Vantage Point: Pandemic
The world has seen the emergence of a novel coronavirus that has infected large numbers of people in China and the rest of the world. This edition is devoted to trying to work out what the economic impact might be, and for how long it will continue.
Weekly Market Roundup
June 1, 2020
Start your week off right with our market snapshot from the Global Economics and Investment Analysis Group.
- Global stocks gained for the second week in a row and delivered 3.6%, the strongest since the first week of April. Returns were led by non-US developed markets, or MSCI EAFE, after Japan increased its stimulus package and a bigger than expected 750 billion euro stimulus program was proposed for the European Union. In the US, returns were led by the S&P 500 (3.0%) followed by small caps (2.9%) and the NASDAQ (1.8%) which is the only index positive YTD—up 6.2%.
- Commodities gained led by another advance in oil (5.8%) and corporate credit spreads retreated further.
- Interest rates were mixed and the US dollar declined -1.5% bringing the YTD gain to 2.0%.
- China approved a plan to impose national security laws on Hong Kong despite a US declaration that the move would signal the city was no longer autonomous from Beijing.
- US Q1 GDP was revised slightly lower to -5.0% q/q from -4.8% driven by weaker than expected business investment.
- US new home sales beat estimates and gained slightly from the prior month to 623,000 in April. Signs of housing market stabilization would be positive for the outlook.
- After falling sharply since February, US Conference Board consumer confidence improved in May. Despite being only a modest increase, a stabilization of deteriorating sentiment would be boost for the near-term outlook.
- US initial jobless declined slightly from 2.4 to 2.1 million yet still remain historically elevated. Over the last 11 weeks, 41 million have filed initial claims for unemployment insurance –26% of the labor force. Continuing claims declined 3.9 million to 21.0 million.
- Eurozone inflation fell 0.3% in May to 0.1% y/y, the lowest since mid-2016.
- The German IFO business climate index beat estimates and improved slightly to 79.5 in May.
- Japan industrial production was worse than expected and fell -14.4% y/y in April, the worst since 2009. Retail sales were -13.7%
- US ISM (Institute for Supply Management Manufacturing PMI (Monday)
- China Caixin Composite and Services PMI (Tuesday)
- US ISM Non-manufacturing PMI (Wednesday)
- Eurozone Retail Sales (Thursday)
- ECB Meeting (Thursday)
- US Jobs Report (Friday)
Monthly Market Roundup
Markets Disconnect from Data
- Global stocks rallied sharply in April by 10.8% after March's worst monthly performance since the Global Financial Crisis in 2008.
- A peak and then subsequent decline in the Covid growth rate, signs of lockdown easings, and extraordinary central bank and fiscal stimulus improved risk-on sentiment despite historically weak economic data.
- Thanks to the Fed, financial conditions eased, yet concerns linger and could get worse if data stays weaker longer than what is currently being priced in.
- Despite the rally in equities, US Treasury yields have yet to signal the all-clear and were largely range-bound in April.
- Overall, markets continue to send distorting signals suggesting that risks are skewed to the downside.
Points of View
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...
Government Bonds: Why we expect yields to edge higher…
Our forecasts for yields still imply a market that is too pessimistic and lowered its estimates too far. Hence, we see a higher probability of an upward drift in yields as growth stabilizes in 2020.