in a laboratory in Wuhan. Beijing has denied the allegations. Many investors have become increasingly concerned that the souring relationship between the two nations is creating further vulnerability for a global economy already on its knees.
- The re-emergence of trade tensions weighed on the price of industrial metals. Copper extended its decline from its late-April high, while aluminium prices also moved lower.
- Oil prices rebounded, shrugging off persistent worries about oversupply and inadequate storage on hopes that the easing of lockdown measures will boost crude demand. Brent contracts for delivery this summer strengthened relative to those for delivery at the end of the year.
- Policymakers remained worried about the economic outlook and the longer-term consequences of high unemployment and strained financial conditions for highly indebted companies.
- The Bank of England voted unanimously to maintain the key bank rate at a record low of 0.1% and forecast that the UK economy will contract by a historic 30% in the first half of the year, and by 14% for 2020 as a whole, but has decided not to launch any new stimulus moves. The UK central bank also said that unemployment was likely to rise 9%, even with the government’s job retention scheme protecting many employees.
- The European Commission expects the eurozone’s GDP to shrink by 7.7% this year, before rebounding by 6.3% in 2021, citing that the economy will experience a recession of historic proportions due to the coronavirus pandemic.
- Norway’s central bank joined the zero-policy club as the Norges Bank cuts its overnight rates by 25bps to a record low of 0%.
- Many investors sought comfort in the US’ latest non-farm payrolls which, despite recording the largest drop on record, came in better than expected. Payrolls fell by 20.5m in April, prompting the unemployment rate to spike to 14.7%, the highest since the Great Depression.
- The latest round of Purchasing Manufacturing Indices (PMIs) continued to highlight the severity of the impact of COVID-19 on domestic economies.
- The IHS Markit/CIPS UK Composite PMI was revised slightly higher to 13.8 in April 2020 from a preliminary estimate of 12.9, still signaling the steepest pace of contraction since the series began in 1998.
- The IHS Markit Eurozone Composite PMI was revised slightly higher to 13.6 in April, little changed from a preliminary estimate of 13.5 and the lowest since the series began 22 years ago.
- Japan’s composite PMI for the private sector was revised lower to 25.8 in April from the flash figure of 27.8 and after a final 36.2 in March. The service sector shrank at the steepest pace in the survey history due to plummeting tourism, event cancellations and supply chain disruption.
- Finally, a surprise pickup in China’s exports raised expectations that the economy may be finding its footing. Chinese exports rose 3.5% in April compared with the same month a year ago. Economists had predicted a fall of almost 16%.
The Week Ahead
|Tuesday||China CPI; US CPI |
|Wednesday||Europe industrial production; UK industrial production; UK GDP|
|Friday||China industrial production; China retail sales; US retail sales; US industrial production; US consumer sentiment|
|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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