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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 6, 2020

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

WHAT HAPPENED

Global stocks gained +3.3% in the latest week on positive global macro releases. In the US, S&P 500 (+4.1%) outperformed small caps (+3.9%).
In commodities, oil gained +5.6% (-33.4% YTD) while gold gained slightly (+0.7%).
In credit, US credit spreads tightened, led by US HY (-15 bp). US Treasury yields were mostly unchanged (2-year at 0.15%; 10-year at 0.67%).
The USD lost -0.3% (+0.8% YTD) against major currencies.
US June employment came stronger than expected. US June nonfarm payrolls up nearly 4.8 million, well ahead of 3.1 million consensus. May also revised upward. Unemployment rate down to 11.1% well below expectations for 12.5%. Labor force participation rate of 61.5% was up 0.7%. However, weekly initial jobless claims (1.427 million vs 1.482 million prior week) somewhat higher than expected and continuing claims have flattened out at an elevated read.
BofA's latest Flow Show report showed money market funds saw largest redemptions since December 2019 in the week to July 1st, while $7.1 billion was pulled out of equity funds. 'Bull & Bear' indicator was no longer in "buy" territory for first time since March 17th. Report showed ~$15.3 billion was pumped into bond funds and $2 billion into gold. HY bond funds saw $3.4 billion withdrawal, breaking 13-week streak of inflows. This exodus was mostly due to rising concerns over the US economic outlook as cases of Covid-19 resurged, coupled with an eagerness to crystallize profits after ferocious rally sparked by historic central bank intervention.
Some positive sentiment from recent promising vaccine headlines. The Pfizer and BioNtech study yesterday saw positive clinical data, and Oxford project was also positive on immune response.
June FOMC minutes suggest that members are moving away from yield-curve control but favoring more explicit lower-for-longer forward guidance. Officials apparently saw the experience of the Reserve Bank of Australia, which recently announced a 0.25% cap on three-year government bond yields, as “most relevant” to the situation in the US.
Eurozone Composite PMI hit four-month high in June (48.5) versus prior 31.9 reading. Country breakdowns showed improvement across the board. Of note, French composite PMI at 51.7, the best-performing country. Spain is on the cusp of expansion with a composite PMI of 49.7. Activity showed slower rate of decline in Italy and Germany.
China Caixin Services PMI came at 10-year high (58.4) in June, markedly better than consensus and followed 55.0 in prior month. Upturn widely attributed to recent easing of virus-related restrictions and stronger demand conditions.

WHAT'S AHEAD

Eurozone Retail Sales (Monday)
US ISM Nonmanufacturing PMI (Tuesday)
Germany Industrial Production (Tuesday)
US Initial Jobless Claims (Tuesday)

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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.

Find out more

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...