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Vantage Point: Alphabet Soup

Since the last edition of Vantage Point, Covid-19 has wreaked both human and economic devastation on the world. In this edition, we look back at what we’ve been through, look ahead to what might happen, assess the monetary and fiscal policy response, analyze the impact on markets and finally draw some broad investment conclusions in what is a highly uncertain and rapidly-evolving situation.

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Weekly Market Roundup

July 13, 2020

Start your week off right with our market snapshot from the Global Economics and Investment Analysis Group.

WHAT HAPPENED

Global stocks gained +1.8% in the latest week as EM (+3.7%) outperformed DM (+1.5%) equities. In the US, S&P 500 (+1.8%) outperformed small caps (-0.6%). US tech outperformance over US banks past 6 months is the biggest since 1999 tech bubble & 2008 GFC.
In commodities, oil lost slightly (-0.2%) while gold gained (+1.8%). Credit spreads were mostly unchanged. US 2-year Treasury finished the week at 0.15%; 10-year at 0.64%.
The USD lost -0.5% (+0.3% YTD) against major currencies.
US initial jobless claims dropped more than expected by 99,000 to 1.31 million in the week ending 4-July. Continuing claims declined to 18.1 million in the week ended June 27 although remain elevated, suggesting a loss of momentum in the labor force.
The ISM non-manufacturing index rebounded more than expected in a sign that re-openings in the Northeast contributed to a solid rise in activity in June. The increase was driven by a surge in the business activity component and new orders. The recovery in the employment index is lagging behind.
The White House and Republicans are considering narrowing the second round of stimulus checks. Treasury Secretary Mnuchin said the bill could come by end of July.
Biden unveiled a $700 billion plan to revitalize the US economy. The "Build Back Better" plan focuses heavily on the role of the US government in promoting the domestic manufacturing base, takes a hawkish approach toward China, and looks to channel new investment opportunities toward women and minorities.
US-China tensions continue to brew, with the US administration reportedly readying a federal contract ban for companies using Huawei and other Chinese technology.
Industrial production rose robustly across the four largest euro area economies in May, confirming that industry has also troughed. While there were some below expectations results in Spain (+14.7% m/m) and Germany (+9.7% m/m), France (+19.6% m/m) and especially Italy (+42.1% m/m) were beats.
The UK government announced £30bn (1.4% of 2019 GDP) of extra fiscal measures, including a “Job Retention Bonus” of £1,000 per employee for employers bringing back furloughed workers.

S&P Yields Above Treasury

WHAT'S AHEAD

UK GDP, Industrial and Manufacturing Production (Tuesday)
Eurozone Industrial Production (Tuesday)
US CPI, Small Business Index (Tuesday)
US Industrial and Manufacturing Production (Wednesday)
ECB Meeting (Thursday)
China GDP (Thursday)
US Michigan Consumer Sentiment (Friday)

VIEW SNAPSHOT

Monthly Market Roundup

July 2020

Risk On Despite Covid Concerns

Global stocks gained 3.2% in June, the third monthly gain in a row and are up 40% since the YTD low on March 23 on rising optimism that major countries are on their V-shaped recovery paths. The second quarter's 19.4% return was the third highest in history.
Gains were led by emerging markets which surged for more than 7%. Overall, small caps outperformed large caps in the US, and growth outperformed value.
Gold resumed its rally (+2.6%, +16.3%) with the price at an eight-year high amid unprecedented global monetary and fiscal easing.
Despite a rise in global Covid-19 cases, risk-on sentiment continues to dominate, yet is vulnerable to cases continuing to rise which could potentially disrupt the pace of reopenings.
Another risk to the outlook centers around political challenges on further stimulus, which has so far helped patch much of the income gap caused by lockdowns.
The rate of change in economic data remains positive but is moderating and the level of activity vs. pre-crisis remains far off.
While the worst of the global slowdown appears to have passed, the labor market rebound and the health of the consumer remain key for market sentiment.

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June 2020

Global stocks rallied 4.4% in May and are now only down -8.9% YTD as risk-on sentiment continues to dominate on the back of economic reopenings and supportive policy.

Risk on Accelerates
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May 2020

Global stocks rallied sharply in April by 10.8% after March's worst monthly performance since the Global Financial Crisis in 2008.

Fallout from Covid-19
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Points of View

What’s priced into markets?

Interest Rates

Short term interest rates reached all-time lows in the US in May, rebounding only marginally since then. At face value, markets appear to be pricing in a significant probability of negative rates in the US. We see this scenario as unlikely.

What type of recovery is the equity market pricing in?

As currently priced, the market is expecting a sharp recovery in growth in 2021. However, our message is to remain cautious. Ultimately the impact on the economy and markets will be primarily determined by the course of the disease...