Week from 27 April to 3 May 2020
On Thursday, the U.S. Labor Department’s report showed initial unemployment claims totaled 3.84 million for the week ending April 25. As a result, more than 30 million Americans filed for unemployment benefits since the beginning of the health crisis. Beyond these devastating figures, the key question is how long the global economy will take to recover? All the evidence suggests that the post-coronavirus world will look and behave very differently with a huge impact on corporate earnings and private sector activity. However, after the impressive rally in April, mostly due to the monetary and fiscal stimulus announcements, the S&P500 PE ratio is close to 20 (i.e. level comparable with that observed in early 2019) as if nothing has happened ever since.
The Bureau of Economic Analysis said on Wednesday that the U.S. economy shrunk by an annualized 4.8% in the first quarter of the year, thereby posting the deepest contraction since 2008. Unsurprisingly, a vast majority of companies have withdrawn their guidance due to uncertainty on the Covid-19 pandemic. Despite an already grim situation worsened by growing tensions between Washington and Beijing over the origin of the coronavirus, the outlook for Q2 could be murkier because the extent of the economy’s reopening is still unclear as evidenced by the NASDAQ Transportation index which has trouble recovering from the 40% peak-to-valley drawdown suffered from 20 February to 23 March.
In light of the performance exhibited by equity indices during the last week of April, markets do not seem to worry about the deteriorating economy. Thus the MSCI EMU rose 4.17%, the easing of lockdown measures across the European continent providing support. The MSCI emerging markets gained 4.25% and the MSCI World added 0.86%. In Asia, the Shanghai composite also fared well (+1.84%), like the Nikkei 225 (+1.86%) after the Bank of Japan unexpectedly announced additional aggressive monetary easing to support corporations’ financing needs.
By contrast, the S&P 500 and the NASDAQ composite ended the week almost flat (-0.21% and -0.34% respectively) after retracing four days’ gains on Friday. On the other hand, small cap stocks managed to finish in positive territory (Russell 2000 up 2.22% WTD in spite of a 3.83% correction on the last trading session). Nevertheless, the comparison with Europe and Asia is biased as most European and APAC markets were closed for the Labor Day holiday, thereby preventing a potential pullback.
There was a rotation among S&P sectors, as monies left utilities (-4.28%), health care (-2.61%), consumer staples (-1.95%), consumer discretionary (-1.12%) and even some tech stocks such as Amazon (down -5.15% but the sector was up +0.25%) to go to cyclical sectors like energy which led the pack (+2.94% as oil prices jumped 16.77% on hopes demand will pick up), materials (+1.90% in the wake of the U.S. construction spending which rose 0.9% in March), industrials (+1.16% with 3M saying its earnings have received a boost from a rapidly rising demand in personal safety equipment), and financials (+1.33%) as investors ditched safe havens triggering a jump in U.S. bond yields.
The yield of the 10-year U.S. T-note precisely rose to 0.64% from 0.60% even though the yield of the German Bund on the same maturity declined to -0.59% from -0.47%. Investment grade corporate bonds notched their longest winning streak since August 2019 (sixth week of consecutive gains: +0.62% in the U.S., +1.08% in the eurozone) and high yield bonds regained some colours (+0.51% in the U.S., +0.58% in the eurozone). Emerging debt offset the whole amount of losses incurred last week (+1.88% in local currencies).
Lastly, gold was a touch lower but preserved the psychological level of $1,700/Oz.
Find the full report here: https://www.trackinsight.com/en/weekly-flow-report/2020-05-01/global