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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

August 3, 2020

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

WHAT HAPPENED

Global stocks gained 0.8% in the latest week, finishing July 5.3% and bringing the YTD loss to -1.0%. Returns were led by emerging markets (1.8%; 9.0% MTD; -1.5% YTD) followed by developed (0.6%; 4.8% MTD; -0.9% YTD). Non-US developed markets lost (MSCI EAFE -2.1% in latest week) while the US continued to gain led by the NASDAQ (3.7%) and the S&P 500 (1.8%).
High yield spreads and interest rates fell, gold gained 4.3% (29.7% YTD), and the USD dipped -1.1% (-3.2% YTD).
Recent jobless claims data portray a potentially stalling labor market recovery. Initial jobless claims increased for the second week in a row to 1.434 million.
US GDP dropped -32.9% q/q saar (seasonally adjusted annualized rate), the worst in history but slightly better than expected. Consumer spending, down -34.6%, led the decline which was especially sharp in services (-43.5%).
The Fed kept rates unchanged, extended dollar liquidity swaps and temporary repo operations through March 31, 2021, and stated that while activity had improved, the level remained far below levels earlier in the year. The Fed did not provide any further updates on what it would take to change rates, suggesting that the current policy may remain for some time. In addition, Fed Chair Jerome Powell reiterated that “the path of the economy will depend significantly on the course of the virus.”
US Conference Board consumer Confidence missed estimates and fell from 98.3 to 92.6 in July –still far from the pre-crisis level in February of 132.6.
German sentiment continues to improve. The German Ifo business climate index improved for the third month in a row and has risen from 74.3 to 90.5 which remains below the 95.8 YTD peak in February.
Eurozone Q2 GDP was in line with estimates and declined -12.1% q/q in Q2 after posting a -3.6% fall in Q1.
Eurozone inflation was 0.1% higher to 0.4% y/y in July and core inflation gained 0.4% to 1.2% y/y, both topping estimates.
Japan retail sales beat estimates and were still lower compared to a year prior (-1.2%) but improved from -12.3% in May.
China’s manufacturing PMI gained slightly to 51.1 while the non-manufacturing PMI dipped by 0.2 to 54.2 in July.

WHAT'S AHEAD

US ISM Manufacturing PMI (Monday)
US ISM Non-manufacturing PMI (Wednesday)
UK BOE Meeting (Thursday)
US Jobs Report (Friday)
China Trade (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.

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...