9-Apr-2020

MORNING COMMENT

Focus on Eurogroup meeting

COVID-19 news remains an important market driver, both for US and European financial markets. Investors have thus welcomed improving numbers coming from Italy, France and Germany, and the positive sentiment around Austria, Czech Republic and Denmark, loosening restrictions on daily life in the coming weeks.

The focus now nevertheless lies on the continuation of the Eurogroup meeting, looking for a deal to support the economy in the euro area. So far, Italy and the Netherlands have clashed over the loans coming from the 500 billion euro bailout fund. Italy requested that the available credit line would come without future economic reform conditions, while the Netherlands stated they would never accept a strings-free funding.

An agreement is crucial for the region that has been severely hit by the spread of the coronavirus, witness yesterday’s spread widening of Italian bonds and decline of the euro.

Economic impact of containment measures

Economic activity has been severely hit by the measures taken to contain the spread of the virus. The German Federal Statistics Office, one of the leading economic institutes, stated that it expects the German economy to shrink almost 10% in the second quarter. That would be the biggest decline since 1970, leading to a GDP contraction of 4.2% this year. However, the institute also expects, in line with Candriam’s economists’ expectations, the economy to rebound by almost 6% in 2021 thanks to fiscal aid.

On the other side of the Atlantic, the meeting minutes of the Fed’s last Open Market Committee said the outlook for the US economy has been downgraded significantly as well, despite politician’s efforts to support growth with fiscal measures. Senate Majority Leader McConnell will possibly try to pass legislation that adds a 250-350 billion US dollar small-business loan programme.

Our view

The publication of these negative economic figures confirms our main scenario of a global, deep, but temporary shock due to the pandemic. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery. The fact that now several European countries are discussing plans to ease lockdown measures is hopeful.

Weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

From a short term perspective, volatility is here to stay. We have increased our equity exposure gradually over the past weeks, but refrain from adding at current levels. Patience remains the key word, since we will not directly have a “V” shape recovery.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

8-Apr-2020

MORNING COMMENT

Global equities markets showed mixed performances on Tuesday (Eurostoxx 50 +2.21%, S&P 500 -0.2%). European equities benefited from news on a declining rate of new infections in both France and Italy. US equities gained more than 3% on the opening, before giving back their gains. Long-term yields rose on the back of encouraging virus news, with the German 10-year yield ending the day at -0.34%.

In the meantime, the Eurogroup meeting of yesterday ended without an agreement on a rescue package that is significant enough to mitigate the economic and social impact of the spread of the coronavirus. As expected, EU finance ministers couldn’t agree on the need to issue joint debt. Moreover, there was a strong dissension between “South” and “Northern” States on the conditions attached to the use of credit lines from the Euro area’s bailout fund. Next meeting is planned on Thursday.

China ends months-long lockdown of Wuhan

Today, the lockdown of the city Wuhan, that came in force on January 23, comes to an end. Wuhan has accounted for nearly 80% of China’s death toll, while the number of symphonic patients exceeded 50.000. The city eventually reported no new COVID-19 cases for an extended number of days. Since late March, travel into the city by high-speed rail of highways is allowed and now also public transportation will be gradually restarted. Nearly all restrictions will be lifted today.

In the meantime, while the health battle in Europe is far from over, as Spain reported another increase in fatalities, some European countries are considering to plan their exit strategies. Italy and France have consistently seen drops in their daily death rates, while in Germany the number of new cases fell. The lack of coordination between European countries in their exit strategies in nevertheless an additional hurdle to a synchronized recovery from current crisis.

Focus on upcoming earnings season

With less than a week before the start of the first quarter earnings season, analysts have strongly revised down earnings expectations. Many companies have already withdrawn their forecasts for the quarter. Apple was one of the first to take that step in mid-February.

According to Factset, the estimated earnings decline for the S&P 500 is around 7.3%. This would mark the largest year-over-year decline since the third quarter of 2009. All sectors have recorded a decrease in earnings expectations since the start of the quarter, led by the energy sector, that is being penalised by the strong oil price drop.

Analysts also expect earnings to decline in the second and third quarter, and an earnings recovery starting from the fourth quarter. During the upcoming week, two S&P 500 companies (JP Morgan and Wells Fargo kick off on April 14) are scheduled to report results for the first quarter.

Our view

The publication of these negative economic figures confirms our main scenario of a global, deep, but temporary shock due to the pandemic. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery. The fact that now several European countries are discussing plans to ease lockdown measures is hopeful.

Weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

From a short term perspective, volatility is here to stay. We have increased our equity exposure gradually over the past weeks, but refrain from adding at current levels. Patience remains the key word, since we will not directly have a “V” shape recovery.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

7-Apr-2020

MORNING COMMENT

Global equities markets jumped on Monday (Eurostoxx 50 +5%, S&P 500 +7%) on the back of improving COVID-19 virus numbers. New infections and fatalities numbers decreased across both European and US hotspots. Separately, the price of a Brent crude oil slightly declined to 34 US dollar, as the planned emergency OPEC+ meeting was postponed to later this week (Thursday).

Hopeful signs for a COVID-19 plateau

Investors are welcoming an encouraging evolution in the latest COVID-19 numbers, both in Europe and the United States.

  • In the United States, the daily death toll has decreased in New York according to Governor Cuomo. He also noted that hospitalisations and intensive care admissions are down. These trends raise hopes on a possible flattening of the curve. In addition, dr. Fauci reported that the amount of deaths might come well below 100.000 and also President Trump said there’ light at the end of the tunnel.
  • In Europe, Spain, France, Italy and the UK have reported declines in new coronavirus deaths in recent days. Some European governments have now begun preparations to ease lockdowns when infection curves get under control. “Exit” strategies will be very gradual and could start at the end of April/at the beginning of May in the countries where the spread of the virus seems to be contained. Avoiding a second epidemic wave will be a focus for governments.

On the more negative side, Japan declared a state of emergency, as the country struggles to rein in the coronavirus pandemic. The state of emergency, which is expected to be formally announced today, will last for approximately one month.

The declaration comes after Japan reported a high number of new COVID-19 cases and an increasing number of deaths.

Focus on Eurogroup meeting and oil

While we should not see issuance of “coronabonds” in the short term in Europe, there is hope today for an agreement on a large-scale ‘solidarity fund’.  Mutualisation of debt should continue to meet a strong opposition (in Netherlands and Austria for instance). The conditions attached to any assistance program will be subject of intense debates, but should not constitute a too heavy burden for some European countries, triggering a fear of a new sovereign debt crisis in the coming years.

This week is pretty quiet on the macroeconomic front. German factory orders for February came in better than anticipated yesterday, showing that German economy was recovering before the crisis. Of course, the COVID-19 crisis has especially hit Europe at the beginning of March, and factory order for last month might be worse.

In the coming days, the focus will continue to be on unemployment data , with initial claims for unemployment benefits being particularly important after rising 10 million in two weeks. Initial claims are reported on Thursday, the same day on which we will closely monitor news flow coming from the OPEC meeting.

Our view

The publication of these negative economic figures confirms our main scenario of a global, deep, but temporary shock due to the pandemic. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery. The fact that now several European countries are discussing plans to ease lockdown measures is hopeful.

Weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

From a short term perspective, volatility is here to stay. We have increased our equity exposure gradually over the past weeks, but refrain from adding at current levels. Patience remains the key word, since we will not directly have a “V” shape recovery.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

6-Apr-2020

MORNING COMMENT

Global equities markets declined on Friday (Eurostoxx 50 -0.9%, S&P 500 -1.5%), as global COVID-19 infections continued to increase and published economic data came out extremely weak. In this context, the price of gold further increased, while the US dollar benefited once again from it’s safe haven status.

Separately, the price for a barrel of Brent crude oil jumped by almost 14% on Friday, on the back of hopes for a global deal to cut worldwide crude supply this week. OPEC has scheduled a Monday emergency meeting, led by Saudi Arabia, where cuts up to 15 million barrels per day (15% world supply) could be agreed-upon.

Further deterioration of economic data

On Monday morning, markets are focusing on more positive news related to the COVID-19 outbreak. The global number of fatalities has declined yesterday, witness the drop in Italy, Spain, France, New York and New Jersey. Although the war hasn’t been won yet, this is a first battle won by confinement.

Italy has now started to communicate on the next phase, the so-called “exit” phase. During this phase, we will have to live with the continuing threat of the virus. It will take time before we can come back to a “normal” life with heavy consequences for our economies, witness the further deterioration of a large set of published economic data last Friday.

  • In the US, the impressive jump of initial jobless claims on Thursday was confirmed by the released job market report on Friday. Nonfarm payrolls dropped by a staggering 701.000 jobs in March, while the unemployment rate has increased to 4.4%, from 3.5% the month before. Both figures came in worse than expected and should continue to deteriorate in the coming months.
  • In the Eurozone, economic activity also continued to deteriorate. The final PMI Composite for posted a record fall in March dropping to 29.7. Both the headline as details (business expectations, new orders,…) came in worse than expected.
  • The deterioration of US economic activity was also visible in the final PMI Composite that came in at 40.9. It was the lowest reading since the start of the series.

This week, we will be closely monitoring the publication of the German factory orders (today), the Federal Reserve’s meeting minutes (Wednesday), US initial jobless claims and the Michigan’s consumer sentiment (Thursday).

Our view

The publication of these negative economic figures confirms our main scenario of a global, deep, but temporary shock due to the pandemic. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery.

Further, we do not see an exit strategy in Europe yet and there is a lack of visibility on the epidemic outbreak in the US and the economic impact of containment measures. Weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

From a short term perspective, volatility is here to stay. We have increased our equity exposure gradually over the past weeks, but refrain from adding at current levels. Patience remains the key word, since we will not directly have a “V” shape recovery.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

3-Apr-2020

MORNING COMMENT

Global equities markets fluctuated throughout the day, ending it slightly higher (Eurostoxx 50 +0.31%, S&P 500 +2.28%), despite an historic increase in initial demands for unemployment benefits in the United States. Instead, investors welcomed the impressive rebound of oil prices (Brent +15.6%), as China said it would buy oil to increase its strategic reserves and hopes of a price war truce increased.

Demand for safe haven assets remained nevertheless important, with rising initial jobless claims in the US and persisting uncertainty around the spread of the virus. The US dollar rose against the euro, while gold jumped.

Coronavirus infections now exceed 1 million

The coronavirus continues to spread and has now infected more than 1 million people across the world just four months after it first surfaced in the Chinese city of Wuhan.

  • The US now has the most officially recorded cases globally with more than 245.000, according to Johns Hopkins University.
  • Italy is next with just over 115.000 and has the highest death toll with almost 14.000 virus fatalities, followed by Spain.
  • Spain reported more than 950 deaths yesterday the most in a single day, bringing total fatalities in the country to more than 10.000.
  • China, that has been gradually easing lockdown measures over the past days, put the county of Jia in central China, back under lockdown. Three doctors that treat Covid-19 patients are affected by the virus without showing symptoms and might have infected visiting patients. This points out the difficulty of sustaining outbreak containment in the face of carriers who show no signs of sickness.

Big economic impact

Over the past days, economic data have clearly shown the huge economic impact of the spread of the coronavirus and the lockdown measures in place.

  • In the US, initial jobless claims jumped another 6.6 million, double of last week’s 3.3 million. This marks a drastic downturn in the US labor market as 6.5% of the workforce filed claims in the past 2 weeks, implying that the unemployment rate could quickly rise to 10%.
  • In Britain, almost 1 million people have claimed welfare payments in the past two weeks.
  • In Germany, the government states it expects the economy to shrink by more than 5% in 2020.

Our view

In our main scenario, we maintain the idea the pandemic will result in a global, deep, but temporary shock. However, it will probably take more time than initially thought to come back to “normal” levels of activity. Weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

Further, we do not see an exit strategy in Europe yet and there is a lack of visibility on the epidemic outbreak in the US and the economic impact of containment measures

From a short term perspective, volatility is here to stay and equity markets might go lower. Due to this lack of visibility, we will keep a slightly underweight position from current market levels.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

2-Apr-2020

MORNING COMMENT

Global equities markets declined on Wednesday ...

Global equities markets declined on Wednesday (S&P 500 -4.41%, Eurostoxx 50 -3.83%). The rapidly spreading coronavirus is spurring recession fears, following the publication of a set of disappointing economic data and President Trump’s warning for a “painful” two weeks ahead. Investor sentiment dampened and pushed Treasury yields further down.

Safe haven currencies performed well yesterday. The US dollar (+0.44%) and Japanese yen (+1.22%) both appreciated against the euro, that extended its drop as manufacturing activity showed the economic impact of the containment measures put in place to combat the spread of the virus.

Coronavirus spreads rapidly, especially in the US

The coronavirus continues to spread. Director-General Tedros from the World Health Organisation noted a near-exponential growth in the number of corona cases globally and said deaths have more than doubled in the past week.

Especially the US is struggling to get the spread of the virus under control, where the confirmed COVID-19 cases doubled since Friday, as the country rolls out broader testing. White House officials are now projecting deaths to total 100.000 to 240.000, with coronavirus fatalities peaking in April.

In Europe, especially Spain saw another significant increase in fatalities, while Italy and Germany (nationwide lockdown until April 19) moved to an extension of lockdown measures.

COVID-19 spurs fears of a non-V-shaped recovery

Yesterday’s published economic data confirmed the weakening economic activity, especially in Europe, where final manufacturing activity data for March was released.

  • The Eurozone’s manufacturing PMI came out slightly below the already very weak preliminary number at 44.5.
  • Also Germany’s final manufacturing PMI was slightly revised down to 45.4 with new orders dropping to 33.4.
  • Spain’s and France’s manufacturing PMI was slightly better than expected, but new orders and future output were particularly disappointing.
  • Italy’s PMI manufacturing came out slightly below expectations at 40.3, the lowest level since 2009.

In the US, Markit’s manufacturing PMI slipped to 48.5, the lowest reading since August 2009. The ISM manufacturing also declined (to 49.1), but came in better than expected, although the underlying components were as weak as in the Markit survey. The non-manufacturing ISM, due this Friday, is expected to exhibit a far steeper decline.

Our view

In our main scenario, we maintain the idea the pandemic will result in a global, deep, but temporary shock. However, it will probably take more time than initially thought to come back to “normal” levels of activity. Weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

Further, we do not see an exit strategy in Europe yet and there is a lack of visibility on the epidemic outbreak in the US and the economic impact of containment measures

From a short term perspective, volatility is here to stay and equity markets might go lower. After having increased our equity exposure gradually over the past two weeks, we will keep a slightly underweight position from current market levels.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

1-Apr-2020

MORNING COMMENT

Global equity markets showed mixed performances on Monday. European equities (Eurostoxx 50 +0.77%) gained throughout the day on the back of an encouraging message from the World Health Organisation, saying that there are signs of some stabilisation in Europe’s coronavirus outbreak, as Italy reported the smallest number of new cases in almost two weeks. US equities (S&P 500 -1.6%) were unable to close the day with a gain, as they swung between a drop in consumer confidence measure and Trump’s call for a fourth stimulus package.

In the meantime, the price for a barrel of Brent crude oil stabilised above the critical technical support of 24 US dollar, as President Trump and Putin seemed to agree that “current oil prices aren’t suitable for either nation”, Kremlin spokesman Dmitry Peskov said.

Mixed economic figures

Yesterday, we wrote on the impressive rebound of the official Chinese manufacturing PMI. This was confirmed by the manufacturing PMI from Caixin that came in at 50.1 in March, following the record-low of 40.3 in the prior month. As with the official PMI, commentary was cautious, stating that the increase in output only reflects manufacturers getting gradually back to work.

In the meantime, we also recognized the publication of several economic indicators in the developed world:

  • In Japan, the Bank of Japan’s Tankan business sentiment index dropped sharply to -8 in March. Large manufacturers state that business conditions have deteriorated and expect them to worsen further in the coming months.
  • In the US, March consumer confidence dropped to 120, according to the Conference Board. The figure was nevertheless slightly better than anticipated and well above cyclical lows. The US consumer might thus prove to be resilient or responds slow to fast-changing conditions.
  • in the Euro-area, consumer price inflation slowed to 0.7% year-on-year, the weakest pace in five months, driven by the collapse in oil prices and the impact of COVID-19.
  • In addition, China’s official PMI manufacturing jumped back into expansion territory to 52 in March, recouping all of February’s declines. Both production and new orders surged back to expansion levels. Although the rebound seems overdone, it confirms that the Chinese situation seems to be under control and activity is gradually returning to normal levels. In an accompanying statement, the NBS noted that “while manufacturing PMI rebounded rapidly in March, the survey showed companies still face relatively big operational pressures” and that “the global virus spread will hit the world economy and trade seriously”.

Today, we’ll be monitoring the publication of the ISM manufacturing, US vehicle sales, which are expected to plunge and the ADP employment report.

Our view

In our main scenario, we maintain the idea the pandemic will result in a global, deep, but temporary shock. However, it will probably take more time than initially thought to come back to “normal” levels of activity. Weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

Further, we do not see an exit strategy in Europe yet and there is a lack of visibility on the epidemic outbreak in the US and the economic impact of containment measures.

From a short term perspective, volatility is here to stay and visibility remains low. After having increased our equity exposure gradually over the past two weeks, we will keep a slightly underweight position from the current market levels.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

31-Mar-2020

MORNING COMMENT

Global equity markets rose on Monday (S&P 500 +3.35%, Eurostoxx 50 +1.35%), while long-term bond yields declined in a less volatile market with US equity market volatility falling towards 57 (Vix index). In the meantime, the price of a barrel of Brent crude oil declined, on the back of weak demand and rising excess supply, before paring some of the losses after President Trump said to call Putin to discuss plunging oil prices.

This morning, Asian equities are trading mixed (Nikkei +0.3%, Hang Seng +1.1%). The positive start to the session was generally attributed to the overnight US rally and better than expected activity data in China. Despite mounting new coronavirus cases, investors are optimistic on the efforts made by the US government to rapidly increase corona tests and possible additional fiscal support measures.

China returns to work

While confirmed COVID-19 cases rose to more than 785.000 across 177 countries and regions, and deaths increased to 38.000 worldwide, China’s major industrial provinces are resuming production. China’s vice-minister of industry and technology said nearly all of its major industrial companies have resumed production, together with more than three-quarter of small- and medium sized companies.

The revival of economic activity can also be seen in the Chinese activity resumption indicators we are tracking on a daily basis. Daily coal consumption (based on six power plants), is close to normal levels, while also transport and property sales are gradually normalising.

In addition, China’s official PMI manufacturing jumped back into expansion territory to 52 in March, recouping all of February’s declines. Both production and new orders surged back to expansion levels. Although the rebound seems overdone, it confirms that the Chinese situation seems to be under control and activity is gradually returning to normal levels. In an accompanying statement, the NBS noted that “while manufacturing PMI rebounded rapidly in March, the survey showed companies still face relatively big operational pressures” and that “the global virus spread will hit the world economy and trade seriously”.

Stronger virus containment measures in the West

While China’s economic activity appears to be gradually returning to normal levels, containment measures are becoming stronger in the West. In the US, containment measures have been extended to the end of April, while the UK mentioned stricter measures for up to six month.

In the meantime, Italy sets to extend containment measures until Easter at least, while Spain extended its measures on Monday, forcing all workers in nonessential sectors to stay at home for two weeks.

We already know that the economic downturn will be deep, and a report by the German Council of Economic Experts yesterday warned for the worst recession in Germany since 2009 if restrictions last longer than mid-May of production is further halted.

Our view

In our main scenario, we maintain the idea the pandemic will result in a deep, but temporary shock. Weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts. Central banks’ and government’s policy responses, that are strong, will stay longer than the virus.

Equity markets are attractively valued compared to their historical average and the negative economic news flow is integrated to a great extent in todays’ market prices.

Volatility is nevertheless here to stay. Therefore, we will continue to further increase our equity exposure gradually with the objective to become neutral in the coming weeks.

30-Mar-2020

MORNING COMMENT

Equity markets had another though day on Friday (S&P 500 -3.37%, Eurostoxx 50 -4.18%), paring some of this week’s strong gains. The S&P 500 had nevertheless one of its best weeks in more than 10 years, remaining 25% of its February high though. Separately, commodity prices dropped, with the price of a barrel of Brent oil declining further on Monday to the lowest level since November 2002, leaving the market between rapidly falling demand and a rising surplus of crude.

This morning, Asian equities mostly headed lower (Nikkei -3%, Hang Seng -1.5%). Australian equities nevertheless gained on the back of the government’s additional stimulus plans that should be revealed in the coming days.

The COVID-19 epidemic

With the exception of China in particular, COVID-19 reports remained broadly negative over the past days, especially in the United States, where new cases have increased to more than 140.000. The US has now clearly overtaken China to become the country with the largest number of confirmed coronavirus cases in the world. US president Trump extended the guidelines for social distancing to 30 April.

New York remains the epicenter with 60.000 confirmed cases and around 1.000 deaths (figures of last Sunday). Despite that, President Trump decided against a quarantine on New York, New Jersey and parts of Connecticut after raising the idea earlier during the weekend.

In Europe, the pace of new inflections seems to slow in both Italy and Spain. Italy recorded another 756 deaths on Sunday while 838 more perished in Spain. The rate of new fatalities and the pace of new infections has nevertheless slowed in both countries in recent days, indicating that containment measures may be working in flattening the curve.

Lockdown taking a toll on the economy and companies’ earnings

Over the past week, we have witnessed the strong negative economic impact of the measures taken to contain the spread of the virus. The impact on companies’ earnings is also starting the become visible ahead of the upcoming Q1 earnings season. Analysts have sharply reduced earnings estimated for Q1 and Q2 2020 over the past weeks. .

  • According to Factset, the estimated earnings decline for the S&P 500 for Q1 2020 is -5.2%. It would mark the largest year-on-year decline reported since Q1 2016.
  • Estimations for Q2 2020 are even more negative, as the S&P 500 would report the first double-digit decline in earnings in ten years.

We will closely watch the upcoming developments on companies’ earnings and the publication of economic figures with this week:

  • The publication of the global services and composite PMI’s that should confirm the sharp deterioration in soft data, shown by the preliminary PMI’s.
  • The US will publish its job report for March, a week after initial jobless claims skyrocketed close to 3.3 million.
  • The Eurozone will publish final consumer and business confidence indices.
  • Japan will publish its Q1 Tankan survey.

Our view

In our main scenario, we maintain the idea the pandemic will result in a deep, but temporary shock. Weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts. Central banks’ and government’s policy responses, that are strong, will stay longer than the virus.

Equity markets are attractively valued compared to their historical average and the negative economic news flow is integrated to a great extent in todays’ market prices.

Volatility is nevertheless here to stay. Therefore, we will continue to gradually increase our equity exposure with the objective to become neutral in the coming weeks.

27-Mar-2020

MORNING COMMENT

Despite an extremely weak jobless claims report in the afternoon, global equity markets rose further in another volatile session (S&P 500 +6.24%, Eurostoxx 50 +1.7%). US equities realised the best performance on the back of the government’s decision to expand unemployment benefits for a share of workers to nearly 100% of their salary.

Separately, the US dollar dropped for a third consecutive day after the publication of the initial jobless claims reports, supporting the price of gold that ended the day at 1650 USD/troy ounce. Oil, in the meantime, deepened losses, as a US government plan to buy oil for its emergency reserves fell through.

The COVID-19 epidemic

News regarding the spread of the COVID-19 virus was mixed throughout the day.

  • The US now leads the world in confirmed coronavirus cases (85,991). New York reported an alarming number with a rise in the daily death toll of 35%.
  • In Europe, Italy reported its biggest increase in new cases in the past five days with most infections in the northern regions near Milan. Confirmed cases in Italy should also pass China today.
  • From China we are receiving mixed signals. Economic activity has clearly picked up this week. China remains nevertheless cautious, closing the border to foreigners as of March 28 and restricting the arrival of Chinese citizens from overseas as of March 29, to prevent another outbreak.

Macro continues to deteriorate

Macroeconomic data continues to feel the brunt of the strict containment measures all over the world, as French business confidence and German consumer confidence plunged

The biggest news nevertheless came from the number of initial claims for unemployment benefits in the US. Claims surged to more than 3 million or around 2% of the US labor force in the week ending March 21. The level surpassed the peak reached during the Great Recession significantly, when claims increased to 665.000 in March 2009. With weekly data going back to 1967, the historical peak was hit in October 1982 (695.000).

We note that Pennsylvania and Ohio saw the biggest increase in claims, with a rise of 363k and 181k respectively vs. the prior week. Both are states in the US “rust belt” and are traditionally swing states in presidential campaigns. Looking forward, this is certainly a development to watch over the coming weeks, as claims should continue to rise significantly.

We nevertheless also recognised a positive point. The US government has decided to expand unemployment benefits for a large share of unemployed workers, assuring the payment of nearly 100% of their prior salary. As a result, unemployment will be less of a financial shock in the near-term for households compared to typical economic downturns.

Our view

In our main scenario, we maintain the idea the pandemic will result in a deep, but temporary shock.  Weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts. Central banks’ and government’s policy responses, that are strong, will stay longer than the virus.

Equity markets are attractively valued compared to their historical average and the negative economic news flow is integrated to a great extent in todays’ market prices.

Volatility is nevertheless here to stay. Therefore, we will continue to gradually increase our equity exposure with the objective to become neutral in the coming weeks.

26-Mar-2020

MORNING COMMENT

Global equity markets fluctuated in a volatile session. Both the European and US equity market opened significantly higher, gave away part of their gains throughout the day, but finished on a positive note (S&P 500 +1.15%, Eurostoxx 50 +3.48%).

US stimulus package, that has been approved by the Senate by now, and weighed the approval of the very large stimulus programme of EUR 750 billion by German parliament that sent the euro higher.

The epidemic is unfolding forcefully in the US

In the meantime, the epidemic is still with us in Europe, where official numbers on Wednesday showed that, although Italy’s growth rate of new infections continues to slow, the total number of diagnosed cases rose further to above 74.000. In Spain the situation continues to deteriorate. New cases jumped in the last 24 hours with already a higher death toll than in China.

On the other side of the Atlantic, the epidemic is unfolding rapidly. The total number of diagnosed cases in the US has increased to just below 70.000 and more than 1000 people have already deceased from COVID-19.

Economic impact

In terms of economic data, yesterday was a light day. The final wbWGerman Ifo Business Climatew/bW index was revised down significantly. The index dropped towards 86.1 in March from 96 in February. Business confidence also dropped in Belgium. Yesterday’s BNB Business Confidence index fell the most on record in Mach to -10.9, the lowest reading in more than 6 years.

Today we will closely watch the publication of the initial jobless claims in the US (at 1:30 PM CET). Consensus expectations point to an increase of claims for unemployment benefits of 1.5 million, although there is a huge dispersion in economists’ estimates. In Europe, the EU council holds a video conference. Among others, heads of state or government will focus on promoting research, including research into a vaccine, and tackling socio-economic consequences.

Our view

In our main scenario, we maintain the idea the pandemic will result in a deep, but temporary shock. Weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

Central banks’ and government’s policy responses, that are strong, will stay longer than the virus. In a legal document released late on Wednesday, the ECB said the self-imposed issue-limits “should not apply” to its new Pandemic Emergency Purchase Program. This decision is a significant boost to the credibility of the ECB’s commitment, including after 2020.

Equity markets are attractively valued compared to their historical average and the negative economic news flow is integrated to a great extent in todays’ market prices.

Volatility is nevertheless here to stay. Therefore, we will continue to gradually increase our equity exposure with the objective to become neutral in the coming weeks.

25-Mar-2020

MORNING COMMENT

Global equity markets rallied on Tuesday, ending the day more than 9% higher (S&P 500 +9.30%, Eurostoxx 50 +9.24%). This morning, American and European stock futures climbed, while Asian equities saw their best day since 2008. Markets were weighing the progress over the US stimulus bill against the significant rise in new coronavirus infections. It was the best day for the S&P 500 since 2008. The Dow Jones Industrials did even better with an 11% gain, the best day since 1933.

Also other asset classes realised an impressive rebound. The price for a barrel of Brent crude oil jumped by almost 13% to 30.6 dollar, while gold rallied almost 6% to 1660 USD/troy ounce.

Bad coronanews remained in the background

Equity markets ignored high infection and death numbers in Italy and Spain, and even the warning from the World Health Organisation that the US might become the new epicenter of COVID-19. Instead, markets focused on the progress made over the US stimulus bill, on which Senate leaders and the Trump Administration finally reached an agreement on Wednesday.

The stimulus package should reach USD 2 trillion to limit the economic fallout of the measures taken to contain the spread of COVID-19. It contains, amongst others, sending a check of USD 1200 to many Americans, a USD 367 billion loan programme for small businesses and a USD 500 billion fund for industries, cities and states.

Markets digest weak economic figures

In the meantime, economic figures look extremely weak, although equity markets already seemed prepared for it and barely moved after their release. The Eurozone flash Composite PMI fell to 31.4 in March from 51.6 in January, the weakest figure since records began in July 1998. Markit highlighted the strong deterioration in services activity and said readings imply a GDP contraction of 2% in the first quarter.

Also the US’ Flash Composite PMI came in below consensus expectations. It hit a new low of 40.5 from 49.6 in February, the steepest reported decline since at least October 2009.

Today, we will closely monitor the publication of Germany’s final Ifo Business Climate and preliminary durable goods orders in the US. We will watch whether US and global equity indexes can post their first back-to-back daily gains since mid-February on Wednesday.

Our view

In our main scenario, we maintain the idea the pandemic will result in a deep, but temporary shock. Central banks’ and government’s policy responses, that are strong, will stay longer than the virus.

Equity markets have now reached more attractive valuations compared to their historical average and the negative economic news flow is integrated to a great extent in todays’ market prices, witness the limited market reaction after the release of yesterday’s disappointing PMI’s.

Therefore, we will continue to gradually increase our equity exposure with the objective to become neutral in the coming weeks.

24-Mar-2020

MORNING COMMENT

Global equity markets ended lower on Monday (S&P 500 -2.93%, Eurostoxx 50 -2.47%) in another volatile trading session. After a negative opening, US equities jumped on the back of a new wave of important monetary support initiatives, but paired gains later on as investors remain cautious around the impasse on stimulus negotiations in the US.

This morning, equity market futures point to a positive market opening in Europe and the US, after strong gains in Asia (Nikkei +7.5%).

Strong policy reactions continue

While the US Senate continued to fail to advance the coronavirus stimulus bill, the Federal Reserve has announced additional monetary support measures, including the unlimited buying of Treasury bonds and mortgage-back securities, to keep borrowing costs at rock-bottom levels. It also announced that it would buy corporate bonds, including the riskiest investment grade debt, for the first time in its history.

In Germany then, the government stepped up its fiscal efforts, approving a very large EUR 750 billion package through an economic stabilisation fund of EUR 600 billion (or 17.5% of GDP) and a supplementary budget of EUR 156 billion (4.5% of GDP).

In addition, Germany followed-up on last week’s discussions, announcing that is ready to help Italy get through the pandemic by preparing to support an emergency loan from the Eurozone’s bailout fund. However, Germany doesn’t appear ready to issue joint coronavirus bonds.

Updating possible economic scenarios: “U-shaped recovery” possible

It comes as no surprise that economic figures are weak, as various countries all over the world are in a sort of lockdown to contain the spread of the virus. The Eurozone’s consumer confidence, that was published yesterday, deteriorated and Markit’s Flash PMI’s, that are due for today, are bound to show a sharp drop in economic activity.

In this context, our economists have already adjusted their economic growth scenarios for the coming two years. These scenarios are based on the time confinement measures are in place.

  • One full month of containment that is progressively lifted implies a fall in the GDP of the Eurozone of 4% for 2020, followed by a strong rebound of 6.5% in 2021. This would result in a cumulated GDP loss of 2.5% for 2020/2021.
  • In the US, where only few states are confined for the time being, one month containment would lead to a fall of 2% of GDP in 2020, followed by a strong rebound of 5.4%. This would result in a cumulated GDP loss of 1.3% for 2020/2021.

Given the expected economic rebound and stimulus measures in place, a “U-shaped” recovery is nevertheless not excluded. Read all about it on https://www.candriam.com/en/professional/market-insights/topics/macro/an-update-on-our-macro-scenarios/.

Our view

In our main scenario, we maintain the idea the pandemic will result in a deep, but temporary shock. Central banks’ and government’s policy responses, that are strong, will stay longer than the virus.

As equity markets have now reached more attractive valuations again compared to their historical average and the negative economic news flow is integrated to a great extent in todays’ market prices, we have already started to increase our equity exposure.

We will continue to gradually increase it with the objective to become neutral in the coming weeks.

23-Mar-2020

MORNING COMMENT

Equity markets showed mixed performances last Friday. European equities gained almost 4% (Eurostoxx 50), as ECB President Lagarde said to do all it takes to combat the economic downturn related to the coronavirus. US equities pared gains through the day, ending the last day of the week with a loss of more than 4% (S&P 500).

We are likely entering another volatile week with extremely high fluctuations. Futures for the S&P 500 fell 5% at the opening in Asia, while Eurostoxx 50 futures are also down.

Fiscal response stepped up

In addition to the central banks’ monetary stimulus measures, governments have continued to step up efforts to limit the short-term economic damage as a result of the drastic measures taken to contain the global spread of the coronavirus.

  • In the US, the Trump Administration is ready to inject USD 1.200 billion in the economy. Various politicians want the bill to be passed today (Monday 23rd).
  • The UK pledged to do all it takes with GBP 330 billion of government backed loans (15% of GDP).
  • The French government intends to support companies by providing loan guarantees worth of EUR 300 billion (12% of GDP). Additional measures are expected.
  • Italy and Spain have announced fiscal support packaged of similar size (1,4% of GDP).
  • Germany is setting up a rescue package worth of around EUR 600 billion and is adding 156 billion euros (4.5% of GDP) in supplemental spending financed with debt.

The upcoming week

This week, markets will not only focus on the progression of the coronavirus all over the world, but also on the publication of various economic figures, like

  • Global PMIs on Tuesday;
  • Business (German Ifo) and consumer sentiment (Eurozone Consumer Confidence Index, GfK German Confidence Index, US Michigan Sentiment);
  • US initial jobless claims.

Although a serious deterioration is expected, financial markets might already have integrated parts of it.

Our view

In our main scenario, in which we maintain the idea the pandemic will result in a deep, but temporary shock, this negative economic news flow is already integrated to a great extent in todays’ market prices, but with a fat tail risk.

We have already started to increase our equity exposure, and we will continue to gradually increase it with the objective to become neutral in the coming weeks.

20-Mar-2020

MORNING COMMENT

Equity markets globally stabilised on Thursday (Eurostoxx 50 +2.86%, S&P 500 +0.47%) and bond markets recovered after the European Central Bank announced its Pandemic Emergency Purchase Programme on Wednesday evening.

Also oil prices registered their biggest-ever one-day rebound (+24% on WTI) after a three-day sell-off, as investors assessed the impact of massive central bank stimulus measures, and China’s and the US’ decision to increase strategic oil reserves. In addition, President Trump said to intervene in the oil price war between Saudi Arabia and Russia when needed.

Western economic data impacted by coronavirus

Central banks have continued to announce additional stimulus measures around the globe.

  • China is set to unleash trillions of yuan to revive an economy that is expected to shrink for the first time in four decades through infrastructure investments of almost USD 400 billion. .
  • Central banks in Great-Britain, Australia, Brazil, Peru, South Africa, Taiwan, Indonesia and the Philippines all cut rates and the Reserve Bank of Australia launched its first QE ever.

The economic impact of the spread of the corona pandemic cannot be underestimated. The first activity indicators now show the advent of it in the developed world too.

  • The US Philadelphia Fed index, that measures overall business activity in the region, dropped strongly towards -12.7 in March from 36 in February.
  • US initial claims for unemployment benefits surged last week by 70K to 281.000, the highest level since September 2017, as companies in the services sector laid off workers because of the coronavirus pandemic that has fractured economic activity.
  • The preliminary German Ifo business climate index fell to 87.7 in March, from 96 in February, the biggest decline since 1991. The index is now at its lowest level since August 2009.

Our view

Yesterday’s economic data comes as no surprise. Economic activity has been severely impacted around the globe in order to contain the spread of the coronavirus. Growth expectations will be well below our initial estimations. In the corporate sector, this will be followed by downward revisions in earnings and cuts in dividends.

In our main scenario, in which we maintain the idea the pandemic will result in a deep, but temporary shock, this negative economic news flow is already integrated to a great extent in todays’ market prices, but with a fat tail risk. We have gradually started to increase our equity exposure with the objective to become neutral in the coming weeks.

19-Mar-2020

MORNING COMMENT

After Tuesday’s rebound, equity markets tumbled again on Wednesday (Eurostoxx 50 -5.7%, S&P 500 -5.2%) near their worst levels. The relentless worldwide spread of the coronavirus and a series of profit warnings related to activity disruptions overshadowed the additional announced economic support measures, that resulted in a bond market sell-off

Fiscal stimulus plans pressure bond markets?

Governments continued to work on additional measures to support businesses and contain the economy from the pandemic.

  • In the Eurozone, leaders are discussing the activation of the European Stability Mechanism(ESM) to deal with the impact of the coronavirus. However, not all member states are convinced of this measure, as they fear it would negatively impact confidence. Instead, Chancellor Merkel suggested that European finance ministers are considering joint debt issuance. This would be a turning point as Germany has been perennially resistant to it and represents genuinely good news for the European periphery.
  • In addition, the ECB announced a EUR 750 billion Pandemic Emergency Purchase Programme (PEPP) that runs until end of 2020 at the earliest. PEPP will involve purchases of private and public securities and include all assets eligible under current asset purchase program. A waiver of the eligibility requirements for securities issued by the Greek government will be granted for purchases under PEPP. While announcing a ceiling, there is effectively no limit to the ECB’s actions as the ECB will terminate net asset purchases under PEPP once it judges that the coronavirus Covid-19 crisis phase is over.
  • In the UK, the Bank of England is creating a Covid-19 Corporate Financing Facility to provide funding to businesses, and an additional programme to help preserve the banking system capacity to lend to smaller and medium-sized companies.
  • In the US, economic relief is gaining traction and could reach levels worth of USD 1000 billion. Upcoming measures might include helicopter money. As discussed in the yesterday’s morning note sending a check of USD 1000 directly to US families is part of the proposition.

Concerns about the magnitude of these fiscal stimulus plans pushed global interest rates higher and resulted in a global bond market sell-off. Long-term bonds underwent a strong decline since the beginning of March. For the 30-year US Treasury Bond for instance, the price decline already exceeds 10%. Also corporate bond spreads increased as markets fear rising defaults. Overall, the rise in volatility is now widespread among all asset classes.

Especially Italian government bonds had an extremely volatile day. The closely watched gap between Italian and German 10 year government yields widened to more than 320 basis points before ending the day at 266 basis points i.e. 12 basis points tighter than the day before!

Oil price war sends Brent to lowest since 2003

In the meantime, oil remained strongly under pressure. Brent crude oil dropped another 10% to below 26 USD/barrel, the lowest level since September 2003. Oil continued to be hit by both global demand worries due to the coronacrisis and supply concerns related to the price war that followed the failed cooperation between the OPEC and Russia.

Our view

In our central scenario, the expected upcoming negative news flow linked to the pandemic is already to a great extent integrated in todays’ prices, but with a fat tail risk. We are gradually looking to further increase our equity exposure with the objective to become neutral, in combination with a limited protective derivative strategy, where possible.

Equity markets now have a better risk-reward but we know that any positive news flow around the epidemic and confidence in the authorities’ actions will be key for a more durable market rebound.

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