Week from 18 to 24 May 2020
Investors remained largely optimistic all week long despite escalating tensions between the U.S. and China after Beijing announced plans to impose new national security laws on Hong Kong, thereby destroying the 1C2S (one country, two systems) framework and risking further civil disorder. The other adverse news came from the U.S. Labor Department which reported that first-time filings for unemployment insurance had totaled 2.438 million last week, bringing the cumulative number of U.S. job losses from the beginning of the health crisis to around 39 million. All the evidence suggests that it will take a long time to recover from this unprecedented shock wave.
However financial markets appeared resilient even if the coronavirus outbreak is scary. Any potentially good news is being seen as an opportunity to move higher and shrug off worries about pandemic-induced layoffs and risk of confrontation between the U.S. and China. As an illustration, equity indices bounced back strongly on Monday after biotech company Moderna reported that its experimental vaccine for Covid-19 showed promising results in early trials. It must also be said that Jerome Powell’s 60 Minutes interview had helped to lift sentiment after he said the Federal Reserve is “not out of ammunition by a long shot”, thereby leaving the door open for more lending programs if need be.
Consequently, the CBOE volatility index (VIX) fell by 11.7% over the week (below 30) and U.S. equity markets closed higher, offsetting last week’s losses: Russell 2000 +7.84%, DJIA +3.29%, S&P 500 +3.20%, and Nasdaq Composite +3.44%. The S&P 500 is about 12.7% below its all-time peak while the Nasdaq Composite is only short by 5%.
Europe followed suit (MSCI EMU up 4.39%) in the wake of discussions between France and Germany about a €500 billion European Covid-19 recovery fund.
Most APAC markets were up too (Nikkei 225 +1.75%, Kospi +2.22%, ASX 200 +1.71%) except for China (Shanghai composite down 1.91%) and India (BSE Sensex down 1.37%).
The most ailing sectors led the pack for once: industrials (+7.2%), energy (+6.11% as oil prices hit a ten-week peak), and real estate (+5.59%). Only one sector finished in the red (health care down 0.78%).
Investment grade and high yield credit indices closed higher (IG EUR +0.50%, IG USD: +1.31%, HY EUR: +1.59%, HY USD: +2.77%). Emerging debt also fared well (+2.65% in local currencies).
Conversely, Government bonds pulled back, reflecting decreased demand for safer assets (U.S. 10-year yield moving from 0.64% to 0.66%, German 10-year yield from -0.59% to -0.54%), while gold came off its peak (-1.18% WTD, at $1,735.50/Oz).
Find the full report here: https://www.trackinsight.com/en/weekly-flow-report/2020-05-22/global