Week from 4 to 10 May 2020
Stock markets rallied on signs U.S.-China trade tensions were easing, thereby snapping their two-week losing streak. The Dow Jones Industrial Average gained 2.56%, the S&P 500 rose 3.5%, and the Nasdaq Composite jumped 6% turning positive for the year. The VIX nosedived below 28 for the first time since 26 February. Sentiment was also boosted by Chinese exports which unexpectedly increased last month (Shanghai Composite up 1.23%).
However, the latest macro data released in the U.S. remained grim while the country saw a spike in new cases of Covid-19. Over 33 million workers have sought unemployment benefits in the past seven weeks (3,169,000 more in the week ended 2 May) and the service sector activity contracted at its fastest pace since 2009 (non-manufacturing ISM at 41.8 in April, thereby ending a 122-month period of growth) but market participants prefer to see the glass half full, hoping that the reopening of the economy will spark the much desired V-shaped recovery (even though evidence shows that the angle of the V is increasing over time, closer to 90 degrees than 45). They still rely on the Federal Reserve to do « whatever it takes » to boost the U.S. economy.
The picture emerging from European markets was more mixed (FTSE 100 up 3%, DAX 30 up 0.39% while the CAC 40 fell 0.49% and the MSCI EMU inched down 0.03%). German orders in March collapsed by 15.6% due to lockdown measures, undoubtedly a bad omen for April. To make things even more complicated, the Constitutional Court in Karlsruhe ruled that part of the European Central Bank’s bond-buying program breached its mandate, prompting a rare rebuke from the highest court in the European Union (ECJ) asserting that it alone has jurisdiction over the ECB. European construction remains a continuous and permanent endeavour.
All the S&P sectors turned green for this first week of May, shrugging off the well-known adage « sell in May and go away ». Once again, energy led the pack (+8.25% as oil prices jumped 25% on expectations that oil output cuts and the reopening of economies would ease the glut in supply). Appetite for tech stocks did not wane (sector up 6.64%). Chip stocks and FAANG names continued their winning streak (Applied Materials: +14.76%, KLA: +14.13%, Apple: +7.58%). On the other hand, the most defensive sectors lagged behind (utilities: +0.53%, consumer staples: +0.87%).
The risk-on mood pushed sovereign bond yields a bit higher (10-year U.S. Treasury yield to 0.69% from 0.64%, 10-year Bund yield to -0.54% from -0.59%) and hurt investment grade bonds (-0.98% in the U.S., -0.46% in the eurozone) after six weeks of consecutive gains. By contrast, the tailwinds supported U.S. high yield bonds (+1.20%) and emerging debt (+1.25% in local currencies).
Among safe haven assets, gold was not affected by the equity rally (+0.76%).
Find the full report here: https://www.trackinsight.com/en/weekly-flow-report/2020-05-08/global