Candriam: Belfius investment partner
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26-June-2020

Global equity markets rose on Thursday (S&P 500: +1.1%, Eurostoxx 50: +0.7%), recovering some of Wednesday’s losses. Overall coronavirus news remains negative, while economic data continues to improve and central banks remain active.

Yesterday, the European Central Bank has set up a new liquidity facility for European banks that aren’t a member of the euro area, the so-called Eurosystem repo facility. It allows a broad set of central banks outside of the currency area to ease liquidity stress related to the coronavirus pandemic. The new facility will be available until June 2021 but could be extended if needed. The creation of a broad liquidity facility reflects the importance of the euro in global financial markets.

In terms of economic data, US durable goods beat expectations in May, and orders and shipments of core capital goods also rose. Durable goods orders jumped more than 15% compared to April. In the meantime, new claims for unemployment benefits came in higher than expected at 1.48 million and have only fallen 86.000 over the past two weeks.

Brexit

Negotiations between the UK and the European Union on a future trade agreement remain difficult, as Britain continues to reinforce the idea of independence.

  • The UK’s Chief Brexit negotiator rejected a potential compromise in its trade negotiations with the EU. Britain isn’t ready to accept tariffs if the country makes laws in its own interests.
  • EU negotiator Barnier has said that the “moment of truth” for any potential trade deal will be in October.

However, there is still an important likelihood that the recovery following the coronavirus crisis will remain the top priority for the EU and Brexit will take a backseat.

Our view

In this context, we continue to watch various indicators to assess our stance and conclude for now that:

  • most European countries have reached their peak in terms of active COVID-19 cases and the epicenter of the epidemic has now moved to South America.;
  • the COVID-19 trend is nevertheless a big concern in the US. Texas has halted the reopening of its economy, while the Sun Belt states are seeing a resurgence of new coronavirus cases;
  • the rate of contagion in Europe is falling in spite of a gradual re-opening of the economies;
  • the recent coronavirus resurgence in China and in Germany should remain under control, but remains an attention point though;
  • and the effective reproduction number could be drastically reduced by preventing big events.

The economic impact and the drop in economic activity has nevertheless been severe. Our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed and we still believe in a U-shaped economic recovery in the medium term.

Policy easing from virtually all central banks and fiscal easing represent a support. The Fed, the ECB and the Bank of Japan keep on easing policies further. It is crucial that fiscal measures are taken, notably in Europe, to support a kickstart of the economy at a future stage, especially if deflation sets in. The European Commission’s proposal of a 750 billion euro recovery fund is a strong signal if approved by all 27 EU member states. The next EU council is scheduled for 17-18 July.

From a short-term perspective, some reassurance can be found in the bottoming of economic figures and economic surprises. Volatility is nevertheless here to stay as visibility on the aftermath of the epidemic remains low and the coronavirus remains a risk until it is contained or a vaccine has been found, successfully tested, mass-produced and commercialised. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential.

25-June-2020

Global equity markets dropped on Wednesday (S&P 500: -2.6%, Eurostoxx 50: -3.1%), as investors are becoming increasingly worried about the global spread of COVID-19 in the US and Latin America, the US’ plans to implement new import tariffs on European products and the IMF’s negative global growth revision. 

In terms of data, the strong increase of the German Ifo Index, a business confidence measure and generally a good indicator for GDP growth, didn’t get investors’ attention yesterday. The main business climate index jumped back to the March level in June at 86.2, but remains below the 95.9 reading in February. The improvement was led by the business expectations index, which is encouraging.

Instead, investors focus on the global spread of COVID-19, with Germany trying to limit the virus spread after an outbreak in a factory. In the US, Florida and California registered daily records for new cases, with Texas also suffering. The states of New York, New Jersey and Connecticut are requiring visitors from virus hot spots to self-quarantine. These measures mark a sharp reversal in the brief history of the pandemic, as Texas was one of the states that originally ordered those restrictions on Northeastern states.

Tariffs might cause additional headwinds for an already struggling economy as the US’s plan to target European products for new tariffs on aircrafts, beverages, food and trucks – the euro lost ground against the US dollar in this context. Further, the Pentagon has put up a list of 20 Chinese companies (including Huawei) that it says are owned or controlled by China’s military, opening them up to potential additional US sanctions.

IMF downgrades global growth forecast

The International Monetary Fund (IMF) has published an update of its World Economic Outlook yesterday. The fund has decided to lower its global growth forecasts for this and next year, as the COVID-19 pandemic has had a more negative than expected impact on activity in the first half of the year, and the projected economic recovery might be more gradual than initially estimated.

  • For 2020, the IMF now sees global growth shrinking 4.9%, down from April’s projection of a 3% contraction.
  • The fund also lowered expectations for next year and now forecasts 4% growth in 2021, down from 5.8%.
  • The biggest downward revisions for 2020 came from the UK and the Euro area (-10.2% in 2020, 6% in 2021, but also the US (-8.2% in 2020, 4.5% in 2021) has been revised down.
  • China’s growth forecast was only adjusted marginally lower (1% in 2020, 8.2% in 2021).

Our view

In this context, we continue to watch various indicators to assess our stance and conclude for now that:

  • most European countries have reached their peak in terms of active COVID-19 cases and the epicenter of the epidemic has now moved to South America;
  • the rate of contagion in Europe is falling in spite of a gradual re-opening of the economies;
  • the recent coronavirus resurgence in China and in Germany should remain under control, but remains an attention point though;
  • mobility indicators continue to improve gradually, but are becoming less useful as the incremental changes are becoming too small to be informative;
  • PMI’s are rebounding strongly;
  • the effective reproduction number could be drastically reduced by preventing big events.
  • in the US, however, the COVID-19 trend is a concern. The country has not been able to curb the virus infections to low levels that would help to prevent a second wave.

The economic impact and the drop in economic activity has nevertheless been severe. Our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed and we still believe in a U-shaped economic recovery in the medium term.

Policy easing from virtually all central banks and fiscal easing represent a support. The Fed, the ECB and the Bank of Japan keep on easing policies further. It is crucial that fiscal measures are taken, notably in Europe, to support a kickstart of the economy at a future stage, especially if deflation sets in. The European Commission’s proposal of a 750 billion euro recovery fund is a strong signal if approved by all 27 EU member states. The next EU council is scheduled for 17-18 July.

From a short-term perspective, some reassurance can be found in the bottoming of economic figures and economic surprises. Volatility is nevertheless here to stay as visibility on the aftermath of the epidemic remains low and the coronavirus remains a risk until it is contained or a vaccine has been found, successfully tested, mass-produced and commercialised. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential.

24-June-2020

Global equity markets rose on Tuesday (S&P 500: +0.4%, Eurostoxx 50: +1.8%), as trade tensions between China and the US calmed down and Europe’s preliminary economic activity indicators beat consensus expectations. Long-term bond yields rose, with the German 10-year ending the day at -0.44%, and the euro gained against the US dollar. Within the tension between Covid-19 second waves and stimulus the latter continues to win out for the moment.

Strong improvement of PMI’s

The spread of the coronavirus and measures taken to prevent it from further spreading led to an historical drop in economic activity in March and April. The Eurozone’s composite PMI index dropped to a record low of 13.6 in that period, but the re-opening of the economy since has led to an impressive rebound in May to 31.9, followed by a strong gain in June to 47.5 (preliminary). That was much better than the anticipated 42 points.

Although the underlying indicators remain below their pre-crisis levels and are still signaling contraction, the recovery was broad based. New orders and new export orders jumped, while the future output index rose above 50, the level that divides growth from contraction. There remain nevertheless important differences between the various countries.

The German composite PMI rose to 45.8, while the French index even jumped to 51.3, reflecting a strong pick-up in economic activity after restrictions have been lifted mid-May. The pick-up in activity has been slower in Italy and Spain, the two countries that were badly hit by COVID-19.

Flash PMI’s were also released for the UK and the US. The UK’s composite PMI rose from 30 to 47.6 in June, while the US one increased from 39.8 in May to 49.6 in June.

Today, we’ll be closely watching the publication of German business sentiment (Ifo Index).

Our view

In this context, we continue to watch various indicators to assess our stance and conclude for now that:

  • most European countries have reached their peak in terms of active COVID-19 cases and the epicenter of the epidemic has now moved to South America.;
  • the rate of contagion in Europe is falling in spite of a gradual re-opening of the economies;
  • the recent coronavirus resurgence in China and in Germany should remain under control, but remains an attention point though;
  • mobility indicators continue to improve gradually and PMI’s are rebounding strongly;
  • and the effective reproduction number could be drastically reduced by preventing big events.
  • in the US, however, the COVID-19 trend is a concern. The country has not been able to curb the virus infections to low levels that would help to prevent a second wave. Anthony Fauci, talked about a “disturbing” surge in cases in the US while in Harris County – home to Houston (TX) and the nation’s third-most-populous county – ICU capacity will be exhausted in 11 days, based on the two-week average expansion rates.

The economic impact and the drop in economic activity has nevertheless been severe. Our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed and we still believe in a U-shaped economic recovery in the medium term.

Policy easing from virtually all central banks and fiscal easing represent a support. The Fed, the ECB and the Bank of Japan keep on easing policies further. It is crucial that fiscal measures are taken, notably in Europe, to support a kickstart of the economy at a future stage, especially if deflation sets in. The European Commission’s proposal of a 750 billion euro recovery fund is a strong signal if approved by all 27 EU member states. There will be a EU summit in person on July 17-18 discussing the Recovery fund.

From a short-term perspective, some reassurance can be found in the bottoming of economic figures and economic surprises. Volatility is nevertheless here to stay as visibility on the aftermath of the epidemic remains low and the coronavirus remains a risk until it is contained or a vaccine has been found, successfully tested, mass-produced and commercialised. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential.

23-June-2020

Global equity markets showed mixed performances on Monday (S&P 500: +0.7%, Eurostoxx 50: -0.7%), as investors’ sentiment remains vulnerable with global coronavirus infections hitting new highs. The World Health Organisation reported the single-largest jump in global cases in its count on Sunday. The organisation is worried about the strong increase in Latin America, as Brazil’s death toll passed 50.000 and Peru now has more active cases than Spain.

Separately, gold rose near a seven-year high at 1757 US dollar/troy ounce, while the US dollar lost ground against the euro.

Recent macroeconomic figures

It was a light day in terms of macroeconomic data. An overview of the most important publications:

  • Yesterday, the negative surprise came from US existing home sales that dropped almost 10% in May to 3.91 million. This follows a decline of 8.5% and 17.8% respectively in March and April. May’s sales still reflect contracts signed in March and April, when lockdowns were at their most stringent.
  • In the Eurozone, consumer confidence rebounded. The preliminary Consumer Confidence Index rose from -18.8 to -14.7, slightly better than anticipated.
  • Japan’s PMI manufacturing activity index further deteriorated, as output registered a strong decline, while service-sector activity was much stronger. Both remain nevertheless in contraction territory.

Today, we’ll be closely watching the publication of the preliminary PMI’s for the Eurozone.

Our view

In this context, we continue to watch various indicators to assess our stance and conclude for now that:

  • most European countries have reached their peak in terms of active COVID-19 cases and the epicenter of the epidemic has now moved to South America.;
  • the rate of contagion in Europe is falling in spite of a gradual re-opening of the economies;
  • the recent coronavirus resurgence in China and in Germany should remain under control, but remains an attention point though;
  • mobility indicators continue to improve gradually;
  • and the effective reproduction number could be drastically reduced by preventing big events.
  • in the US, however, the COVID-19 trend is a concern. The country has not been able to curb the virus infections to low levels that would help to prevent a second wave.

The economic impact and the drop in economic activity has nevertheless been severe. Our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed and we still believe in a U-shaped economic recovery in the medium term.

Policy easing from virtually all central banks and fiscal easing represent a support. The Fed, the ECB and the Bank of Japan keep on easing policies further. It is crucial that fiscal measures are taken, notably in Europe, to support a kickstart of the economy at a future stage, especially if deflation sets in. The European Commission’s proposal of a 750 billion euro recovery fund is a strong signal if approved by all 27 EU member states.

From a short-term perspective, some reassurance can be found in the bottoming of economic figures and economic surprises. Volatility is nevertheless here to stay as visibility on the aftermath of the epidemic remains low and the coronavirus remains a risk until it is contained or a vaccine has been found, successfully tested, mass-produced and commercialised. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential.

22-June-2020

Global equity markets showed mixed performances on Friday (S&P 500: -0.6%, Eurostoxx 50: +0.6%), as EU leaders began their negotiations on Next Generation EU, an economic recovery plan of 750 billion euro, and China reported that it is planning to accelerate purchases of American farm goods in order to comply with the phase one trade deal with the US.

Separately, COVID-19 news remained broadly negative. John Hopkins data showed the US reported more than 30.000 new cases on Friday and Saturday, the highest daily new infections since May 1. New cases are going up in states across the South, West and Midwest. Seven states reported record cases, including Florida and South Carolina. Will this lead Florida to become a “blue state” in the upcoming election? The good news is that severity (i.e. hospitalizations/deaths) is decreasing in the US. Brazil, in the meantime, has passed 50.000 deaths related to COVID-19. That marks COVID-19 as the deadliest event in recent Brazilian history.

What to expect this week?

After a more quiet week on the macroeconomic front, a new set of economic indicators will be assessed by investors:

  • Today, the Eurozone’s consumer confidence indicator will be released. Consensus expectations point to an improvement, although the index is expected to remain in negative territory.
  • Tomorrow, the June flash PMI’s for the Eurozone will be released. Consensus expectations point to further improvement for the PMI Composite to 42 (prior: 31.9).
  • On Wednesday, the German IFO business climate index will be released. It should show further improvement as lockdowns continue to be eased.
  • On Friday, we’ll watch the final publication of the Michigan consumer sentiment index in the US.

Finally, the IMF will also publish its revised global economic growth forecast and is set to cut numbers announced last April. The release of the report is due on Wednesday.

Our view

In this context, we continue to watch various indicators to assess our stance and conclude for now that:

  • most countries have reached their peak in terms of active COVID-19 cases and the epicenter of the epidemic has now moved to South America.;
  • the rate of contagion is falling in spite of a gradual re-opening of the economies;
  • the recent coronavirus resurgence in China and in Germany should remain under control, but remains an attention point though;
  • mobility indicators continue to improve;
  • and the effective reproduction number could be drastically reduced by preventing big events.
  • in the US, however, the COVID-19 trend is a concern. The country has not been able to curb the virus infections to low levels that would help to prevent a second wave.

The economic impact and the drop in economic activity has nevertheless been severe. Our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed and we still believe in a U-shaped economic recovery in the medium term.

Policy easing from virtually all central banks and fiscal easing represent a support. The Fed, the ECB and the Bank of Japan keep on easing policies further. It is crucial that fiscal measures are taken, notably in Europe, to support a kickstart of the economy at a future stage, especially if deflation sets in. The European Commission’s proposal of a 750 billion euro recovery fund is a strong signal if approved by all 27 EU member states.

From a short-term perspective, some reassurance can be found in the bottoming of economic figures and economic surprises. Volatility is nevertheless here to stay as visibility on the aftermath of the epidemic remains low and the coronavirus remains a risk until it is contained or a vaccine has been found, successfully tested, mass-produced and commercialised. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential.

19-June-2020

Global equity markets showed mixed performances on Thursday (S&P 500: +0.1%, Eurostoxx 50: -0.5%), as investors are becoming more cautious following the increase in COVID-19 cases in China and fears for a second wave in the United States. In addition, investors assessed the lack of consensus around Trump’s infrastructure plan, additional aid to state and local governments or another round of 1200 US dollar stimulus checks.

In terms of economic data, it was a quiet day. The Philadelphia Fed headline index, measuring manufacturing conditions in the region, came out stronger than expected at 27.5, compared to consensus expectations of -21.4. Initial claims for unemployment benefits in the US where somewhat higher than expected at 1.5 million. Continuing claims declined by 62.000.

Today, markets will focus on the possible outcome of the EU Council meeting, where EU leaders will try to find an agreement on Next Generation EU, the economic recovery fund of 750 billion euro proposed by the European Commission.

Recent central banks actions

The European Central Bank’s new TLTRO (Target Long Term Refinancing Operations), that allows banks to lend money at interest rates than can be as low as -1%, was launched. The EBC announced the allotment of 1.302 billion euro, which is slightly higher than expected (expectations were around 1.200 billion). It is also in line with the statement of an ECB Board Member last week, that referred to 1.400 billion euro.

Separately, both the Norges Bank and Bank of England have had their policy meetings yesterday.

  • The Bank of England decided to keep rates on hold and extended its quantitative easing program by another 100 billion pound to 745 billion pound. The current pace will nevertheless be tapered with the total purchases expected to be completed by the end of the year. There was no discussion on negative interest rates for the time being. The British pound lost almost 1% against the euro.
  • The Norwegian central bank also left its policy rate unchanged at 0%, but was surprisingly hawkish in its communication. The central bank recognizes the stronger than expected pick-up in economic activity with higher oil prices and declining unemployment. The Norwegian Krona slightly rose against the euro.

Our view

In this context, we continue to watch various indicators to assess our stance and conclude for now that:

  • most countries have reached their peak in terms of active COVID-19 cases and the epicenter of the epidemic has now moved to South America.;
  • the rate of contagion is falling in spite of a gradual re-opening of the economies;
  • the recent coronavirus resurgence in China should remain under control, but remains an attention point though;
  • mobility indicators continue to improve fast;
  • and the effective reproduction number could be drastically reduced by preventing big events.
  • in the US, however, the COVID-19 trend is a concern. The country has not been able to curb the virus infections to low levels that would help to prevent a second wave.

The economic impact and the drop in economic activity has nevertheless been severe. Our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed and we still believe in a U-shaped economic recovery in the medium term.

Policy easing from virtually all central banks and fiscal easing represent a support. The Fed, the ECB and the Bank of Japan keep on easing policies further. It is crucial that fiscal measures are taken, notably in Europe, to support a kickstart of the economy at a future stage, especially if deflation sets in. The European Commission’s proposal of a 750 billion euro recovery fund is a strong signal if approved by all 27 EU member states in the coming weeks.

From a short-term perspective, some reassurance can be found in the bottoming of economic figures and economic surprises. Volatility is nevertheless here to stay as visibility on the aftermath of the epidemic remains low and the coronavirus remains a risk until it is contained or a vaccine has been found, successfully tested, mass-produced and commercialised. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential.

18-June-2020

Global equity markets showed mixed performances on Wednesday (S&P 500: -0.4%, Eurostoxx 50: +0.8%) after the strong rally the day before. Investors weigh the chance of President Trump’s
1 trillion dollar infrastructure plan passing through Congress and continue to assess the risk for a second coronavirus wave.

With exception of Europe, COVID-19 news was broadly negative with reports of rising caseloads coming from several US states, record infections in Latin America and increasing coronavirus cases in China.

  • In the US, California and Florida are seeing a steady climb in infections, while hospitalisations in Texas rose another 11% to a record high. In Arizona, 83% of intensive care beds are occupied. As some of the increase has been linked to reopened bars, Dr. Fauci expressed his concern about a dampened commitment to social distancing. On the positive side, New York City is on track to enter the second phase of reopening on Monday.
  • Latin America remains the epicenter of the epidemic. COVID-19 hotspot Brazil reported almost 35.000 new confirmed infections on June 17.
  • China reported another 28 coronavirus cases on Wednesday, 21 of which were from Beijing. Restrictions have progressively tightened with very limited movement allowed among residents. On Wednesday hundreds of flights in and out of the city were canceled.

In terms of economic data, it was a rather light day. The Eurozone’s consumer price index for May came out in line with the preliminary figure at 0.10% year-on-year, while US housing starts for May were slightly below consensus expectations.

Our view

In this context, we continue to watch various indicators to assess our stance and conclude for now that:

  • most countries have reached their peak in terms of active COVID-19 cases and the epicenter of the epidemic has now moved to South America.;
  • the rate of contagion is falling in spite of a gradual re-opening of the economies;
  • the recent coronavirus resurgence in China should remain under control, but remains an attention point though;
  • mobility indicators continue to improve fast;
  • and the effective reproduction number could be drastically reduced by preventing big events.
  • in the US, however, the COVID-19 trend is a concern. The country has not been able to curb the virus infections to low levels that would help to prevent a second wave.

The economic impact and the drop in economic activity has nevertheless been severe. Our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed and we still believe in a U-shaped economic recovery in the medium term.

Policy easing from virtually all central banks and fiscal easing represent a support. The Fed, the ECB and the Bank of Japan keep on easing policies further. It is crucial that fiscal measures are taken, notably in Europe, to support a kickstart of the economy at a future stage, especially if deflation sets in. The European Commission’s proposal of a 750 billion euro recovery fund is a strong signal if approved by all 27 EU member states in the coming weeks.

From a short-term perspective, some reassurance can be found in the bottoming of economic figures and economic surprises. Volatility is nevertheless here to stay as visibility on the aftermath of the epidemic remains low and the coronavirus remains a risk until it is contained or a vaccine has been found, successfully tested, mass-produced and commercialised. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential.

17-June-2020

Global equity markets jumped performances on Tuesday (S&P 500: +2%, Eurostoxx 50: +3.3%), following the publication of encouraging economic data and the White House’s proposal of a 1.000 billion US dollar infrastructure bill to spur the world’s largest economy back to life. Investors ignored the further spread of COVID-19 in China, out of Beijing, as provinces Hebei, Laioning, Sichuan and Zheijang have all reporting new cases linked to Beijing’s wholesale market Xinfadi.

This morning, Asian equities (Nikkei: -0.7%, Hang Seng: 0%, Shanghai Composite: -0.10%) were slightly lower, as investors weigh increasing infection rates against signs of an economic bottoming-out.

Improving economic data

While fears for a second coronavirus wave are mounting, investors are welcoming encouraging economic data, both in the United States and the Eurozone.

  • In Germany, economic sentiment rebounded strongly. The ZEW economic sentiment index rose to 63.4 in June from 51 in the prior month, beating consensus expectations. According to the ZEW institute: “there is growing evidence that the economy will bottom –out by this summer.”
  • In the US, retail sales jumped in May by the most on record with data going back to 1992. Sales rose by almost 18% compared to April, the double of consensus forecasts.
  • Also in the US, industrial production increased by 1.14% Although the figure was weaker than the expected 3% gain, the positive number indicates production has started to rebound after sharp declines in recent months.

Also Fed President Powell highlighted the recent improvement of some economic data, although his tone is still more cautious than the current market narrative.

Our view

In this context, we continue to watch various indicators to assess our stance and conclude for now that:

  • most countries have reached their peak in terms of active COVID-19 cases and the epicenter of the epidemic has now moved to South America.;
  • the rate of contagion is falling in spite of a gradual re-opening of the economies;
  • the recent coronavirus resurgence in China should remain under control, but remains an attention point though;
  • mobility indicators continue to improve fast;
  • and the effective reproduction number could be drastically reduced by preventing big events.
  • in the US, however, the COVID-19 trend is a concern. The country has not been able to curb the virus infections to low levels that would help to prevent a second wave.

The economic impact and the drop in economic activity has nevertheless been severe. Our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed and we still believe in a U-shaped economic recovery in the medium term.

Policy easing from virtually all central banks and fiscal easing represent a support. The Fed, the ECB and the Bank of Japan keep on easing policies further. It is crucial that fiscal measures are taken, notably in Europe, to support a kickstart of the economy at a future stage, especially if deflation sets in. The European Commission’s proposal of a 750 billion euro recovery fund is a strong signal if approved by all 27 EU member states in the coming weeks.

From a short-term perspective, some reassurance can be found in the bottoming of economic figures and economic surprises. Volatility is nevertheless here to stay as visibility on the aftermath of the epidemic remains low and the coronavirus remains a risk until it is contained or a vaccine has been found, successfully tested, mass-produced and commercialised. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential.

16-June-2020

Global equity markets showed mixed performances on Monday (S&P 500: +0.83%, Eurostoxx 50: -0.6%), as second wave fears battered investors’ hope for a fast economic recovery. Several US states including Arizona, Texas and Arkansas reported an increased number of COVID-19 cases and more than 20 US states saw a pick-up in new infections. In addition, Chinese authorities shut down parts of Beijing due to a record number of coronavirus infections in the past few days.

US equities nevertheless pared losses towards the end of the day, as the Federal Reserve announced it will begin to buy a broad diversified portfolio of corporate bonds (focus on investment grade, but also including high yield) for its Second Market Corporate Credit Facility starting today. In addition, the central bank announced its Main Street Lending Program is open for lender registrations. The program is designed to lend fund directly to companies in order to support them in this economic crisis due to COVID-19.

This morning, Asian equities also reacted positively to the Fed’s announcement (Nikkei +3.9%, Shanghai Composite: +0.9%, Hang Seng: +2.9%).

New round of Brexit negotiations

As negotiations about a future post-Brexit trade agreement between the UK and the EU didn’t show any real progress, the UK’s Prime Minister Johnson and the EU’s top officials agreed to hold two months of intensive talks to reach a deal. Johnson said the changes of reaching a deal with the EU are “very good”. He urged the EU to be ready to reach agreement by the end of the summer, but the EU said it would "never accept a deal which goes against the interests of the Union".

To be continued…

Our view

In this context, we continue to watch various indicators to assess our stance and conclude for now that:

  • most countries have reached their peak in terms of active COVID-19 cases and the epicenter of the epidemic has now moved to South America.;
  • the rate of contagion is falling in spite of a gradual re-opening of the economies;
  • mobility indicators continue to improve fast;
  • and the effective reproduction number could be drastically reduced by preventing big events.
  • in the US, however, the COVID-19 trend is a concern. The country has not been able to curb the virus infections to low levels that would help to prevent a second wave.

The economic impact and the drop in economic activity has nevertheless been severe. Our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed and we still believe in a U-shaped economic recovery in the medium term.

Policy easing from virtually all central banks and fiscal easing represent a support. The Fed, the ECB and the Bank of Japan keep on easing policies further. It is crucial that fiscal measures are taken, notably in Europe, to support a kickstart of the economy at a future stage, especially if deflation sets in. The European Commission’s proposal of a 750 billion euro recovery fund is a strong signal if approved by all 27 EU member states in the coming weeks.

From a short-term perspective, some reassurance can be found in the bottoming of economic figures and economic surprises. Volatility is nevertheless here to stay as visibility on the aftermath of the epidemic remains low and the coronavirus remains a risk until it is contained or a vaccine has been found, successfully tested, mass-produced and commercialised. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential.

15-June-2020

Global equity markets stabilised on Friday (S&P 500: +1.3%, Eurostoxx 50: +0.3%), recovering some of Thursday’s losses. There was no clear catalyst to explain the bounce from the market opening, as worries about the evolution of the coronavirus spread remained, especially in the US where some states continue to see a significant increase in infections and deaths. New York Governor Cuomo even threatened to roll back phased reopening, citing a mass of complaints about a lack of compliance of coronavirus restrictions. In the meantime, second wave fears are increasing elsewhere with over 100 new infections reported over the weekend in China, that closed a food market, and a rise in cases in Tokyo.

On the macroeconomic front, it was a quiet day with the exception of the publication of the Michigan consumer sentiment index in the US that climbed by the most since 2016 in early June, as more states began to reopen their economies and employers restored jobs.

This morning, Asia equities traded mostly lower with Japan, Hong Kong, South Korea and Australia moderately softer and mainland China mixed, as Chinese economic activity data improved less than expected. Industrial production rose 4.4% year-on-year in May below consensus expectations of a 5% increase, and retail sales declined more than expected at -2.8% year-on-year in May.

Our view

In this context, we continue to watch various indicators to assess our stance and conclude for now that:

  • Europe has managed to keep the epidemic under control. For now, the rate of contagion is falling and internal borders in the Schengen area are being reopened;
  • mobility indicators continue to improve fast;
  • and the effective reproduction number could be drastically reduced by preventing big events.
  • in the US, however, the COVID-19 trend is a concern. The country has not been able to curb the virus infections to low levels that would help to prevent a second wave;
  • the epicenter of the epidemic has now moved to South America.

The economic impact and the drop in economic activity has nevertheless been severe. Our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed and we still believe in a U-shaped economic recovery in the medium term.

Policy easing from virtually all central banks and fiscal easing represent a support. The Fed, the ECB and the Bank of Japan keep on easing policies further. It is crucial that fiscal measures are taken, notably in Europe, to support a kickstart of the economy at a future stage, especially if deflation sets in. The European Commission’s proposal of a 750 billion euro recovery fund is a strong signal if approved by all 27 EU member states in the coming weeks.

From a short-term perspective, some reassurance can be found in the bottoming of economic figures and economic surprises. Volatility is nevertheless here to stay as visibility on the aftermath of the epidemic remains low and the coronavirus remains a risk until it is contained or a vaccine has been found, successfully tested, mass-produced and commercialised. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential.

12-June-2020

Global equity markets dropped on Thursday (S&P 500: -5.9%, Eurostoxx 50: -4.5%) and the Vix Index, a gauge for US equity market volatility, jumped to its highest level in more than a month. Investors are becoming increasingly worried about a resurgence of coronavirus cases in the United States that could lead to new restriction measures to prevent the virus from spreading further. Safe haven assets performed well as Bund yields dropped almost 10 bps to end the day at only -0.43% while the price of gold rallied to 1732 US dollar/troy ounce.

In terms of data, initial claims for unemployment benefits in the US remained high at 1.54 million, slightly higher than consensus expectations. Continuing claims remained above 20 million. Separately, the US seems to be avoiding outright deflation for the time being. Producer prices rose 0.40% in May compared to April (when they posted a -1.3% decline), above consensus expectations of a 0.10% rise.

Resurgence of COVID-19 cases in the US

Financial markets have been alarmed yesterday by a rise in infections in the United States that could lead to new coronavirus restrictions that weigh on business activity. Coronavirus cases have topped two million, while the death toll has exceeded 113.000. Although the hardest-hit US states, like New York, are seeing a flattening of the curve, a dozen of other states is struggling in the fight against the spread of the virus.

  • The most problematic states are California, Texas, Florida and Arizona. The first three are the largest US states in terms of population (combined at 90.5 million people) and Arizona has the fastest growth rate in the last week.
  • Texas has seen record hospitalisations for three days in a row, and North Carolina has only a remaining 13% of the intensive care beds available due to severe COVID-19 cases.
  • Arizona has seen a record number of hospitalisations at 1.291, while Utah and New Mexico all posted rises of 40% or higher for the week, compared with the prior seven days according to a Reuters analysis.
  • New cases in Florida, Arkansas, South and North Carolina have seen COVID-19 cases increase by over 30% over the past week.

The recent spike in cases in these states can nevertheless also be partially attributed to increased testing. It nevertheless also tells us that the first wave of coronavirus infections in the US is not yet under complete control and vigilance remains.

Our view

We continue to watch various indicators to assess our stance and conclude for now that:

  • most countries in the developed markets have reached their peak in terms of active COVID-19 cases and the epicenter of the epidemic has now moved to South America.;
  • in Europe, the rate of contagion is falling in spite of a gradual re-opening of the economies;
  • mobility indicators continue to improve fast;
  • and the effective reproduction number could be drastically reduced by preventing big events.

The economic impact and the drop in economic activity has nevertheless been severe. Our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed and we still believe in a U-shaped economic recovery in the medium term.

Policy easing from virtually all central banks and fiscal easing represent a support. The Fed, the ECB and the Bank of Japan keep on easing policies further. It is crucial that fiscal measures are taken, notably in Europe, to support a kickstart of the economy at a future stage, especially if deflation sets in. The European Commission’s proposal of a 750 billion euro recovery fund is a strong signal if approved by all 27 EU member states in the coming weeks.

From a short-term perspective, some reassurance can be found in the bottoming of economic figures and economic surprises. Volatility is nevertheless here to stay as visibility on the aftermath of the epidemic remains low and the coronavirus remains a risk until it is contained or a vaccine has been found, successfully tested, mass-produced and commercialised. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential.

11-June-2020

Global equity markets declined on Wednesday (S&P 500: -0.5%, Eurostoxx 50: -0.8%), as investors’ optimism regarding the state of the economy was tempered by a dull Federal Reserve that has kept its monetary policy unchanged. Separately, oil prices declined after data from the International Energy Agency showed US crude inventories rose to a record high. The price for a barrel of Brent crude oil declined 1.8% to just above 40 US dollar.

In terms of data, US consumer prices declined in May for the third consecutive month, the longest stretch of declines on record. The core index, excluding the more volatile food and energy prices, slipped 0.1%. In France, April’s industrial production dropped more than 20%, when the country was still in a full lockdown. The drop follows an already 16% decline in industrial output in March. The most severe contraction took place in the country’s auto sector, that saw an 88% decline compared to the month before.

Few surprises from the Federal Reserve

Yesterday, the Fed’s economic projections and policy statement were released, followed by a press conference with Fed Chair Jerome Powell. The Fed predicted the US economy would shrink 6.5% in 2020 and unemployment would still be at 9.3% at year’s end, risk are skewed to the downside.

As a result, Powell said he was not even thinking about raising interest rates. Instead, he emphasized the economic recovery would be a long road and that monetary policy would have to be proactive with interest rates near zero out to 2022. The Federal Reserve also confirmed it would continue to purchase Treasuries and Mortgage Backed Securities at current pace for the coming months.

Our view

We continue to watch various indicators to assess our stance and conclude for now that:

  • most countries have reached their peak in terms of active COVID-19 cases and the epicenter of the epidemic has now moved to South America.;
  • the rate of contagion is falling in spite of a gradual re-opening of the economies;
  • mobility indicators continue to improve fast;
  • and the effective reproduction number could be drastically reduced by preventing big events.

The economic impact and the drop in economic activity has nevertheless been severe. Our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed and we still believe in a U-shaped economic recovery in the medium term.

Policy easing from virtually all central banks and fiscal easing represent a support. The Fed, the ECB and the Bank of Japan keep on easing policies further. It is crucial that fiscal measures are taken, notably in Europe, to support a kickstart of the economy at a future stage, especially if deflation sets in. The European Commission’s proposal of a 750 billion euro recovery fund is a strong signal if approved by all 27 EU member states in the coming weeks.

From a short-term perspective, some reassurance can be found in the bottoming of economic figures and economic surprises. Volatility is nevertheless here to stay as visibility on the aftermath of the epidemic remains low and the coronavirus remains a risk until it is contained or a vaccine has been found, successfully tested, mass-produced and commercialised. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential.

10-June-2020

Global equity markets slipped on Tuesday  (S&P 500: -0.8%, Eurostoxx 50: -1.4%), as equity markets took a breather before today’s FOMC meeting and assessed an increase in coronavirus infections over the past week in several US states. In addition, the World Bank cautioned that the world economy might contract the most since World War II this year due to the coronavirus pandemic.

In terms of data, the final GDP report of the Eurozone was published. First-quarter GDP finally contracted 3.1% compared to the same quarter the year before, slightly better than the anticipated 3.2% decline. The contraction was the steepest in the hardest-hit countries by COVID-19, Spain and Italy, that saw their GDP decline by respectively 5.4% and 4.1% compared to the same quarter last year. Also the French economy contracted by 5%, while the German economy limited the drop to 2.3%.

All eyes on the Federal Reserve

The Federal Reserve completes its latest policy meeting today with attention turning from its massive response to the coronavirus pandemic towards its plans to strengthen the economic recovery.

  • The Federal Reserve is likely to keep interest rates unchanged at 0.25%, stating it will keep interest rates low for as long as needed to recover from the economic crisis due to the spread of COVID-19.
  • Analysts will also be monitoring the Fed’s thinking on using its unlimited purchasing power to cap Treasury yields. While this cannot be excluded this month, expectations are that the Fed will wait until July or September to see how economic data develops.
  • Investors will, in the meantime, get a look at a fresh Summary of Economic Projections and dot plot for the first time since December. The central bank could also clarify its current purchase targets of Treasuries and Mortgage-Backed Securities.

The projections and the Fed’s policy statement will be released at 20h CET, followed by a press conference with Fed Chair Jerome Powell.

Our view

We continue to watch various indicators to assess our stance and conclude for now that:

  • most countries have reached their peak in terms of active COVID-19 cases and the epicenter of the epidemic has now moved to South America.;
  • the rate of contagion is falling in spite of a gradual re-opening of the economies;
  • mobility indicators continue to improve fast;
  • and the effective reproduction number could be drastically reduced by preventing big events.

The economic impact and the drop in economic activity has nevertheless been severe. Our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed and we still believe in a U-shaped economic recovery in the medium term.

Policy easing from virtually all central banks and fiscal easing represent a support. The Fed, the ECB and the Bank of Japan keep on easing policies further. It is crucial that fiscal measures are taken, notably in Europe, to support a kickstart of the economy at a future stage, especially if deflation sets in. The European Commission’s proposal of a 750 billion euro recovery fund is a strong signal if approved by all 27 EU member states in the coming weeks.

From a short-term perspective, some reassurance can be found in the bottoming of economic figures and economic surprises. Volatility is nevertheless here to stay as visibility on the aftermath of the epidemic remains low and the coronavirus remains a risk until it is contained or a vaccine has been found, successfully tested, mass-produced and commercialised. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential.

9-June-2020

Global equity markets showed mixed performances on Monday (S&P 500: +1.2%, Eurostoxx 50: -0.5%) after the rally of last week driven by improving economic data and additional fiscal and monetary stimulus. US equities outperformed before tomorrow’s Federal Open Market Committee.

This morning, Asian equities showed mixed performances (Nikkei: -0.6%, Hang Seng: +1.1%, Shanghai: +0.5%). Japanese equities slipped, while Chinese equities gained on the back the first increase of car passenger sales in the country since June last year, a sign that the market might be recovering from the coronavirus crisis and trade war with the US.

Yesterday’s economic publications

It was a light day on the macroeconomic front, with the publication of only a few economic indicators in Europe:

  • Economic sentiment in the Eurozone picked up in early June. The Sentix economic index rose to -24.8 in June, from -41.8 the month before. The underlying expectations index registered its third consecutive increase to its highest level since November 2017. According to the Sentix survey, investors expected that over 50% of the economic slump can be made up within a year.
  • German industrial production took a record-hit in April, just before the gradual easing of the lockdown restrictions in the country. Output dropped almost 18%, as manufacturers were badly affected by unprecedented closures of factories and shops. The figure was below consensus expectations of a 16% drop.

Today, investors will watch the final GDP figure for the first quarter in the Eurozone, estimated at -3.2%.

Our view

We continue to watch various indicators to assess our stance and conclude for now that:

  • most countries have reached their peak in terms of active COVID-19 cases and the epicenter of the epidemic has now moved to South America.;
  • the rate of contagion is falling in spite of a gradual re-opening of the economies;
  • mobility indicators continue to improve fast;
  • and the effective reproduction number could be drastically reduced by preventing big events.

The economic impact and the drop in economic activity has nevertheless been severe. Our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed and we still believe in a U-shaped economic recovery in the medium term.

Policy easing from virtually all central banks and fiscal easing represent a support. The Fed, the ECB and the Bank of Japan keep on easing policies further. It is crucial that fiscal measures are taken, notably in Europe, to support a kickstart of the economy at a future stage, especially if deflation sets in. The European Commission’s proposal of a 750 billion euro recovery fund is a strong signal if approved by all 27 EU member states in the coming weeks.

From a short-term perspective, some reassurance can be found in the bottoming of economic figures and economic surprises. Volatility is nevertheless here to stay as visibility on the aftermath of the epidemic remains low and the coronavirus remains a risk until it is contained or a vaccine has been found, successfully tested, mass-produced and commercialised. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential.

8-June-2020

Global equity markets rallied on Friday (S&P 500: +2.6%, Eurostoxx 50: +3.8%), following better than expected US unemployment data and as investors continue to be very optimistic regarding the state of the economy. European equities outperformed, boosted by the strong rebound of cyclical and value sectors, such banks, automobile and energy stocks. In this context, also long-term yields continued to creep up with the 10-year US ending the week at 0.91% and the German one rising to -0.28%.

Oil also continued its impressive rebound of the past weeks, as OPEC+ members scheduled a round of meetings on Saturday to discuss an extensions of the oil production cuts. The price for a barrel of Brent crude oil already anticipated an extension, gaining almost 6% on Friday to more than 43 US dollar. Finally, the oil cartel decided to extend the production cuts until the end of July, while countries such as Nigeria and Iraq, which exceeded production quotas in May and June, will compensate with extra cuts in July and September.

Unexpected job growth in the US

Last Friday, the biggest surprise came from the publication of the latest US job report, that was expected to show another decline of 8 million nonfarm payrolls in May. Nevertheless, the US economy unexpectedly added 2.5 million jobs in May and the unemployment rate declined to 13.3%. Labor market indicators offer some hope that the worst of the Covid-19 shock on the economy could be over.

During the week-end, China reported a larger than expected trade surplus, as exports surprised on the upside in May. Exports were expected to be soft reflecting a weakened global demand under coronavirus restrictions. Although they fell 3.3% year-on-year, reversing the gain of the month before, exports were much better than expected thanks to sharp export growth to Japan and an increase in demand for medical equipment and supplies.

In the coming days, we will closely monitor the following events and publications:

  • The US Fed will meet and Chair Powell will hold its usual press conference. No change in rates is expected, putting the focus on what is said on the objective of potentially open-ended Treasury and MBS purchases.
  • ECB President Lagarde will appear before the European Parliament’s Committee on Economic and Monetary Affairs. The ECB acted last week by increasing its buying envelope as its economic projections came in worse than in March.
  • In a light week of data releases, the weekly jobless claims report and the University of Michigan’s preliminary consumer sentiment will give us an initial indication of how the American consumer  has been faring into the start of the month.

Our view

We continue to watch various indicators to assess our stance and conclude for now that:

  • most countries have reached their peak in terms of active COVID-19 cases and the epicenter of the epidemic has now moved to South America.;
  • the rate of contagion is falling in spite of a gradual re-opening of the economies;
  • mobility indicators continue to improve fast;
  • and the effective reproduction number could be drastically reduced by preventing big events.

The economic impact and the drop in economic activity has nevertheless been severe. Our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed and we still believe in a U-shaped economic recovery in the medium term.

Policy easing from virtually all central banks and fiscal easing represent a support. The Fed, the ECB and the Bank of Japan keep on easing policies further. It is crucial that fiscal measures are taken, notably in Europe, to support a kickstart of the economy at a future stage, especially if deflation sets in. The European Commission’s proposal of a 750 billion euro recovery fund is a strong signal if approved by all 27 EU member states in the coming weeks.

From a short-term perspective, some reassurance can be found in the bottoming of economic figures and economic surprises. Volatility is nevertheless here to stay as visibility on the aftermath of the epidemic remains low and the coronavirus remains a risk until it is contained or a vaccine has been found, successfully tested, mass-produced and commercialised. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential.

5-June-2020

Global equity markets edged slightly lower on Thursday (S&P 500: -0.4%, Eurostoxx 50: -0.2%), despite an expansion of the ECB’s monetary stimulus and the announcement of Germany’s additional fiscal stimulus package on Wednesday night. Investors had already widely anticipated additional stimulus, witness the strong equity market rebound of the past weeks. The stimulus announcement nevertheless pushed German yields higher, with the 10-year reaching -0.32%, and peripheral government bond spreads down. The 10-year Italian government bond spread tightened more than 20 bps to 1.72%. Also the euro gained strength against the US dollar, with the EUR/USD cross ending the day at 1.13.

This afternoon, investors will closely watch the publication of the US labour market report. Economists are expecting an 8 million job loss in May and an increase of the unemployment rate from 14.7% to 19.7%.

ECB expands Pandemic Emergency Purchase Program

The European Central Bank (ECB) has stepped up its efforts yesterday. It announced an expansion of its so-called Pandemic Emergency Purchase Program (PEPP) from 750 billion euro to 1350 billion euro, with purchases to be done until mid-2021 and reinvestments of maturing bonds until the end of 2022. This expands the PEPP by another 600 billion euro for six months. In addition, the central bank stated that the PEPP can be further expanded in function of the COVID-19 emergency phase.

Separately, the ECB left interest rates unchanged, it made no further changes to the TLTRO-III program (Targeted Long-Term Refinancing Operations) and didn’t comment the possible eligibility of the credit lines coming from the European Stability Mechanism.

The expansion of the PEPP highlights the ECB’s commitment to strengthening the recovery, and should act as a strong support for peripheral bond markets in particular. While there are still hurdles ahead, most notably for the EU in reaching an unanimous agreement on the Next Generation EU recovery fund, the European policy response has taken huge steps forward in a very short period of time to emerge quickly from the economic crisis related to COVID-19.

Our view

Most countries have reached their peak in terms of active COVID-19 cases. Confinement and social distancing measures have widely differed from one country to another, but the economic impact and the drop in economic activity has been severe. While several countries around the world have been gradually re-opening their economies, our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus and will represent a support in the medium term.

From a short-term perspective, the main focus remains on the definition and implementation of exit strategies and economic support measures. While weak economic data and significant downward earnings revisions are being integrated in analysts’ forecasts, the Fed, the ECB and the Bank of Japan keep on easing policies further. It is now crucial that fiscal measures are taken, notably in Europe, to support a kickstart of the economy at a future stage, especially if deflation sets in. The European Commission’s proposal of a 750 billion euro recovery fund is a strong signal if approved by all 27 EU member states in the coming weeks.

There is an improved risk/reward ratio for a long-term investor, but volatility remains high from a short term perspective, as the coronavirus remains a risk until it is contained or a vaccine has been found, successfully tested, mass-produced and commercialised. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential.

4-June-2020

Global equity markets rose further on Wednesday (S&P 500: +1.4%, Eurostoxx 50: +3.5%), as better than expected economic data around the globe resulted in optimism for a quick economic recovery while the gradual easing of lockdown measures failed to trigger a second wave of coronavirus infections so far. European equities strongly outperformed and are now almost 40% above their March-low, which is also the case for the US’ S&P 500. Volatility continued to decline, with the VIX index down 25.7%, its lowest level since late February. Conversely, safe haven assets slumped yesterday, as investors turned away from safe haven assets, with gold declining 1.6% to just below 1700 US dollar/troy ounce.

Fiscal and monetary stimulus continue to be added

The post-pandemic policy framework is turning the back to austerity. More and more countries are adding recovery spending on top of the previously decided rescue spending:

  • Last night, Germany announced a new fiscal package of EUR130bn, representing close to 4% of GDP (and exceeding the 2.5% of GDP fiscal stimulus package of 2008/09). The large demand stimulus will include temporarily lower VAT rates from July 1st and transfers will be increased. There is no broad car scrapping scheme, but more subsidies for electric vehicles.
  • Last week, Japan announced the second fiscal stimulus package. Combining the first and second packages, fiscal expenditures total 11% of GDP (compared to 5% during the 2008/099 episode).
  • Today, the ECB is expected to expand its Pandemic Emergency Purchase Program by increasing its size and expanding it into 2021; downward revisions to the staff forecasts could give the central bank cover to act further.
  • Next week, France is set to announce a supplementary budget for demand stimulus (10 June).

Better than expected economic data

The gradual easing of lockdown measures hasn’t resulted in a second wave of COVID-19 infections so far, but has nevertheless been beneficial for leading economic indicators that seemed to have found a bottom. An overview of the recently published economic figures:

  • In the Eurozone, economic activity in May was better than previously thought. Markit’s final PMI Composite was revised up to 31.9, beating consensus expectations. Separately, also the unemployment rate seemed to be better than anticipated, coming in a 7.3% against consensus expectations of 8.2%.
  • In the US, May’s ISM nonmanufacturing increased to 45.4, better than anticipated, while the ADP Employment Survey showed fewer job losses than forecast. It showed that 2.8 million jobs were lost in the private sector, much less than consensus expectations of a 9 million loss. The report comes ahead of the nonfarm payrolls report on Friday, for which consensus expectations expect a net job loss of 8 million in May.
  • Finally, the Chinese Markit/Caixin Services PMI also beat expectations. It jumped back into expansion territory in May at 55, much better than the expected 47.

Our view

Most countries have reached their peak in terms of active COVID-19 cases. Confinement and social distancing measures have widely differed from one country to another, but the economic impact and the drop in economic activity has been severe. While several countries around the world have been gradually re-opening their economies, our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus and will represent a support in the medium term.

From a short-term perspective, the main focus remains on the definition and implementation of exit strategies and economic support measures. While weak economic data and significant downward earnings revisions are being integrated in analysts’ forecasts, the Fed, the ECB and the Bank of Japan keep on easing policies further. It is now crucial that fiscal measures are taken, notably in Europe, to support a kickstart of the economy at a future stage, especially if deflation sets in. The European Commission’s proposal of a 750 billion euro recovery fund is a strong signal if approved by all 27 EU member states in the coming weeks.

There is an improved risk/reward ratio for a long-term investor, but volatility remains high from a short term perspective, as the coronavirus remains a risk until it is contained or a vaccine has been found, successfully tested, mass-produced and commercialised. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential.

3-June-2020

Global equity markets continued their rally on Tuesday (S&P 500: +0.8%, Eurostoxx 50: +2.6%), on the back of a gradual reopening of the global economy and further stimulus hopes. Chancellor Angela Merkel is currently negotiating a second economic support package of 100 billion euro for the German economy, considering amongst others, aid for families through cash bonuses and car subsidies. In addition, investors expect the European Central Bank to expand its 750 billion euro Pandemic Emerging Purchase Program at its meeting tomorrow. Having already spent over 210 billion euro, the programme is on track to run out of firepower by October.

Separately, oil prices continued their rebound yesterday, rising to three-month highs, on expectations that the OPEC+ countries will agree this week upon an extension of the output cuts that have pushed oil prices higher over the past month. The meeting was supposed to be held as early as June 9, although multiple reports suggest the meeting could be moved to June 4. The price for a barrel of Brent crude oil rose 4.5% to just above 40 US dollar.

Brexit becomes a topic again

With COVID-19 in the spotlights over the past months, investors seemed to have overlooked the pending Brexit deadline. The topic is nevertheless gradually coming back to the table, as negotiations between the UK and the EU continue without real progress. It is the last full round of talks before a meeting where both sides will take stock of progress.

As a reminder, the UK officially left the European Union on January 31 and has been in a transition period since. This transition period was set up to create time for both sides to negotiate their future trade agreement without disrupting business and citizens. However, the transition period ends on December 31 and both the UK and EU have confirmed that little progress has been made. In this context, the British pound has already weakened 2.5% against the euro since the end of April.

Our view

Most countries have reached their peak in terms of active COVID-19 cases. Confinement and social distancing measures have widely differed from one country to another, but the economic impact and the drop in economic activity has been severe. While several countries around the world have been gradually re-opening their economies, our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus and will represent a support in the medium term.

From a short-term perspective, the main focus remains on the definition and implementation of exit strategies, especially given the risk for a second wave in the epidemic, and economic support measures. While weak economic data and significant downward earnings revisions are being integrated in analysts’ forecasts, the Fed, the ECB and the Bank of Japan keep on easing policies further. It is now crucial that fiscal measures are taken, notably in Europe, to support a kickstart of the economy at a future stage, especially if deflation sets in. The European Commission’s proposal of a 750 billion euro recovery fund is a strong signal if approved by all 27 EU member states in the coming weeks.

There is an improved risk/reward ratio for a long-term investor, but volatility remains high from a short term perspective, as the coronavirus remains a risk until it is contained or a vaccine has been found, successfully tested, mass-produced and commercialised. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential.

2-June-2020

Global equity markets gained on Monday (S&P 500: +0.4%, Eurostoxx 50: +0.9%), as investors continued to put their hopes on a global economic recovery. The Netherlands reopened bars and restaurants, classes for primary school children are about to reopen in England and UK retailers should reopen this month. Also in the US, restrictions are being eased in several states.

Meanwhile, investors are closely watching the developments of the political tensions between China and the US. China has now ordered companies to stop importing US farm goods, such as soybeans, until it evaluates the ramp up in tensions with the US over Hong Kong.

Separately, oil gained yesterday on the back of rumours that the OPEC and its allies are considering to bring their next meeting forward to Thursday to discuss the prolongation of production cuts by one to three months. The price for a barrel of Brent crude oil rose 2.4% to just below 39 US dollar.

Economic figures show some minor improvements

While the global economy is gradually reopening, economic activity appears to have bottomed out, mid-May in the Euro area and end of April in the US. Economic figures have started to stabilise:

  • In the US, manufacturing activity has slightly improved. The ISM manufacturing increased to 43.1 in May, from 41.5 in April. The figure was nevertheless slightly below consensus expectations. Separately, construction spending declined 2.9% in April, a weak reading, but better than the anticipated drop of 6.3%.
  • In Europe, the final readings of the PMI manufacturing were published. The Eurozone’s PMI manufacturing was more or less in line with consensus expectations at 39.4, while the UK’s reading was slightly better than expected at 40.7. Germany disappointed with a PMI manufacturing at 36.3.
  • In China, the Markit/Caixin PMI manufacturing was published, rebounding back into “expansion territory”. The reading for May came in at 50.7, better than consensus expectations of 49.8.

Our view

Most countries have reached their peak in terms of active COVID-19 cases. Confinement and social distancing measures have widely differed from one country to another, but the economic impact and the drop in economic activity has been severe. While several countries around the world have been gradually re-opening their economies, our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus and will represent a support in the medium term.

From a short-term perspective, the main focus remains on the definition and implementation of exit strategies, especially given the risk for a second wave in the epidemic, and economic support measures. While weak economic data and significant downward earnings revisions are being integrated in analysts’ forecasts, the Fed, the ECB and the Bank of Japan keep on easing policies further. It is now crucial that fiscal measures are taken, notably in Europe, to support a kickstart of the economy at a future stage, especially if deflation sets in. The European Commission’s proposal of a 750 billion euro recovery fund is a strong signal if approved by all 27 EU member states in the coming weeks.

There is an improved risk/reward ratio for a long-term investor, but volatility remains high from a short term perspective, as the coronavirus remains a risk until it is contained or a vaccine has been found, successfully tested, mass-produced and commercialised. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential.

29-May-2020

Global equity markets showed mixed performances on Thursday (S&P 500: -0.2%, Eurostoxx 50: +1.4%), as investors continued to digest weak economic data and political tensions remained broadly in the background throughout the day. US equities were nevertheless unable to extend gains into a fourth consecutive day after reaching a 12-week high, as Donald Trump said he will hold a press conference on China today. The US President has pledged to respond strongly after Chinese lawmakers approved a proposal for sweeping new national security legislation in Hong Kong by an overwhelming vote. The US has signaled that Beijing will be held accountable for robbing Hong Kong for its freedom, considering a suspension of Hong Kong’s preferential tariff rates and sanctions for Chinese individuals.

Asian equities are also showing mixed performances this morning (Nikkei: -0.2% Shanghai Composite: +0.2%), after the release of some bad economic figures in Japan. Japanese industrial production dropped a staggering 9.1% in April (compared to March), marking the biggest drop since the 2011 tsunami and missing consensus expectations for a 5.7% slide. Also retail were much weaker than expected, declining 9.6% in April (compared to March).

Economic data remains weak

While economies continue to reopen gradually, investors digested a large set of economic data yesterday, both in Europe and the US. An overview of the most important published data:

  • In Europe, economic confidence rebounded in May from a record low of 64.9, as companies have started to reopen across the continent, following the easing of the lockdown measures put in place to prevent COVID-19 from further spreading. The European Commission’s Economic Confidence Index came in at 67.5, below consensus expectations.
  • In the US, first-quarter growth was revised down from -4.8% to -5% in the BEA’s second preliminary estimate, while also April’s durable goods orders were very weak. Overall orders dropped by more than 17%, while capital goods orders fell 5.8%.
  • Finally, the initial jobless claim reports brought some “good” news. Initial claims for unemployment benefits declined to around 2.1 million, while continuing claims, though still well above the norms that existed before COVID-19, declined to 21 million from 25 million. This was the first weekly decline in continuing claims since the end of February.

Today, we will closely follow the publication of German retail sales, US personal income expenditures and the final Michigan Sentiment Index.

Our view

Most countries have reached their peak in terms of active COVID-19 cases. Confinement and social distancing measures have widely differed from one country to another, but the economic impact and the drop in economic activity has been severe. While several countries around the world have been gradually re-opening their economies, our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus and will represent a support in the medium term.

From a short-term perspective, the main focus remains on the definition and implementation of exit strategies, especially given the risk for a second wave in the epidemic, and economic support measures. While weak economic data and significant downward earnings revisions are being integrated in analysts’ forecasts, the Fed, the ECB and the Bank of Japan keep on easing policies further. It is now crucial that fiscal measures are taken, notably in Europe, to support a kickstart of the economy at a future stage, especially if deflation sets in. The European Commission’s proposal of a 750 billion euro recovery fund is a strong signal if approved by all 27 EU member states in the coming weeks.

There is an improved risk/reward ratio for a long-term investor, but volatility remains high from a short term perspective, as visibility on the epidemic remains low and the coronavirus is a risk until it is contained or a vaccine has been found, successfully tested, mass-produced and commercialised. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential.

28-May-2020

Global equity markets rose on Wednesday (S&P 500: +1.5%, Eurostoxx 50: +1.5%) despite increasing political tensions between China and the US. Instead, investors continued to focus on the reopening of the global economy, the improving economic activity from the trough of early April and the continuing announcement of monetary and fiscal stimulus measures around the globe. In Europe, the European Commission proposed a 750 billion euro recovery fund, called the Next Generation EU plan.

Tensions between China and the US remain elevated with several flashpoints. The US said it won’t certify Hong Kong’s autonomy, paving the way for President Trump to sanction China for human right abuses. In addition, reports showed that China bought Brazilian soybeans amid rising trade tensions.

Next Generation EU

As expected, the European Commission proposed a major economic recovery fund yesterday, worth 750 billion euro to help the EU recover from the huge economic impact of the lockdown measures that were put in place to prevent COVID-19 from further spreading. Ursula von der Leyen, President of the European Commission, described the package as "an urgent and exceptional need for an urgent and exceptional crisis." The proposals are unprecedented in nature and ambitious in scope:

  • The 750 billion fund would be made up of 500 billion euro in grants and 250 billion euro in loans. It would be raised by lifting the EU's resources ceiling to 2% of EU gross national income and would be reliant on the EU's strong credit rating.
  • The 500 billion euro in grants will be distributed to the EU’s hardest hit countries by COVID-19. For instance, Italy will receive almost 82 billion euro, whereas Spain would get more than 77 billion euro.

When added to a proposed 1,100 billion euro budget for 2021-27, and an earlier 540 billion initial rescue package, the total amount would rise to 2,400 billion euro. EU officials, that are likely to meet in June, will now have to approve the Next Generation EU plan, although an agreement before the summer isn’t guaranteed. All 27 EU member states have to back the plan for it to go ahead!

Our view

Most countries have reached their peak in terms of active COVID-19 cases. Confinement and social distancing measures have widely differed from one country to another, but the economic impact and the drop in economic activity has been severe. While several countries around the world have been gradually re-opening their economies, our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus and will represent a support in the medium term.

From a short-term perspective, the main focus remains on the definition and implementation of exit strategies, especially given the risk for a second wave in the epidemic, and economic support measures. While weak economic data and significant downward earnings revisions are being integrated in analysts’ forecasts, the Fed, the ECB and the Bank of Japan keep on easing policies further. It is now crucial that fiscal measures are taken, notably in Europe, to support a kickstart of the economy at a future stage, especially if deflation sets in. The European Commission’s proposal of a 750 billion euro recovery fund is a strong signal if approved by all 27 EU member states in the coming weeks.

There is an improved risk/reward ratio for a long-term investor, but volatility remains high from a short term perspective, as visibility on the epidemic remains low and the coronavirus is a risk until it is contained or a vaccine has been found, successfully tested, mass-produced and commercialised. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential.

27-May-2020

Global equity markets continued their rally on Tuesday (S&P 500: +1.2%, Eurostoxx 50: +0.9%), as investors welcomed optimism on the further reopening of economies worldwide and positive developments on COVID-19 vaccines. Investors are now putting their hopes on the development of several coronavirus vaccines that will eventually come to the market. While Novovax said it started the first human study of its experimental vaccine, pharmaceutical companies such as Pfizer, Merck and Moderna are also in the vaccine development race.

In the meantime, lockdown restrictions continue to be eased in countries all around the world, as the daily number of coronavirus infections continues to decline. For instance, the UK announced plans to reopen retail stores next month, while Italy saw people return to bars and restaurants over the weekend.

EU Recovery Fund: set for tough talks

Despite some slight recent economic data improvement, the Eurozone’s economy has been severely hit by the lockdown measures put in place to prevent the coronavirus from further spreading. In additional to the monetary support measures, taken by the European Central Bank, and the fiscal stimulus that has been announced by the various member states of the EU, the need for an EU Recovery Plan after COVID-19 is high.

Today, the EU will come together to discuss the Commission proposal. This follows the initiative, taken by France and Germany last week, for a 500 billion euro fund to support the EU’s hardest-hit countries. Negotiations are expected to be difficult as Sweden already said it won’t support the plan and also Denmark, the Netherlands and Austria have already expressed their cold feelings around the proposal. Investors will gauge the support level for this initiative.

Our view

Most countries have reached their peak in terms of active COVID-19 cases. Confinement and social distancing measures have widely differed from one country to another, but the economic impact and the drop in economic activity has been severe. While several countries around the world have been gradually re-opening their economies, our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus and will represent a support in the medium term.

From a short-term perspective, the main focus remains on the definition and implementation of exit strategies, especially given the risk for a second wave in the epidemic, and economic support measures. While weak economic data and significant downward earnings revisions are being integrated in analysts’ forecasts, the Fed, the ECB and the Bank of Japan keep on easing policies further. It is now crucial that fiscal measures are taken, notably in Europe, to support a kickstart of the economy at a future stage, especially if deflation sets in. The Franco-German initiative of 500 billion euro is already a step into the right direction.

There is an improved risk/reward ratio for a long-term investor, but volatility remains high from a short term perspective, as visibility on the epidemic remains low and the coronavirus is a risk until it is contained or a vaccine has been found, successfully tested, mass-produced and commercialised. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential.

26-May-2020

European equity markets rose on Monday (Eurostoxx 50: +2.3%) in low volumes, as both US and British equity markets were closed for public holidays. Markets gained strength after the publication of a stronger than expected German business morale.

This morning, Asian equities extended their gains (Nikkei: +2.2%, Hang Seng: +1.8%, Shanghai Composite: +0.7%), as investors are looking past increasing geopolitical tensions and continue to focus on economic re-openings and Chinese stimulus optimism. The Nikkei outperformed, as Japan lifted the state of emergency in the remaining five regions, including Tokyo.

First signs of an economic rebound?

Germany, the Eurozone’s biggest economy, was one of the first European countries to start lifting lockdown restrictions that were put in place to prevent the COVID-19-virus from further spreading. The easing of these measures and the (gradual) re-opening of the economy has now started to show in the leading indicators, witness yesterday’s Ifo Index publication. For financial markets, confirmation that April marked the bottom in leading indicators – such as business climate and consumer sentiment – is an important signal, even if the recovery path remains choppy.

The German Ifo business climate index rose to 79.5 from a downwardly revised 74.2 in April, better than consensus expectations. It was the strongest monthly increase on record, but still the second weakest reading since the German reunification. The headline index was still far below March’s 86.0 reading, but the easing of restrictions has clearly provided a boost to sentiment.

The Ifo Institute said that May’s reading points to a double-digit GDP decline in the second quarter and added that companies still expect exports to decline, but less dramatically than a month ago. The latest Ifo reading came after the final publication of the first-quarter GDP in Germany that showed a 2.2% quarter-on-quarter contraction.

Our view

Most countries have reached their peak in terms of active COVID-19 cases. Confinement and social distancing measures have widely differed from one country to another, but the economic impact and the drop in economic activity has been severe. While several countries around the world have been gradually re-opening their economies, our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus and will represent a support in the medium term.

From a short-term perspective, the main focus remains on the definition and implementation of exit strategies, especially given the risk for a second wave in the epidemic, and economic support measures. While weak economic data and significant downward earnings revisions are being integrated in analysts’ forecasts, the Fed, the ECB and the Bank of Japan keep on easing policies further. It is now crucial that fiscal measures are taken, notably in Europe, to support a kickstart of the economy at a future stage, especially if deflation sets in. The Franco-German initiative of 500 billion euro is already a step into the right direction.

There is an improved risk/reward ratio for a long-term investor, but volatility remains high from a short term perspective, as visibility on the epidemic remains low and the coronavirus is a risk until it is contained or a vaccine has been found, successfully tested, mass-produced and commercialised. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential.

25-May-2020

Global equity markets closed last week with a slightly positive performance on Friday (S&P 500: +0.2%, Eurostoxx 50: +0.5%). On the one hand, investors welcomed the upbeat comments on the recent vaccine update from Moderna and the continuing announcements on the gradual reopening of economies worldwide.

On the other hand, they also recognised Brazil becoming a top global COVID-19 hotspot and renewed tensions in Hong Kong, as China announced dramatic plans to increase its power in the Hong Kong region by writing a new law in the city’s charter. As a result, a fresh wave of street protests has started, and the Hang Seng, Hong Kong’s equity market index, dropped 5.6% on Friday.

Economic data remain weak

Recent economic data has shown signs of improvement, but remains globally weak. We focus, this time, on the Flash PMI releases last Thursday. Although many preliminary PMI’s revealed better than expected figures, hinting that the rate of collapse might have peaked in April, they remain drastically low.

  • The Eurozone’s flash Composite PMI for May bounced back to 30.5 (estimate: 36, prior: 16), leaving the survey at a low level. Manufacturing increased to 39.5 and services to 28.7.
  • Numbers were slightly disappointing in Germany and France, suggesting the biggest improvement is coming from the hardest-hit peripheral companies.
  • PMI details came in mixed with new orders rising to 28.4, new export orders at only 26.8 and future output increasing to 45.8.

This week, both the US and the Eurozone will publish soft data on business confidence, business climate and consumer sentiment, hopefully confirming that we saw the bottom in leading indicators.

Our view

Most countries have reached their peak in terms of active COVID-19 cases. Confinement and social distancing measures have widely differed from one country to another, but the economic impact and the drop in economic activity has been severe.

While several countries around the world have been gradually re-opening their economies, our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus and will represent a support in the medium term.

From a short-term perspective, the main focus remains on the definition and implementation of exit strategies, especially given the risk for a second wave in the epidemic, and economic support measures. While weak economic data and significant downward earnings revisions are being integrated in analysts’ forecasts, the Fed, the ECB and the Bank of Japan keep on easing policies further. It is now crucial that fiscal measures are taken, notably in Europe, to support a kickstart of the economy at a future stage, especially if deflation sets in. The Franco-German initiative of 500 billion euro is already a step into the right direction.

There is an improved risk/reward ratio for a long-term investor, but volatility remains high from a short term perspective, as visibility on the epidemic remains low and the coronavirus is a risk until it is contained or a vaccine has been found, successfully tested, mass-produced and commercialised. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential.

20-May-2020

Global equity markets declined yesterday  (S&P 500: -1.1%, Eurostoxx 50: -0.3%) after Monday’s strong equity market rally. It was a quiet day on the macroeconomic front. The sole exception was the publication of Germany’s ZEW. The current economic conditions index came in worse than expected, but investor expectations surprisingly jumped to 51, far better than expected.

Separately, although Merkel’s and Macron’s announcement yesterday on a 500 billion euro European Recovery Fund had little impact on equities, peripheral spreads continued to tighten, and not only in Italy. Also Spanish and Portuguese bonds benefited from the announcement. The final proposal from the European Commission is due on May 27th and will be discussed at the June EU Council meeting mid-June.

Equity investors remain cautious

Yesterday, Bank of America Merrill Lynch published its May Fund Manager Survey. Global fund managers remain cautious about global growth, as 93% of the respondents expects a recession. Chances on a V-shaped recovery remain small as 75% of the portfolio managers anticipated a U- of W-shaped economic recovery.

In this context, cash levels remained a full point above the ten-year average. Investors did not agree upon whether we are currently in a bear market rally of a bull market rally following the market sell-off in March. As the firms bull & bear indicator remained at 0, investors are still extremely bearish. Investors remain underweight equities, with the exception of US equities.

The biggest tail risk global fund managers fear is, without surprise, a second coronavirus wave.

Our view

In the meantime, our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery. The definition and implementation of exit strategies are currently the main focus, especially given that a second surge in the epidemic is a possibility.

In the meantime, while weak economic data and significant downward earnings revisions are being integrated in analysts’ forecasts, the Fed, the ECB and the Bank of Japan keep on easing policies further. It is crucial that fiscal measures are taken, notably in Europe, to support a kickstart of the economy at a future stage, especially if deflation sets in.

There is an improved risk/reward ratio for a long-term investor, but volatility remains high from a short term perspective, as visibility on the epidemic remains low and the coronavirus is a risk until it is contained or a vaccine has been found, successfully tested, mass-produced and commercialised. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus and will represent a support in the medium term.

19-May-2020

Global equity markets jumped on Monday (S&P 500: +3.2%, Eurostoxx 50: +5.1%), on the back of further easing of coronavirus restrictions in countries all over the world and positive news on the coronavirus vaccine candidate of US company Moderna. European equities fully recovered of last week’s losses, boosted by an end of short-selling restrictions in several European countries and encouraging news regarding a European Recovery Fund.

Separately, the German 10-year yield rose to -0.48% on the back of an improving market sentiment. Peripheral spreads tightened sharply and the euro gained, as Germany and France agreed to back a plan for a 500 billion euro fund to support the EU’s hardest-hit countries.

EU Recovery Fund

European assets jumped yesterday on increasing hopes for a EU economic recovery fund to support the region’s economy after COVID-19. The funding of the fund will be within the framework of the EU budget and it will have the possibility to borrow money on the financial markets. The bonds issued by the European Commission would be repaid from the EU budget, of which the lion’s share is covered by Germany. ECB president Lagarde and Italy welcomed the initiative, while Austria quickly rejected the proposal.

Although this 500 billion euro recovery fund is far from being endorsed by the European parliaments and national governments, and comes short of the discussed 2000 billion euro plan floated by the European Commission last month, it’s a step into the right direction. Investors will gauge the support level for this initiative when the European Commission comes together next week.

Vaccine hopes

Investors also welcomed Moderna’s announcement of positive interim phase 1 clinical data for its coronavirus vaccine candidate mRNA-1273. The treatment produced antibodies in all 45 participants and the vaccine was generally safe and well-tolerated. Moderna’s Chief Medical Officer stated that if trails go well, the drug could be in widespread use by the end of 2020 or early 2021. The company will start with its phase 2 study soon, testing the vaccine’s effectiveness on 600 people. The third phase, if all goes well, is scheduled for July, involving tests on thousands of healthy people.

Separately, the EU is working on a plan to fast track the sale of Gilead’s drug remdesivir as a COVID-19 treatment. The head of the EU’s medicines agency said they may give green light for commercialisation in the EU in the coming days.

Our view

In the meantime, our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery. The definition and implementation of exit strategies are currently the main focus, especially given that a second surge in the epidemic is a possibility.

In the meantime, while weak economic data and significant downward earnings revisions are being integrated in analysts’ forecasts, the Fed, the ECB and the Bank of Japan keep on easing policies further. It is crucial that fiscal measures are taken, notably in Europe, to support a kickstart of the economy at a future stage, especially if deflation sets in.

There is an improved risk/reward ratio for a long-term investor, but volatility remains high from a short term perspective, as visibility on the epidemic remains low and the coronavirus is a risk until it is contained or a vaccine has been found, successfully tested, mass-produced and commercialised. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus and will represent a support in the medium term.

18-May-2020

Global equity markets closed a choppy week with slightly positive performances on Friday (S&P 500: +0.4%, Eurostoxx 50: +0.4%) on the back of the continuing release of weak economic data and geopolitical headlines. China state media warned of retaliation against US technology firms following the White House’s move on Friday to block American chip sales to Huawei. President Trump said the trade deal doesn’t feel the same anymore to him and he is not happy with the subject.

This morning, Asian equities are gaining (Nikkei +0.5%, Shanghai Composite +0.6%), while Japan released its first quarter GDP. The Japanese economy shrank by a 3.4% annualised (quarter-on-quarter) pace in the first quarter, which was better than consensus expectations of a 4.5% contraction. This follows Friday’s release of Tokyo Governor Yuriko Koike’s road map for easing coronavirus restrictions, as Japan recorded a decrease in new infections.

Focus on earnings and economic data

Last Friday, market’s digested another set of weak economic data. The Eurozone’s first quarter GDP decline was confirmed at -3.8% compared to the fourth quarter of 2019, while a large set of US economic data was released.

  • April retail sales (month-on-month) came out very weak, declining 16.4% on the month, below consensus expectations of a 12% decline.
  • US industrial production (month-on-month) for April was slightly better than expected, but nevertheless showed a drop of -11.2%. Capacity utilisation remains low at less than 65%.
  • The first survey release for May was slightly better than expected. The New York Empire Manufacturing index rose more than anticipated to -48.5 (prior -78.2).
  • Also May’s preliminary Michigan Consumer Sentiment index surprised on the upside, increasing to 73.7 (prior 71.8, consensus estimate: 68).

In the meantime, the earnings season is coming to an end with 90% of the companies having reported first quarter earnings in both Europe and the US. US earnings growth currently stands at -13% year-on-year, while Europe’s earnings are trending 25% lower year-on-year. Energy, financials and cyclicals have been a drag, while defensives, in particularly pharma, performed better than expected.

Our view

In the meantime, our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery. The definition and implementation of exit strategies are currently the main focus, especially given that a second surge in the epidemic is a possibility.

In the meantime, while weak economic data and significant downward earnings revisions are being integrated in analysts’ forecasts, the Fed, the ECB and the Bank of Japan keep on easing policies further. It is crucial that fiscal measures are taken, notably in Europe, to support a kickstart of the economy at a future stage, especially if deflation sets in.

There is an improved risk/reward ratio for a long-term investor, but volatility remains high from a short term perspective, as visibility on the epidemic remains low and the coronavirus is a risk until it is contained or a vaccine has been found, successfully tested, mass-produced and commercialised. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus and will represent a support in the medium term.

15-May-2020

Global equity markets showed mixed performances on Thursday (S&P 500: +1.2%, Eurostoxx 50: -1.8%), as investors assessed continuing economic weakness due to the coronavirus spread and the threat of a renewed trade war between China and the US. European equities ended the day with a negative performance, while US equities pared earlier losses, digesting another disappointing initial jobless claims report.

Bond yields went further down after the publication of weekly initial jobless claims. The 10-year Treasury yield in the US fell towards 0.62% and also the 10-year Bund yield declined to-0.54%. Gold benefited from an uncertain market environment, gaining almost 1.5% towards 1738 US dollar/troy ounce.

This morning, Asian equities are slightly positive (Nikkei: +0.2%, Shanghai Composite: +0.2%). Chinese industrial production was better than expected, increasing almost 4% year-on-year in April. All major sectors registered growth except for a marginal decline in utilities. Chinese retail sales came nevertheless short of expectations, declining 7.5% year-on-year in April (vs. -6.0% expected and -15.8% the month before). The NBS noted that the Chinese economy “hasn’t returned to normal yet”.

U-shaped recovery most likely

Following last week’s bad negative US job report, investors closely monitored another release of initial jobless claims number that showed that initial claims for unemployment benefits were down again. They remained nevertheless close to 3 million and were worse than consensus expectations (2.5 million). Since mid-March, 36.5 million people in the US requested unemployment benefits. The total figure is now approaching the total number filed during the last recession that lasted 18 months.

Investors are now increasingly taking into account a prolonged economic weakness, and so is corporate America. According to the latest Beige Book, few US companies expect a V-shaped recovery, as they expect it to take some time for things returning to normal.

Also Candriam’s economists believe a U-shaped recovery is most likely. In the US, they expect an economic contraction of 6.4% this year, before rebounding more than 9% next year. In the Eurozone, the economic contraction will be even worse with a 7.6% decline of GDP in 2020, followed by 9% growth in 2021 in their central scenario.

Our view

In the meantime, our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery.  Policy easing from virtually all central banks and fiscal easing represent a support in the medium term.

In the meantime, weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

There is an improved risk/reward ratio for a long-term investor, but volatility remains high from a short term perspective. The coronavirus is a risk until it is contained or a vaccine is found, successfully tested, mass-produced and commercialised. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

14-May-2020

Global equity markets declined on Wednesday  (S&P 500: -1.8%, Eurostoxx 50: -2.6%), on the back of the publication of another set of bad economic data, slightly more negative COVID-19 numbers and Jerome Powell’s speech.

The Fed Chairman said additional fiscal support may be needed to prevent long-term damage to the US economy, highlighting significant downside risks without further economic responses. Following his speech, long-term interest rates declined, with the 10-year Treasury yield ending the day at 0.65%.

Also the German Bund yield fell to -0.53% following the publication of the Eurozone’s industrial production, while Italian spreads tightened, despite declining equity markets. Italy registered the fewest new coronavirus cases in two days on Wednesday and the government approved a stimulus package of 55 billion euro to support the battered economy.

Economic data remain weak

While Fed Chairman Powell highlighted further downside risks to the US economy, economic figures continued to show the economic cost of the lockdown measures that have been put in place over the past months to prevent COVID-19 from further spreading.

  • The Eurozone’s industrial production dropped by 11.3% in March and April might even be worse. There were huge differences between the various countries of the region. As Italy was the first European country to introduce lockdown measures, it is no surprise that Italian production dropped 28.4% on the month. France registered a drop of 16.4%, while Germany and Spain saw more or less similar declines of around 11%. The German decline is large relative to other countries with a relatively mild lockdown like Netherlands and Finland for example.
  • The UK economy contracted 2% in the first quarter of the year. The contraction was largest in March, showing a decline of almost 6%. According to the UK statistics office, the monthly contraction was the largest on record and the quarterly contraction the biggest since the fourth quarter of 2008.

Today, investors will focus again on another update on initial jobless claims in the United States, after last week’s job report that showed more than 20 million people had lost their job in April.

US Presidential elections

Separate from the further deterioration of economic figures, COVID-19 also appears to be having an impact on the upcoming presidential elections. Reuters/Ipsos provided the results of an election poll, showing that former Vice-President Biden is leading President Trump by 8% among registered voters (46% against 38%).

The poll also Trump’s approval rating fell by 4%, as net disapproval of Trump’s handling of the pandemic increased to 13%, the highest since the poll introduced the question at the start of March.

Our view

In the meantime, our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery.  Policy easing from virtually all central banks and fiscal easing represent a support in the medium term.

In the meantime, weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

There is an improved risk/reward ratio for a long-term investor, but volatility remains high from a short term perspective. The coronavirus is a risk until it is contained or a vaccine is found, successfully tested, mass-produced and commercialised. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

13-May-2020

Global equity markets slightly declined on Tuesday (S&P 500: -2.1%, Eurostoxx 50: +0%), as investors assessed the risk of a second wave of coronavirus infections and renewed trade tensions between China and the United States.

Trade tensions between the US and China came back into focus, as President Trump ordered a government retirement savings fund not to invest in Chinese stocks, and a spokeswoman for Trump said the US has no interest in reopening trade talks. In addition, Senate Republicans are set to introduce a bill that would sanction Chinese officials over human rights abuses and will give the President the power to impose asset freezes and travel bans, if Beijing does not cooperate with the coronavirus probe.

From a macroeconomic perspective, US headline consumer prices declined by 0.8% in April. A large drop in energy prices weighed on the figure, while food prices posted a solid gain. The core index, without the more volatile energy and food components, however, also dropped 0.4%, the biggest monthly decline on record (since 1957) and far below consensus expectations.

COVID-19: between hope and fear

In the meantime, the threat of a second wave of coronavirus infections remains in focus, as more countries around the world are reopening their economies. Some of them have already seen an increase in infection rates with amongst others South Korea, Germany and the city of Wuhan that will be testing its entire population of 11 million people.

In the US, while President Trump is pushing to reopening the economy in every state, Dr. Anthony Fauci warned the Senate Health Committee of the danger of easing restrictions to prevent COVID-19 from further spreading too soon. “A too-quick reopening at the state level could lead to suffering and death that could be avoided”, he said.

In contrast to the US’ reopening plans, the UK has maintained the largest death toll in Europe, urging Prime Minister Johnson to water down his plan to start easing lockdown measures. Also, employers and labour unions said many workplaces aren’t ready yet for the return to work.

Our view

In the meantime, our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery.  Policy easing from virtually all central banks and fiscal easing represent a support in the medium term.

In the meantime, weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

There is an improved risk/reward ratio for a long-term investor, but volatility remains high from a short term perspective. The coronavirus is a risk until it is contained or a vaccine is found, successfully tested, mass-produced and commercialised. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

12-May-2020

Global equity markets slightly declined on Monday (Eurostoxx 50: -0.8%), as investors are starting to get worried about a second wave of COVID-19 infections with the reopening of several economies worldwide. The US dollar gained against most currencies.

Separately, oil prices declined, despite Saudi-Arabia’s effort to boost prices with an additional oil production cut. The country announced that it was taking the unilateral decision to cut oil production by another one million barrels a day on top of what had already been agreed with its OPEC allies. The price for a barrel of Brent crude oil declined 4% to just below 30 US dollar.

COVID-19: second wave coming?

An analysis of the active COVID-19 cases learns us that most European countries are having the spread of the virus under control. France, Italy and Spain continue to show signs of improvement. However, investors are starting to fear for a second wave of coronavirus infections, as several economies have started to gradually reopen their economies, such as Germany.

The German curve of active cases has declined strongly, but the reopening of the economy has resulted in an increase of the reproduction rate to 1.1, according to the Robert Koch Institute. This means that each German infected with the coronavirus, infects another 1.1 people. A rate above 1 means the virus is again spreading exponentially.

In addition, new reports also have shown emerging coronavirus outbreaks in other countries and regions:

  • In the United States, were virus deaths have now passed 80.000, infections have spiked across several metro areas and communities according to NBC, while the spread of the coronavirus in the White House is another source of concern.
  • In Asia, South Korea saw its biggest one-day increase in one month, while there have been discovered new infections in China’s Wuhan.
  • Meanwhile, Russia is emerging as a new hotspot within Europe with over 10.000 new infections in one day.

Although, the spread of the coronavirus is becoming more under control worldwide, we will continue to closely monitor the evolution of it to assess the risk of a second infections wave.

Our view

In the meantime, our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery.  Policy easing from virtually all central banks and fiscal easing represent a support in the medium term.

In the meantime, weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

There is an improved risk/reward ratio for a long-term investor, but volatility remains high from a short term perspective. The coronavirus is a risk until it is contained or a vaccine is found, successfully tested, mass-produced and commercialised. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

11-May-2020

Global equity markets continued to rise on Friday (S&P 500: +1.7%, Eurostoxx 50: +1%), despite the loss of a staggering 20.5 million jobs in the US in April reported in the closely watched job report.

The figure had nevertheless already been widely expected following the weekly publication of initial claims for unemployment benefits and the ADP employment report on Wednesday. The unemployment rate jumped to 14.7% in April, from only 4.4% the month before, but was better that the expected 16%.

All eyes on worldwide exit strategies

The US job report underscores the speed and the depth of the labour market’s collapse, as the corona pandemic took a devastating toll. Besides improving figures on the spread of COVID-19, this is an important driver for politicians to continue to work on the reopening of their economies worldwide.

Today, France and Belgium are implementing first steps in the gradual re-opening of their economies, while New York Governor Cuomo is expected to provide more details about his state's reopening plans and also the UK’s Prime Minister Boris Johnson outlined a conditional roadmap to reopen the economy and urged return to work.

Even Italy’s Prime Minister Conte said he may further ease the country’s lockdown earlier than planned. Italy eased the lockdown on May 4, allowing manufacturing and construction companies to restart. Bars, restaurants and barbers are scheduled to begin operating again on June 1, a date that may be brought forward if COVID-19 figures continue to improve.

Separately, the Italian Prime Minister urged the European Union to ensure that the financial resources for a new economic recovery fund for the region are available from the start of the second half of the year, to support the country’s devastated economy. On Friday, ECB President Lagarde said that a “common European fiscal response is highly desirable”.

What’s next?

This week, investors will continue to follow the publication of a new set of economic data, impacted by the measures taken to limit the spread of the COVID-19 virus.

  • The US, the UK, China, and the Eurozone will publish inflation figures. The measures taken to contain the spread virus and the related layoffs could result in deflationary pressures.
  • Germany and the UK will release their flash Q1 GDP rate. Forecasts are deeply negative. Also, the second preliminary estimate of Q1 GDP for the Eurozone will be published.
  • Friday will be the busiest macro day in the US with the release of April’s retail sales and industrial production data, and the preliminary Michigan consumer sentiment index of May.

Besides that, investors will continue to monitor developments in the trade progress made between China and the US.

Our view

In the meantime, our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery.  Policy easing from virtually all central banks and fiscal easing represent a support in the medium term.

In the meantime, weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

There is an improved risk/reward ratio for a long-term investor, but volatility remains high from a short term perspective. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

8-May-2020

Global equity markets rose on Thursday (S&P 500: +1.15%, Eurostoxx 50: +1.3%), as governments’ efforts worldwide to reopen their economies continued and prospects for a COVID-19 vaccine increased as Moderna said its experimental vaccine would be in late-stage studies by early summer. In Europe, France has joined Germany, Italy and the Netherlands in easing lockdown restrictions, and also the UK might announce a very limited easing next week.

On the macroeconomic front, markets mainly focused on another initial jobless claims report in the United States. New claims for unemployment benefits came in at 3.17 million in the week ending May 2 with total applications since mid-March surpassing 33 million. Today, we’ll closely monitor the release of the job report of April.

In Europe, figures on industrial production in both France and Germany were released. German industrial production dropped 9.2% in March, below consensus expectations of a 7.4% drop. In France, industrial output fell 16.2%, also below expectations of an 11.7% decline.

Earnings are no performance driver

The earnings season is approaching its end with nearly three-fourth of the companies having reported already for the first quarter of the year. Globally, earnings are not worse than expected in Europe, Q2 should nevertheless be weaker than Q1:

  • In the US, earnings growth is currently running at -13% year-on year. More than 70% of the companies in the S&P 500 that have already released Q1 figures beat earnings estimates. Communication services, consumer staples, and healthcare fare best within defensive sectors. Financials have disappointed most.
  • In Europe, earnings growth is running at -32%, in line with consensus expectations and mainly dragged down by energy. Around 52% of the already published earnings reports was better than expected, which is close to the historical average. The defensive sectors healthcare and consumer staples have outperformed other sectors so far.

Despite strong earnings declines in both Europe and the US, earnings don’t seem to be a market performance driver. Companies have been able to perform whether they have beaten of missed expectations.

Our view

In the meantime, our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery.

In the meantime, weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

There is an improved risk/reward ratio for a long-term investor, but volatility remains high from a short term perspective. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

7-May-2020

MORNING COMMENT

Global equity markets slightly declined on Wednesday (S&P 500: -0.7%, Eurostoxx 50: -1.1%) as a new set of economic data continued to show the economic cost of the lockdown measures in place, and hostile trade rhetoric between China and the US remained in focus. US President Donald Trump said he would report within two weeks whether Beijing was fulfilling its obligations under the phase one trade agreement, increasing concerns about the trade deal and the threat of new import tariffs.

A renewed escalation in the trade war between the United States and China would be bad news, especially for the battered Chinese economy. This morning, the Caixin services PMI continued to show the impact of the coronavirus. The activity index came in at 44.4 in April, below consensus expectations of 50.1. Exports figures on the other hand surprised with the first positive growth since December 2019, in stark contrast with consensus expectations of a 15.7% drop.

EU warns for uneven virus shock

Also developing economies are suffering from the spread of COVID-19 and clearly feel the economic impact of the health crisis. For instance, the European Commission expects the Eurozone economy to contract 7.7% 2020, before making an incomplete recovery of 6.3% in 2021.

All economies are expected to contract, but the size of the economic drop varies among member states. Greece, Spain and Italy should contract almost 10% this year, while their debt-to-GDP ratio will increase significantly. The Commission expects the region’s debt to rise above 100% of GDP and stressed that the lack of a common fiscal response could cause permanent damage to economy. The release of a new set of economic data for the Eurozone was poor, indeed.

  • Final PMI’s for April were very weak. The PMI Composite for the Eurozone came in at 13.6, more or less in line with the previously published flash PMI.
  • Eurozone retail sales dropped a staggering 11% in March, while German manufacturing orders declined by almost 16% last month.

In the meantime, the ADP employment report was released in the United States. The report, that comes before the closely watched nonfarm payrolls report on Friday, showed private employment fell by 20.2 million in April, slightly better than anticipated.

Today, investors will monitor the publication of German industrial production and another weekly jobless claims report in the US.

Our view

In the meantime, our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery.

In the meantime, weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

There is an improved risk/reward ratio for a long-term investor, but volatility remains high from a short term perspective. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

6-May-2020

MORNING COMMENT

Global equity markets gained on Tuesday (S&P 500: +0.9%, Eurostoxx 50: +2.1%) on the back of further easing of lockdown restrictions in Europe and the US, and rising oil prices. Oil is headed for one of the longest runs of daily gains, as OPEC+ has started to cut production and investors anticipate a slow increase in oil demand as several economies are slowly reopening. The price for a barrel of Brent crude oil jumped by almost 14% above 30 US dollar for the first time since April 15.

Separately, the ECB also came into focus, as a German court criticised the Court of Justice of the European Union for disregarding the “actual economic policy effects” of the PSPP (Public Sector Purchase Programme) in its assessment of the programme’s proportionality. It calls into question the “whatever it takes” at a time when the European central bank appears to be the strongest bulwark against a European dislocation . After the release of this news, the euro weakened and Italian 10-year yields increased by 10 bps to 1.87%.

German court challenges ECB

Yesterday, as expected,  the German Federal Constitutional Court concluded that the PSPP (Public Sector Purchase Programme) does not constitute a violation of the prohibition of monetary financing of member state budgets, but at the same time, it gave the ECB three months to demonstrate that  "the monetary policy objectives pursued by the PSPP are not disproportionate to the economic and fiscal policy effects resulting from the programme".  

Looking ahead, it should not threaten either the PSPP or PEPP (Pandemic Emergency Purchase Programme), but it puts a limit on the ECB’s possibilities and its flexibility with respect to capital-key rules and issuer limits. This decision should strengthen the position of the most critical Governing Council members. More fiscal action will therefore be needed, as the management of the crisis and the economic recovery cannot rest solely on the central bank.

Mixed economic data

Yesterday, we monitored the release of some new economic figures, showing the economic cost of the lockdown measures put in place to prevent COVID-19 from further spreading.

  • Markit’s final services PMI for the US came in slightly lower than its flash reading and missed consensus expectations only just. The headline business activity index dropped from 49.4 in February to 26.7 in April. Both the employment index as business expectations were down.
  • The ISM non-manufacturing was also released and beat consensus expectations (37.5). The survey declined to 41.8 in April from 52.5 the month before. Details were nevertheless worse than expected with a drop of new orders to 32.9 and employment to 30.

Today, we will closely follow the release of the Eurozone’s final PMI composite, German manufacturing orders and the ADP employment report in the US.

Our view

In the meantime, our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery.

In the meantime, weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

There is an improved risk/reward ratio for a long-term investor, but volatility remains high from a short term perspective. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

5-May-2020

MORNING COMMENT

Global equity markets showed mixed performances on Monday (S&P 500: +0.4%, Eurostoxx 50: -3.8%). US equities posted a slightly positive performance, while European equities caught up with the S&P’s drop of last Friday after being closed on May 1. Investors are becoming more worried about increasing tensions between China and the US, as President Trump blames China for the outbreak of the coronavirus and wants to punish the country. For that, Donald Trump is considering to remove China from global industrial supply chains and reintroduce tariffs on Chinese goods imported in the US.

Fears over a potential trade war between China and the US on top of a global recession with massive unemployment pushed the safe US dollar higher against the euro. Also the price of gold increased towards 1706.9 US dollar/troy ounce.

Global economic activity plunges

While President Trump is threating China and urging some US states to reopen faster, the release of bad economic data, as a result of the containment measures in place to prevent the virus from further spreading, continues. The Markit/JP Morgan Global PMI Manufacturing fell to 39.8 in April, its lowest level since March 2009. Excluding China’s mainland PMI reading, which is relatively resilient, the index was even down to 35.8. Rates of contraction in output and new orders were among the steepest registered in the 22-years survey history and the worst since the global financial crisis of 2008/09. This global output drop is also clearly visible in regional economic data:

  • In the US, durable goods orders decreased by almost 15% in March, while factory goods orders dropped more than 10%, falling short of expectations.
  • In the Eurozone, the final PMI manufacturing for April came in slightly lower than its flash estimate at 33.4.
  • The downturn was the most severe in Spain and Italy, Europe’s most hit countries by COVID-19. Spain’s manufacturing PMI dropped to 30.8 (from 45.7 in March), Italy’s PMI manufacturing declined to 31.1 (from 40.3 in March).

According to Markit, we are currently facing one of the biggest factory slumps in history and a recovery might be “frustratingly slow”. Today, we’ll be watching the release of the US’ PMI services and ISM non-manufacturing.

Our view

In the meantime, our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery.

Currently, weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

There is an improved risk/reward ratio for a long-term investor, but volatility remains high from a short term perspective. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

4-May-2020

MORNING COMMENT

Global equity markets declined on Friday (S&P 500: -2.8%, Nasdaq: -3.2%, FTSE 100: -2.3%) in quiet day, as most European markets were closed. The decline was mainly a result of increasing tensions between China and the US, with President Trump sharpening criticism over China’s initial handling of the outbreak of the coronavirus. There were even rumours that the US President is again considering import tariffs to punish China.

Q1 earnings season is almost halfway

Investors also worried on corporate earnings at the end of last week with Amazon warning that Covid-19 could negatively impact operating income in Q2 , while Apple withheld guidance for current quarter. The Q1 earnings season is now almost halfway:

In the US, 39% of the S&P 500 companies has reported so far, with 46% of them beating earnings expectations. Earnings have thus globally surprised on the downside with an aggregated earnings growth running at around -15%. Defensives, like consumer staples, healthcare and utilities are delivering positive growth, while cyclicals, energy and financials are showing a sharp earnings decline. Among cyclicals, technology, consumer discretionary and materials are delivering the majority of earnings beats.

In Europe, 50% of the companies in the Stoxx Europe 600 has reported so far, with 59% beating earnings estimates. For the companies that have already reported, earnings are currently down by more than 25%. As in the US, Defensives are the only category to show positive earnings growth, while cyclicals, financials and energy show a significant earnings drop. Among defensives, health care, consumer staples and communication services have led the way.

What’s next?

Last Friday, economic news was limited, with the exception of the publication of the final ISM manufacturing in the US. The gauge for US manufacturing activity fell less than estimated (41.5 vs. 36.7). Details were nevertheless weaker than the deadline with production dropping at a record pace and new orders and employment falling to low levels.

This week, we will continue to closely watch the release of new economic data. Today, Markit’s final PMI manufacturing for the Eurozone will be released together with Sentix economic sentiment index. In the coming days, more economic figures will be published:

  • Tomorrow, the ISM non-manufacturing will be released in the US, followed by US retail sales and the final PMI composite for the Eurozone on Wednesday.
  • On Thursday, we will closely watch another initial jobless claims report and China’s Caixin services PMI and Chinese export figures.
  • The Bank of England will publish its interest rate decision. It is unlikely that it will buck the trend of the Bank of Japan, the Fed and the ECB who emphasized the need for both long-term monetary support and combined with fiscal support.
  • The US Bureau of Labor Statistics will release the April job report on Friday. Over the past weeks, 30 million Americans have registered for unemployment claims, likely pushing the unemployment rate into double-digit territory.

Our view

In the meantime, our main scenario of a global, deep, but temporary shock due to the pandemic hasn’t changed. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery.

In the meantime, weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

There is an improved risk/reward ratio for a long-term investor, but volatility remains high from a short term perspective. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

30-Apr-2020

MORNING COMMENT

Global equity markets rose Wednesday (Eurostoxx 50: +2.2%, S&P 500: +2.7%), as the latest batch of first quarter earnings was fairly well received and Gilead released a positive update on the clinical trial of its drug remdesivir that helped COVID-19 patients recover faster.

Separately, Italian bond yields rose, as credit rating agency Fitch surprised with a rating downgrade to just above junk. It is the first downgrade that reflects a surge in public debt related to the costs of the coronavirus lockdown. Fitch expects the Italian economy to shrink by 8% this year and indicates that there's even a risk of a deeper downturn.

This morning, Asian equities are gaining (Nikkei: +2.8%, Shanghai Composite: +1.3%), as investors shrug off disappointing PMI’s. The official PMI composite came in at 50.8, slightly below consensus expectations, while the Caixin PMI manufacturing dropped below 50 again.

Fed: “Economy could use more fiscal support”

Yesterday, the US’ first-quarter GDP was released. The US economy contracted at a 4.8% annual rate (preliminary first estimate), which was below consensus expectations of a 4% decline. Without surprise, the contraction in output was mainly due to COVID-19 restrictions.

The American consumer, the biggest driver of US growth, was badly hit with a 7.6% drop in consumption, which marked the biggest decline since 1980. The collapse in consumption comes together with a jump in the savings rate from 7.6% to 9.6%.

Following the release of this first growth estimate, the Federal Reserve kept interest rates, as expected, steady. In its statement, the central bank said the health crisis poses considerable risks to the economic outlook. Chair Powell said he expects the Fed will need to do more, but also stressed the economy could use more fiscal support in order to create a robust recovery. He added finally that now is not the time to let deficit concerns in the way of winning the battle.

In Europe, these “considerable risks” in the medium term imply that central banks will provide support for a considerable time. Regarding support for sovereign issuers, the ECB’s Governing Council will likely upsize its PEPP (pandemic emergency purchase programme) by the June meeting at the latest and the only real debate is whether it waits to June or acts today.

Regarding ECB’s support for banks and non-financial corporate, investors will watch details regarding the treatment of fallen angels, commercial paper purchases, TLTRO enhancements (Targeted Long Term Refinancing Operations) and improved tiering.

Update on Q1 earnings

Meanwhile, the Q1 earnings season is still ongoing and latest figures were fairly well received. The global balance remains nevertheless negative.

In the US, one third of the companies in the S&P 500 has already reported first-quarter earnings. Only 44% has been able to exceed consensus expectations and earnings have surprised almost 18% on the downside. For companies that have reported so far, earnings growth is running at -19.4%.

In Europe, 42% of companies in the Stoxx Europe 600 has reported so far. For companies that have already reported, 58% did better than consensus expectations with an aggregated earnings growth currently running at -21.2%.

Our view

Our main scenario remains a global, deep, but temporary shock due to the pandemic. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery.

In the meantime, weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

There is an improved risk/reward ratio for a long-term investor, but volatility remains high from a short term perspective. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

29-Apr-2020

MORNING COMMENT

Global equity markets showed mixed performances on Tuesday (Eurostoxx 50: +1.7%, S&P 500: -0.5%). On the one hand, European equities gained, as investors’ focus remained on the restart plans of the various economies. US equities, on the other hand, declined slightly, as hopes on a relaxation of the containment measures were counterbalanced by another set of weak economic data.

Restart plans

More US states and countries around the world are preparing to ease lockdown measures.

  • While COVID-19 infections in the US topping one million, California, Texas and Ohio joined other US states preparing to ease coronavirus containment measures.
  • Spain plans to announce loosening measures, while France announced to begin easing lockdown measures with plans to reopen shops as of May 11.
  • Germany is also about the ease lockdown measures in the coming days, as the number of new cases fell below 1.000 for the first time in more than five weeks.
  • In Hong Kong, government employees will return to work on May 4, while New Zealand came out of its five-week lockdown .
  • Even in the UK, it seems that Prime Minister Boris Johnson will outline easing plans by Friday.

Although things are clearly heading into the right direction, the World Health Organisation warned that the pandemic is far from over and urged for caution.

Weak economic figures

The economic restart plans are nevertheless clearly good news for investors, as economic figures continue to show the severe economic impact of the lockdown measures in place.

  • On the US consumer side, confidence plunged in April. The Conference Board’s Consumer Confidence Index declined to 86.9, coming from 118.8 the month before. This marked the worst monthly decline on record.
  • On the manufacturing side, the Richmont Fed Index, that measures manufacturing activity in the district, dropped to -53 in April. The figure came in short of expectations and reached an all-time low.

Today, we will closely monitor the publication of the first preliminary estimate of the US’ first-quarter GDP and the outcome of the Federal Open Market Committee. In Eurozone, the focus will be on the publication of April’s Economic Confidence Index.

Our view

Our main scenario remains a global, deep, but temporary shock due to the pandemic. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery.

In the meantime, weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

There is an improved risk/reward ratio for a long-term investor, but volatility remains high from a short term perspective. In this context, we stay slightly underweight equities. Patience remains key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

28-Apr-2020

MORNING COMMENT

Global equity markets gained on Monday (Eurostoxx 50: +2.6%, S&P 500: +1.5%), as the major economies are evolving towards a reopening and investors are anticipating additional stimulus measures from both the US and European central bank later this week.

In this context, long-term yields slightly increased yesterday, both in the US and Germany. The Italian 10-year government bond spread over Germany on the other hand declined, following Standard & Poor’s decision to keep Italy’s credit rating unchanged at BBB with a negative outlook. Italian 10-year yields declined almost 15 bps towards 1.75%.

Separately, oil price volatility remains high. Oil prices fell yesterday, as the biggest oil ETF said it will sell its June WTI futures position, increasing downward pressure. The price for a barrel of Brent crude oil dropped below 20 US dollar, whilst the WTI lost more than 30% and trades below 11 US dollar this morning.

Reopening the economy

The spread of the COVID-19 virus is becoming more under control. Coronavirus deaths slowed the most in more than a month in Italy, France and Spain. These countries are thus preparing themselves to reopen their economy in the coming weeks and ease lockdown restrictions. This is also the case in Australia and New Zealand. Also in the United States, more states are moving to reopen their economy as President Trump unveiled a blueprint to increase testing capacity in all 50 states. Still, the concern for a second wave of infections remains. Both businesses and consumers remain cautious.

In the meantime, investors are betting on more stimulus measures. The Bank of Japan more than doubled its ceiling of Commercial Paper and Corporate bond holdings and announced that there is no limit anymore on government bond purchases. The Federal Reserve said it would expand the scope and the duration of the Municipal Liquidity Facility to do more for smaller cities and counties suffering from the economic fallout from the coronavirus outbreak.

The central bank will buy up to 500 billion US dollar of short-term notes issued by US states with a population of 500.000 residents and US cities with a population of at least 250.000 residents. The duration of the eligible securities would also be expanded to three years.

The Federal Reserve meets on Wednesday, the European Central Bank on Thursday.

Our view

Our main scenario remains a global, deep, but temporary shock due to the pandemic. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery.

In the meantime, weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

There is an improved risk/reward ratio for a long-term investor, but volatility remains high from a short term perspective. Patience is key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

27-Apr-2020

MORNING COMMENT

Global equity markets showed mixed performances on Friday (Eurostoxx 50: -1.5%, S&P 500: +1.4%), as investors weighed the publication of the latest economic figures and earnings reports. European equities declined, as investors were disappointed on the outcome of the EU summit, while US equities welcomed another economic stimulus bill of 484 billion US dollar.

This morning, Asian equities gained (Nikkei +2.4%, Hang Seng +1.6%, Shanghai Composite +0.7%), especially Japanese equities, as they benefited from the Bank of Japan’s decision to increase asset purchases (commercial paper and corporate bonds).

Big week ahead

Last Friday, markets had to digest another set of economic data, both in Europa and the United States.

  • German business confidence further eroded. The IFO business climate index declined to 74.3 (below consensus expectations of 80) and business expectations dropped to 69.4.
  • US durable goods orders for March fell more than expected, declining more than 14%.
  • Final Michigan Consumer Sentiment was slightly revised higher, remaining at a very weak level though (71.8 against the preliminary estimate of 71).
  • Finally, UK retail sales posted their biggest decline on record, while Belgian business confidence came out very weak at -36.1 (against consensus expectations of -21).

This week we will closely monitor the publication of some important economic data and earnings reports, and the outcome of the central bank’s policy meetings.

  • European (Thursday) and US GDP (Wednesday) will show the size of the contraction in the first quarter.
  • In addition, another rise in initial jobless claims is expected on Thursday.
  • The US Fed and the ECB, will announce their latest decisions on rates and might add further policy accommodation via lower rates or higher asset purchases.
  • The US Q1 earnings season will continue as approximately 170 companies will release their reportings. Almost 100 companies of the Stoxx Europe 600 will do so as well.

Our view

Our main scenario remains a global, deep, but temporary shock due to the pandemic. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery.

In the meantime, weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

There is an improved risk/reward ratio for a long-term investor, but volatility remains high from a short term perspective. Patience is key in this U-shaped recovery.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

24-Apr-2020

MORNING COMMENT

Global equity markets showed mixed performances on Thursday (Eurostoxx 50: +0.6%, S&P 500: -0.1%), as investors weighed extremely weak global preliminary PMI’s, lower initial jobless claims in the US, the first outcome of the EU summit on an Economic Recovery Fund and a continuing oil price rebound. The price for a barrel of Brent crude oil recovered further ground to more than 21 US dollar (June contract).

Disappointing EU summit so far

EU leaders agreed on the need for a European Recovery Fund after corona during yesterday’s council. They have now tasked the European Commission to come up in May with a proposal to offset the economic fallout from the coronavirus outbreak. This was largely in line with expectations, but can still be seen as a disappointment, given the need for an aggressive, near-term fiscal policy response. It is difficult to assess the credibility and the strength of the EU response, as many issues have to be addressed yet, among which size, maturity, execution and the timetable. Disagreements between the various countries remain on the ratio of grants vs. loans and on the funding of it.

This comes despite ECB President Largarde’s efforts to urge EU leaders to act forcefully. Largarde told EU leaders that the GDP of the Euro-area’s economy may shrink up to 15% as a result of the pandemic and that they risk to act too little, too late. Hence, all eyes will now turn to the next ECB meeting on 30 April and potential tweaks to the pandemic emergency purchase program. 

Economic activity figures continue to deteriorate

The need for fiscal aid is nevertheless quite clear, witness yesterday’s release of the global preliminary PMI’s. The Eurozone’s composite PMI dropped sharply to 13.5, the lowest level on record and significantly below consensus expectations (estimates: 25). The PMI was mainly dragged down by the services sector, falling to 11.7, and a decline in manufacturing to 33.6. New orders fell sharply alongside new export orders and employment.

Also in the US, economic activity indicators continued to deteriorate. The PMI manufacturing dropped to 36.9 in the preliminary report for April, while non-manufacturing activity went further down with a services PMI of 27.4. This was the lowest level on record.

US initial jobless claims, however, were in line with consensus expectations with 4.4 million Americans requesting unemployment benefits (against 5.2 million the week before). This brings total job losses over the past weeks to more than 26 million.

Our view

Our main scenario remains a global, deep, but temporary shock due to the pandemic. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery. The fact that now several European countries are discussing plans to ease lockdown measures and the EU has drafted a plan to coordinate it is hopeful.

In the meantime, weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

From a short term perspective, volatility is here to stay. We have increased our equity exposure gradually over the past weeks, but refrain from adding at current levels. Patience remains the key word, since we will not directly have a “V” shape recovery.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

23-Apr-2020

MORNING COMMENT

Global equity markets rose on Wednesday (Eurostoxx 50: +1.6%, S&P 500: +2.3%), as oil markets rebounded. The price for a barrel of Brent crude oil increased by more than 18% to almost 23 US dollar, as markets anticipate further production cuts and President Trump ordered the navy to destroy any Iranian gun boat harassing American ships at sea. 

With regards to the COVID-19, recent reports on the spread of the virus are mixed. While Germany and other countries are about to ease lockdown restrictions, Singapore reported more than 1.000 new cases for the third day in a row. In the meantime, a German biotechnology company BioNTech is about to proceed with clinical trials of a COVID-19 vaccine (in collaboration with Pfizer in the US), after receiving regulatory approval. 

All eyes on the EU

Today, markets will closely monitor the publication of US initial jobless claims, global preliminary PMI’s for April and the developments on the EU’s recovery plan. According to several declarations ahead of the EU meeting, the EU plans to integrate a 300 billion euro recovery fund into the budget from 2021-2027 and borrow 320 billion euro on the capital markets. 

The European Commission even suggested the possible mobilisation of a total of 2.000 billion euro, although it was not clear on the content and the financing. Expectations for today’s EU summit remain low, as major disagreements persist. Various countries, like France, Spain and Italy, urge the EU to introduce mutual debt issuance. However, governments, such as Germany and the Netherlands, have always been opposed to it. 

An update on earnings

In the meantime, in the on-going earnings season, around 14% of the US and European companies have released their first quarter report (as at 22/04). Earnings expectations had already been severely revised down before the start of the earnings season and the impact of the measures taken to prevent COVID-19 from further spreading are clearly visible. 

According to JP Morgan’s earnings tracker, aggregated earnings of the companies that have already published their results are down by 24% in the US. European earnings currently show a decline of 11%. While defensive sectors are coming in with better than expected earnings, delivery for cyclical sectors and financials is poor. 

It is nevertheless too early to jump to conclusions, as the coming week will be important, with 30-40% of US and European companies scheduled to report first quarter earnings. 

Our view

Our main scenario remains a global, deep, but temporary shock due to the pandemic. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery. The fact that now several European countries are discussing plans to ease lockdown measures and the EU has drafted a plan to coordinate it is hopeful. 

In the meantime, weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts. 

From a short term perspective, volatility is here to stay. We have increased our equity exposure gradually over the past weeks, but refrain from adding at current levels. Patience remains the key word, since we will not directly have a “V” shape recovery. 

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

22-Apr-2020

MORNING COMMENT

Global equity markets declined on Tuesday (Eurostoxx 50: -4.1%, S&P 500: -3.1%) as the deepening oil price crash caused a strong risk aversion increase. Both US WTI and Brent crude oil dropped to a two-decade low. The price of a barrel of Brent crude oil fell 36.5% yesterday, ending the day at 16.3 US dollar. In this context, long-term yields dropped (US 10-year at 0.57%, German 10-year at -0.49%).

COVID-19 spread

The spread of the COVID-19 virus seems to becoming more under control in Europe. Infection curves are clearly going down in Switzerland, Germany, Denmark, Austria and Norway, while stabilising in Spain and Italy. These countries are working on their exit plans and continue to announce, despite easing restrictions, the cancelling of mass events in the coming months to avoid a second wave of coronavirus infections. Munich’s Oktoberfest has been cancelled, while Spain’s Running of the Bulls in Pamplona was suspended.

However, not all countries are on the right track yet. The UK, for instance, reported a sharp rise in coronavirus deaths (more than 800 in a day). Also on the other side of the Atlantic, coronavirus deaths have jumped with more than 2.700 deaths in the past 24 hours, bringing the total death number in the US to around 45.000.

The importance of fiscal aid

Economic figures continue to show the strong negative impact of the implemented containment measures on economic activity. Germany’s ZEW Business Climate Index dropped to -91.5, below consensus expectations, while German companies seek state aid.

Reuters reported that, amongst others, Adidas, TUI, Puma and Lufthansa have taken out government-guaranteed loans as part of the federal government’s aid package to deal with the coronavirus crisis. This emphases the importance of tomorrow’s EU council that will decided upon a broad-based recovery package after corona.

In the US, the government continues to react forcefully. Yesterday, the Senate passed a 484 billion US dollar coronavirus relief package that includes measures for small businesses, financial support for hospitals and additional COVID-19 testing kits. President Trump already said he will sign the bill and urged legislators to start discussions on relief for local governments, infrastructure investments, tax incentives for business and a payroll tax cut.

Our view

Our main scenario remains a global, deep, but temporary shock due to the pandemic. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery. The fact that now several European countries are discussing plans to ease lockdown measures and the EU has drafted a plan to coordinate it is hopeful.

In the meantime, weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

From a short term perspective, volatility is here to stay. We have increased our equity exposure gradually over the past weeks, but refrain from adding at current levels. Patience remains the key word, since we will not directly have a “V” shape recovery.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

21-Apr-2020

MORNING COMMENT

Global equity markets ended with mixed performances on Monday (Eurostoxx 50: +0.7%, S&P 500: -1.8%). European equities were able to post a positive performance, while the US equity market fell through the day, following a crash in oil prices that temporarily reached -40 dollar for the WTI May contract yesterday evening, as a lack of demand and storage caused investors to flee from the May futures contract ahead of today’s expiration. The May contract is  slightly positive this morning at 0.1 dollar.

Despite OPEC+’s output cut deal of last week, the oil market remains massively oversupplied due to a drop in global crude demand. This morning, the Brent crude oil is dropping below 25 dollar (June contract).

Separately, the British pound weakened, as investors are starting to put more focus on the upcoming Brexit negotiations. As a reminder, the UK and the EU have just started the first out of three rounds of trade talks.

Focus on exit plans

With positive signs on the evolution of the COVID-19 pandemic in both Europe and the US, investors are looking forward to the government’s exit plans. Some countries, such as Austria, Germany, Denmark, Norway and others, have already gradually started to reopen part of their economy. Most of them have nevertheless emphasized the importance of maintaining social distancing until a vaccine is widely available. This confirms our expectation of a U-shaped recovery in the coming months and the importance of economic stimulus.

In the US, congress is getting closes in signing the new 500 billion dollar virus aid deal, while in Europe, investors are focusing on this Thursday’s important EU council. EU leaders will then discuss the economic recovery package for the region after corona. Italy’s Prime Minister Conte already called for a mutual debt issuance of as much as 1.500 billion euro to support the badly hit European economies. The will without a doubt end-up in an important clash between the various member states.

Our view

Our main scenario remains a global, deep, but temporary shock due to the pandemic. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery. The fact that now several European countries are discussing plans to ease lockdown measures and the EU has drafted a plan to coordinate it is hopeful.

In the meantime, weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

From a short term perspective, volatility is here to stay. We have increased our equity exposure gradually over the past weeks, but refrain from adding at current levels. Patience remains the key word, since we will not directly have a “V” shape recovery.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

20-Apr-2020

MORNING COMMENT

Global equity markets ended the week with a positive performance on Friday (Eurostoxx 50: +2.7%, S&P 500: +2.7%) in a less volatile session. Equity market volatility continued to decline with the Vix Index ending the week below 40. 

Oil remained under pressure, as the OPEC predicted demand will drop by 20% alone in April and US inventories increased by around 50 million barrels over the past three weeks. The price for a barrel of Brent crude oil declined more than 1% on Friday, ending the week at 27.4 dollar and remains under pressure this morning.

 

Focus on reopening US economy

Investors continue to focus on the schedule for a reopening of the US economy, as the pressure on State governors to ease restrictions increases. Number of US coronavirus infections topped 742.400 on Sunday with more than 40.500 dead. New York reported 507 fatalities in the past 24 hours, the lowest number since April 6.

State governors are facing public pressure to ease restrictions amid growing protests. Many States are nevertheless warning for a lack of testing capacity to safely restart their economies. Polls by the Wall Street Journal showed nearly 60% of the respondents worry that lifting stay-at-home orders will refuel the pandemic.

 

Looking ahead

This week, investors’ focus will remain on the evolution of COVID-19 numbers, the release of economic data and earnings publications. The US earnings season is ramping up this week with 145 S&P 500 companies reporting. Analysts are now forecasting the largest year-on-year earnings decline since the Great Recession (-14.5%). As at April 17, 9% of the companies in the S&P 500 have reported actual results for Q1 2020. According to Factset, 66% published earnings above estimates, which is below the five-year average, and negative earnings surprises were globally 8.3% below estimates. 

On the economic front, US and European preliminary PMI’s will come out on Thursday, followed by US durable goods on Friday. Also initial jobless claims will remain in focus after a 22 million increase over the past four weeks. The European summit on Thursday will be crucial to assess the quality of the European response to the pandemic.

 

Our view

Our main scenario remains a global, deep, but temporary shock due to the pandemic. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we believe in a U-shaped economic recovery. The fact that now several European countries are discussing plans to ease lockdown measures and the EU has drafted a plan to coordinate it is hopeful. 

In the meantime, weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts. 

From a short term perspective, volatility is here to stay. We have increased our equity exposure gradually over the past weeks, but refrain from adding at current levels. Patience remains the key word, since we will not directly have a “V” shape recovery. 

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

17-Apr-2020

MORNING COMMENT

Global equity markets fluctuated on Thursday, ending the day slightly higher (S&P 500 +0.58%, Eurostoxx 50 +0.15%). Economic data, despite slightly better than expected initial claims for unemployment benefits in the US, continued to disappoint. In this context, the US dollar extended its rally as a safe haven currency, whilst long-term bond yields continued to fall. Separately, the British pound weakened as the UK refuses to extend the Brexit transition period and the pandemic continues to expand at a rapid pace in the region.

This morning, Asian equities are rallying (Hang Seng +2.2%, Nikkei +2.5%, Shanghai Composite +0.9%), after President Trump unveiled guidelines to gradually reopen the US economy with respect to social distancing and STAT News reported Covid-19 patients getting treatment with Gilead’s experimental drug Remdesivir have been recovering quickly. Gains are nevertheless smaller in mainland China, as China’s first quarter GDP came in below consensus expectations.

Large economic impact of the pandemic

The economic impact of the lockdown measures taken to prevent COVID-19 from spreading further, is huge. China, were it all began, reported the economy contracted by 6.8% year-on-year in the first quarter of this year. This contraction was even worse than the 6.5% expected decline and follows 6% growth in the prior quarter. Industrial production was the bright spot with a decline of only 1.1% (vs. expected 7.3% drop) year-on-year in March. Retails sales dropped (-15.8% year-on-year in March) and fixed asset investments shrank.

Also in the United States, economic figures continue to feel the brunt of the lockdown measures in place. On the one hand, weekly initial jobless claims came in at 5.25 million, slightly better than expected and down from the week before (estimate 5.5 million, prior 6.6 million).

On the other hand, Philadelphia’s manufacturing index dropped to -56.6, below the through from the Great Recession, and US home building fell short of expectations with a 22.3% drop in March.

Brexit back on the table

In the meantime, the Brexit risk has come back as a market topic. While investors were counting on an extension of the transition period that ends at the end of December this year, the UK government stated it will refuse to extend it.

A spokesman said any extension would keep the UK bound by EU rules when it instead "needs flexibility" to deal with coronavirus. The UK and the EU will now hold three rounds of trade talks on 20 April, 11 May and 1 June.

Our view

Our main scenario remains a global, deep, but temporary shock due to the pandemic. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we believe in a U-shaped economic recovery. The fact that now several European countries are discussing plans to ease lockdown measures and the EU has drafted a plan to coordinate it is hopeful.

In the meantime, weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

From a short term perspective, volatility is here to stay. We have increased our equity exposure gradually over the past weeks, but refrain from adding at current levels. Patience remains the key word, since we will not directly have a “V” shape recovery.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

16-Apr-2020

MORNING COMMENT

Global equity markets declined on Wednesday (S&P 500 -2.2%, Eurostoxx 50: -3.8%), following the publication of some bad US economic figures and disappointing earnings. Italian government bond spreads continued to widen, while both the US Treasury and German Bund rallied in a risk off session. Also the US dollar gained, benefiting from its safe haven status. 

Separately, the price for a barrel of Brent crude oil dropped another 6.5% to below 28 US dollar. The International Energy Agency (IEA) expects the coronavirus to erase almost a decade of oil demand growth in 2020. Demand in April is expected to be 29 million barrels a day lower than a year ago. The IEA stated that the announced OPEC+ output cut of 9.7 million barrels a day as of next month won’t rebalance the market immediately, although it should help to absorb part of the crisis. 

Disappointing economic and earnings publications

Yesterday saw a further deterioration in economic data in the United States. Both the economic activity in the industry as services sector came out very weak and will sharply weigh on first-quarter growth.

  • US retail sales missed expectations of a 7% drop in March, declining 8.7%. Especially gasoline purchases and motor vehicle sales were weaker than expected. Excluding both autos and gasoline, retail sales only declined 3.2%, ahead of the expected 5% decline.
  • US industrial production dropped4% in March from a month earlier, below expectations of a 4% decline. That was the largest drop since 1946. Capacity utilisation dropped to 72.7%.
  • The worst (and most timely) number came from the New York Empire Manufacturing survey for April that plunged to -78.2, far below expectations (-35) and far more weaker than the decline in 2008-09 (-34).

In addition, investors were disappointed by earnings publications, as Bank of America, Goldman Sachs and Citigroup joined JP Morgan Chase and Wells Fargo in setting aside billions to cover potential loan losses tied to the coronavirus pandemic. 

Our view

Our main scenario remains a global, deep, but temporary shock due to the pandemic. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we believe in a U-shaped economic recovery. The fact that now several European countries are discussing plans to ease lockdown measures and the EU has drafted a plan to coordinate it is hopeful. 

In the meantime, weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts. 

From a short term perspective, volatility is here to stay. We have increased our equity exposure gradually over the past weeks, but refrain from adding at current levels. Patience remains the key word, since we will not directly have a “V” shape recovery. 

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

15-Apr-2020

MORNING COMMENT

Global equity markets rose on Tuesday (S&P 500 +3.1% Eurostoxx 50:+0.9%), despite a weak start of the Q1 earnings season (without surprise) and the IMF’s warning for the steepest recession in almost a century. In contrast with rising equities, long-term yields declined and safe haven assets, such as gold and the Japanese yen rose. Also, the Italian 10-year spread over German Bunds rose by 22 bps, as last Thursday’s Eurogroup meeting failed to convince investors.

 

The “Great Lockdown” recession

Yesterday, the International Monetary Fund (IMF), published an update of its World Economic Outlook. Without surprise, the institution expects a severe economic downturn due to the lockdown measures in place to prevent COVID-19 from spreading. The IMF downgraded its growth projection for the world economic in 2020 to -3%, far worse than the -0.1% contraction in 2009.

  • The IMF’s baseline scenario also assumes the pandemic will fade in the second half of the year and that containment measures will be gradually wound down.
  • Both advanced economies (-6.1%) and emerging markets and developing economies (-1.0%) should see a GDP contraction.
  • US GDP should contract by 5.9% in 2020, followed by a 4.7% rebound next year.
  • The Eurozone’s GDP is expected to shrink by 7.5% this year, followed by a 4.7% expansion in 2021.

In this context of economic pessimism and flattening corona infection curves, corona headlines are shifting towards economic reopening. Austria and Denmark are beginning to open up some schools and stores this week and French President Macron wants to ease restrictions from May 11. In Germany, Merkel starts discussing her plans with her state premiers today, while the European Commission will release a plan today to coordinate strategies in Europe. In the US, President Trump, keeps on insisting on a quick economic reopening as the growth rate of known COVID-19 infections is slowing down.

 

Investors remain pessimistic

While economic activity and earnings are caught in a downtrend, investors remain extremely pessimistic according to April’s BofA Merrill Lynch Global Fund Manager Survey. Cash levels jumped to 5.9%, the highest level since 9/11 and equity allocation is at its lowest level since March 2009. 

Respondents believe global GDP cuts are likely to be behind us, while global earnings revisions have just started. Around 52% believes the economic recovery will be U-shaped, while only 15% expects a V-shaped economic recovery.

 

Our view

Our main scenario remains a global, deep, but temporary shock due to the pandemic. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we believe in a U-shaped economic recovery. The fact that now several European countries are discussing plans to ease lockdown measures and the EU has drafted a plan to coordinate it is hopeful. 

In the meantime, weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts. 

From a short term perspective, volatility is here to stay. We have increased our equity exposure gradually over the past weeks, but refrain from adding at current levels. Patience remains the key word, since we will not directly have a “V” shape recovery. 

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

14-Apr-2020

MORNING COMMENT

Global equities markets declined on Monday (S&P 500 -1.01%, Eurostoxx 50: closed for Easter Monday, Nikkei: -2.3%). It was a quiet day with shut European markets and US investors embracing themselves for the start of the earnings season today. 

Separately, oil got investors’ attention, as OPEC+ (Organisation of Oil Exporting Companies + alliance states including Russia) pulled off a historic deal to cut oil production by almost 10 million barrels a day. The price of a barrel of Brent crude oil nevertheless rose by only 1.5% yesterday to more than 32 US dollar. The production cut reduces market imbalances, but can’t erase the strong demand drop due to worldwide containment measures to prevent COVID-19 from spreading even further.

Eurogroup comes with 500 billion package

Over the past few days, we have recognized a continuing improvement of COVID-19 numbers in Europe, and several European countries are about to restart non-essential economic activities progressively in April or May. The peak of epidemic might be in sight, but caution remains in order to avoid a second infections wave. 

The economic impact will nevertheless be huge, and thus, the Eurogroup finally agreed upon a 500 billion euro emergency rescue package in which:

  • Credit lines from the ESM (European Stability Mechanism) will be available within two weeks;
  • the lending capacity of the EIB (European Investment Bank) will be boosted by 200 billion euro;
  • a 100 billion euro new unemployment insurance scheme.

In addition, finance ministers are about to set up a temporary targeted recovery fund for a post-lockdown economic rebound, although some questions about the size and funding sources remain. 

Our economists are disappointed on the reached agreement, but an agreement is always better than no agreement. Finance ministers have agreed on a decent amount of loans, but the only somewhat collective commitment is the 200 billion euro for the EIB. It’s rather the distribution of the funds, than a lack of firepower that leads to disappointment. Mutual debt would have been a big step forward, but this will probably remain a hurdle for the region in the coming years. 

All in all, not really a surprise, we should not have expected anything else. If we want stronger decisions to be taken, this must be done at the level of heads of state not the Eurogroup.

This week’s events

In the coming days, economic figures will continue to show a deterioration of economic activity. This morning, China’s export (-6.6% year-on-year) and import (-0.9% year-on-year) figures for March came in better than expected, and both in Europe and the US we can expect a drop in industrial production (US tomorrow, Eurozone on Thursday). In addition, we will closely watch another publication of initial jobless claims in the US on Thursday. 

As of today, markets will also focus on the start of the Q1 earnings season, that will be kicked off by JP Morgan, Wells Fargo and Johnson & Johnson. For the first quarter of 2020, the estimated earnings decline for the S&P 500 is 10%. That would be the largest year-over-year decline in earnings reported by the index since Q3 2009. Investors are nevertheless already away of this downward trend due to the coronacrisis.

Our view

Our main scenario remains a global, deep, but temporary shock due to the pandemic. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery. The fact that now several European countries are discussing plans to ease lockdown measures is hopeful. 

Weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

9-Apr-2020

MORNING COMMENT

Focus on Eurogroup meeting

COVID-19 news remains an important market driver, both for US and European financial markets. Investors have thus welcomed improving numbers coming from Italy, France and Germany, and the positive sentiment around Austria, Czech Republic and Denmark, loosening restrictions on daily life in the coming weeks.

The focus now nevertheless lies on the continuation of the Eurogroup meeting, looking for a deal to support the economy in the euro area. So far, Italy and the Netherlands have clashed over the loans coming from the 500 billion euro bailout fund. Italy requested that the available credit line would come without future economic reform conditions, while the Netherlands stated they would never accept a strings-free funding.

An agreement is crucial for the region that has been severely hit by the spread of the coronavirus, witness yesterday’s spread widening of Italian bonds and decline of the euro.

Economic impact of containment measures

Economic activity has been severely hit by the measures taken to contain the spread of the virus. The German Federal Statistics Office, one of the leading economic institutes, stated that it expects the German economy to shrink almost 10% in the second quarter. That would be the biggest decline since 1970, leading to a GDP contraction of 4.2% this year. However, the institute also expects, in line with Candriam’s economists’ expectations, the economy to rebound by almost 6% in 2021 thanks to fiscal aid.

On the other side of the Atlantic, the meeting minutes of the Fed’s last Open Market Committee said the outlook for the US economy has been downgraded significantly as well, despite politician’s efforts to support growth with fiscal measures. Senate Majority Leader McConnell will possibly try to pass legislation that adds a 250-350 billion US dollar small-business loan programme.

Our view

The publication of these negative economic figures confirms our main scenario of a global, deep, but temporary shock due to the pandemic. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery. The fact that now several European countries are discussing plans to ease lockdown measures is hopeful.

Weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

From a short term perspective, volatility is here to stay. We have increased our equity exposure gradually over the past weeks, but refrain from adding at current levels. Patience remains the key word, since we will not directly have a “V” shape recovery.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

8-Apr-2020

MORNING COMMENT

Global equities markets showed mixed performances on Tuesday (Eurostoxx 50 +2.21%, S&P 500 -0.2%). European equities benefited from news on a declining rate of new infections in both France and Italy. US equities gained more than 3% on the opening, before giving back their gains. Long-term yields rose on the back of encouraging virus news, with the German 10-year yield ending the day at -0.34%.

In the meantime, the Eurogroup meeting of yesterday ended without an agreement on a rescue package that is significant enough to mitigate the economic and social impact of the spread of the coronavirus. As expected, EU finance ministers couldn’t agree on the need to issue joint debt. Moreover, there was a strong dissension between “South” and “Northern” States on the conditions attached to the use of credit lines from the Euro area’s bailout fund. Next meeting is planned on Thursday.

China ends months-long lockdown of Wuhan

Today, the lockdown of the city Wuhan, that came in force on January 23, comes to an end. Wuhan has accounted for nearly 80% of China’s death toll, while the number of symphonic patients exceeded 50.000. The city eventually reported no new COVID-19 cases for an extended number of days. Since late March, travel into the city by high-speed rail of highways is allowed and now also public transportation will be gradually restarted. Nearly all restrictions will be lifted today.

In the meantime, while the health battle in Europe is far from over, as Spain reported another increase in fatalities, some European countries are considering to plan their exit strategies. Italy and France have consistently seen drops in their daily death rates, while in Germany the number of new cases fell. The lack of coordination between European countries in their exit strategies in nevertheless an additional hurdle to a synchronized recovery from current crisis.

Focus on upcoming earnings season

With less than a week before the start of the first quarter earnings season, analysts have strongly revised down earnings expectations. Many companies have already withdrawn their forecasts for the quarter. Apple was one of the first to take that step in mid-February.

According to Factset, the estimated earnings decline for the S&P 500 is around 7.3%. This would mark the largest year-over-year decline since the third quarter of 2009. All sectors have recorded a decrease in earnings expectations since the start of the quarter, led by the energy sector, that is being penalised by the strong oil price drop.

Analysts also expect earnings to decline in the second and third quarter, and an earnings recovery starting from the fourth quarter. During the upcoming week, two S&P 500 companies (JP Morgan and Wells Fargo kick off on April 14) are scheduled to report results for the first quarter.

Our view

The publication of these negative economic figures confirms our main scenario of a global, deep, but temporary shock due to the pandemic. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery. The fact that now several European countries are discussing plans to ease lockdown measures is hopeful.

Weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

From a short term perspective, volatility is here to stay. We have increased our equity exposure gradually over the past weeks, but refrain from adding at current levels. Patience remains the key word, since we will not directly have a “V” shape recovery.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

7-Apr-2020

MORNING COMMENT

Global equities markets jumped on Monday (Eurostoxx 50 +5%, S&P 500 +7%) on the back of improving COVID-19 virus numbers. New infections and fatalities numbers decreased across both European and US hotspots. Separately, the price of a Brent crude oil slightly declined to 34 US dollar, as the planned emergency OPEC+ meeting was postponed to later this week (Thursday).

Hopeful signs for a COVID-19 plateau

Investors are welcoming an encouraging evolution in the latest COVID-19 numbers, both in Europe and the United States.

  • In the United States, the daily death toll has decreased in New York according to Governor Cuomo. He also noted that hospitalisations and intensive care admissions are down. These trends raise hopes on a possible flattening of the curve. In addition, dr. Fauci reported that the amount of deaths might come well below 100.000 and also President Trump said there’ light at the end of the tunnel.
  • In Europe, Spain, France, Italy and the UK have reported declines in new coronavirus deaths in recent days. Some European governments have now begun preparations to ease lockdowns when infection curves get under control. “Exit” strategies will be very gradual and could start at the end of April/at the beginning of May in the countries where the spread of the virus seems to be contained. Avoiding a second epidemic wave will be a focus for governments.

On the more negative side, Japan declared a state of emergency, as the country struggles to rein in the coronavirus pandemic. The state of emergency, which is expected to be formally announced today, will last for approximately one month.

The declaration comes after Japan reported a high number of new COVID-19 cases and an increasing number of deaths.

Focus on Eurogroup meeting and oil

While we should not see issuance of “coronabonds” in the short term in Europe, there is hope today for an agreement on a large-scale ‘solidarity fund’.  Mutualisation of debt should continue to meet a strong opposition (in Netherlands and Austria for instance). The conditions attached to any assistance program will be subject of intense debates, but should not constitute a too heavy burden for some European countries, triggering a fear of a new sovereign debt crisis in the coming years.

This week is pretty quiet on the macroeconomic front. German factory orders for February came in better than anticipated yesterday, showing that German economy was recovering before the crisis. Of course, the COVID-19 crisis has especially hit Europe at the beginning of March, and factory order for last month might be worse.

In the coming days, the focus will continue to be on unemployment data , with initial claims for unemployment benefits being particularly important after rising 10 million in two weeks. Initial claims are reported on Thursday, the same day on which we will closely monitor news flow coming from the OPEC meeting.

Our view

The publication of these negative economic figures confirms our main scenario of a global, deep, but temporary shock due to the pandemic. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery. The fact that now several European countries are discussing plans to ease lockdown measures is hopeful.

Weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

From a short term perspective, volatility is here to stay. We have increased our equity exposure gradually over the past weeks, but refrain from adding at current levels. Patience remains the key word, since we will not directly have a “V” shape recovery.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

6-Apr-2020

MORNING COMMENT

Global equities markets declined on Friday (Eurostoxx 50 -0.9%, S&P 500 -1.5%), as global COVID-19 infections continued to increase and published economic data came out extremely weak. In this context, the price of gold further increased, while the US dollar benefited once again from it’s safe haven status.

Separately, the price for a barrel of Brent crude oil jumped by almost 14% on Friday, on the back of hopes for a global deal to cut worldwide crude supply this week. OPEC has scheduled a Monday emergency meeting, led by Saudi Arabia, where cuts up to 15 million barrels per day (15% world supply) could be agreed-upon.

Further deterioration of economic data

On Monday morning, markets are focusing on more positive news related to the COVID-19 outbreak. The global number of fatalities has declined yesterday, witness the drop in Italy, Spain, France, New York and New Jersey. Although the war hasn’t been won yet, this is a first battle won by confinement.

Italy has now started to communicate on the next phase, the so-called “exit” phase. During this phase, we will have to live with the continuing threat of the virus. It will take time before we can come back to a “normal” life with heavy consequences for our economies, witness the further deterioration of a large set of published economic data last Friday.

  • In the US, the impressive jump of initial jobless claims on Thursday was confirmed by the released job market report on Friday. Nonfarm payrolls dropped by a staggering 701.000 jobs in March, while the unemployment rate has increased to 4.4%, from 3.5% the month before. Both figures came in worse than expected and should continue to deteriorate in the coming months.
  • In the Eurozone, economic activity also continued to deteriorate. The final PMI Composite for posted a record fall in March dropping to 29.7. Both the headline as details (business expectations, new orders,…) came in worse than expected.
  • The deterioration of US economic activity was also visible in the final PMI Composite that came in at 40.9. It was the lowest reading since the start of the series.

This week, we will be closely monitoring the publication of the German factory orders (today), the Federal Reserve’s meeting minutes (Wednesday), US initial jobless claims and the Michigan’s consumer sentiment (Thursday).

Our view

The publication of these negative economic figures confirms our main scenario of a global, deep, but temporary shock due to the pandemic. Although it will probably take more time than initially thought to come back to “normal” levels of activity, we still believe in a U-shaped economic recovery.

Further, we do not see an exit strategy in Europe yet and there is a lack of visibility on the epidemic outbreak in the US and the economic impact of containment measures. Weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

From a short term perspective, volatility is here to stay. We have increased our equity exposure gradually over the past weeks, but refrain from adding at current levels. Patience remains the key word, since we will not directly have a “V” shape recovery.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

3-Apr-2020

MORNING COMMENT

Global equities markets fluctuated throughout the day, ending it slightly higher (Eurostoxx 50 +0.31%, S&P 500 +2.28%), despite an historic increase in initial demands for unemployment benefits in the United States. Instead, investors welcomed the impressive rebound of oil prices (Brent +15.6%), as China said it would buy oil to increase its strategic reserves and hopes of a price war truce increased.

Demand for safe haven assets remained nevertheless important, with rising initial jobless claims in the US and persisting uncertainty around the spread of the virus. The US dollar rose against the euro, while gold jumped.

Coronavirus infections now exceed 1 million

The coronavirus continues to spread and has now infected more than 1 million people across the world just four months after it first surfaced in the Chinese city of Wuhan.

  • The US now has the most officially recorded cases globally with more than 245.000, according to Johns Hopkins University.
  • Italy is next with just over 115.000 and has the highest death toll with almost 14.000 virus fatalities, followed by Spain.
  • Spain reported more than 950 deaths yesterday the most in a single day, bringing total fatalities in the country to more than 10.000.
  • China, that has been gradually easing lockdown measures over the past days, put the county of Jia in central China, back under lockdown. Three doctors that treat Covid-19 patients are affected by the virus without showing symptoms and might have infected visiting patients. This points out the difficulty of sustaining outbreak containment in the face of carriers who show no signs of sickness.

Big economic impact

Over the past days, economic data have clearly shown the huge economic impact of the spread of the coronavirus and the lockdown measures in place.

  • In the US, initial jobless claims jumped another 6.6 million, double of last week’s 3.3 million. This marks a drastic downturn in the US labor market as 6.5% of the workforce filed claims in the past 2 weeks, implying that the unemployment rate could quickly rise to 10%.
  • In Britain, almost 1 million people have claimed welfare payments in the past two weeks.
  • In Germany, the government states it expects the economy to shrink by more than 5% in 2020.

Our view

In our main scenario, we maintain the idea the pandemic will result in a global, deep, but temporary shock. However, it will probably take more time than initially thought to come back to “normal” levels of activity. Weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

Further, we do not see an exit strategy in Europe yet and there is a lack of visibility on the epidemic outbreak in the US and the economic impact of containment measures

From a short term perspective, volatility is here to stay and equity markets might go lower. Due to this lack of visibility, we will keep a slightly underweight position from current market levels.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

2-Apr-2020

MORNING COMMENT

Global equities markets declined on Wednesday ...

Global equities markets declined on Wednesday (S&P 500 -4.41%, Eurostoxx 50 -3.83%). The rapidly spreading coronavirus is spurring recession fears, following the publication of a set of disappointing economic data and President Trump’s warning for a “painful” two weeks ahead. Investor sentiment dampened and pushed Treasury yields further down.

Safe haven currencies performed well yesterday. The US dollar (+0.44%) and Japanese yen (+1.22%) both appreciated against the euro, that extended its drop as manufacturing activity showed the economic impact of the containment measures put in place to combat the spread of the virus.

Coronavirus spreads rapidly, especially in the US

The coronavirus continues to spread. Director-General Tedros from the World Health Organisation noted a near-exponential growth in the number of corona cases globally and said deaths have more than doubled in the past week.

Especially the US is struggling to get the spread of the virus under control, where the confirmed COVID-19 cases doubled since Friday, as the country rolls out broader testing. White House officials are now projecting deaths to total 100.000 to 240.000, with coronavirus fatalities peaking in April.

In Europe, especially Spain saw another significant increase in fatalities, while Italy and Germany (nationwide lockdown until April 19) moved to an extension of lockdown measures.

COVID-19 spurs fears of a non-V-shaped recovery

Yesterday’s published economic data confirmed the weakening economic activity, especially in Europe, where final manufacturing activity data for March was released.

  • The Eurozone’s manufacturing PMI came out slightly below the already very weak preliminary number at 44.5.
  • Also Germany’s final manufacturing PMI was slightly revised down to 45.4 with new orders dropping to 33.4.
  • Spain’s and France’s manufacturing PMI was slightly better than expected, but new orders and future output were particularly disappointing.
  • Italy’s PMI manufacturing came out slightly below expectations at 40.3, the lowest level since 2009.

In the US, Markit’s manufacturing PMI slipped to 48.5, the lowest reading since August 2009. The ISM manufacturing also declined (to 49.1), but came in better than expected, although the underlying components were as weak as in the Markit survey. The non-manufacturing ISM, due this Friday, is expected to exhibit a far steeper decline.

Our view

In our main scenario, we maintain the idea the pandemic will result in a global, deep, but temporary shock. However, it will probably take more time than initially thought to come back to “normal” levels of activity. Weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

Further, we do not see an exit strategy in Europe yet and there is a lack of visibility on the epidemic outbreak in the US and the economic impact of containment measures

From a short term perspective, volatility is here to stay and equity markets might go lower. After having increased our equity exposure gradually over the past two weeks, we will keep a slightly underweight position from current market levels.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

1-Apr-2020

MORNING COMMENT

Global equity markets showed mixed performances on Monday. European equities (Eurostoxx 50 +0.77%) gained throughout the day on the back of an encouraging message from the World Health Organisation, saying that there are signs of some stabilisation in Europe’s coronavirus outbreak, as Italy reported the smallest number of new cases in almost two weeks. US equities (S&P 500 -1.6%) were unable to close the day with a gain, as they swung between a drop in consumer confidence measure and Trump’s call for a fourth stimulus package.

In the meantime, the price for a barrel of Brent crude oil stabilised above the critical technical support of 24 US dollar, as President Trump and Putin seemed to agree that “current oil prices aren’t suitable for either nation”, Kremlin spokesman Dmitry Peskov said.

Mixed economic figures

Yesterday, we wrote on the impressive rebound of the official Chinese manufacturing PMI. This was confirmed by the manufacturing PMI from Caixin that came in at 50.1 in March, following the record-low of 40.3 in the prior month. As with the official PMI, commentary was cautious, stating that the increase in output only reflects manufacturers getting gradually back to work.

In the meantime, we also recognized the publication of several economic indicators in the developed world:

  • In Japan, the Bank of Japan’s Tankan business sentiment index dropped sharply to -8 in March. Large manufacturers state that business conditions have deteriorated and expect them to worsen further in the coming months.
  • In the US, March consumer confidence dropped to 120, according to the Conference Board. The figure was nevertheless slightly better than anticipated and well above cyclical lows. The US consumer might thus prove to be resilient or responds slow to fast-changing conditions.
  • in the Euro-area, consumer price inflation slowed to 0.7% year-on-year, the weakest pace in five months, driven by the collapse in oil prices and the impact of COVID-19.
  • In addition, China’s official PMI manufacturing jumped back into expansion territory to 52 in March, recouping all of February’s declines. Both production and new orders surged back to expansion levels. Although the rebound seems overdone, it confirms that the Chinese situation seems to be under control and activity is gradually returning to normal levels. In an accompanying statement, the NBS noted that “while manufacturing PMI rebounded rapidly in March, the survey showed companies still face relatively big operational pressures” and that “the global virus spread will hit the world economy and trade seriously”.

Today, we’ll be monitoring the publication of the ISM manufacturing, US vehicle sales, which are expected to plunge and the ADP employment report.

Our view

In our main scenario, we maintain the idea the pandemic will result in a global, deep, but temporary shock. However, it will probably take more time than initially thought to come back to “normal” levels of activity. Weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

Further, we do not see an exit strategy in Europe yet and there is a lack of visibility on the epidemic outbreak in the US and the economic impact of containment measures.

From a short term perspective, volatility is here to stay and visibility remains low. After having increased our equity exposure gradually over the past two weeks, we will keep a slightly underweight position from the current market levels.

From a long term perspective, equity markets are still offering value and represent upside potential. Ultimately, central banks’ and government’s strong policy responses will stay longer than the virus.

31-Mar-2020

MORNING COMMENT

Global equity markets rose on Monday (S&P 500 +3.35%, Eurostoxx 50 +1.35%), while long-term bond yields declined in a less volatile market with US equity market volatility falling towards 57 (Vix index). In the meantime, the price of a barrel of Brent crude oil declined, on the back of weak demand and rising excess supply, before paring some of the losses after President Trump said to call Putin to discuss plunging oil prices.

This morning, Asian equities are trading mixed (Nikkei +0.3%, Hang Seng +1.1%). The positive start to the session was generally attributed to the overnight US rally and better than expected activity data in China. Despite mounting new coronavirus cases, investors are optimistic on the efforts made by the US government to rapidly increase corona tests and possible additional fiscal support measures.

China returns to work

While confirmed COVID-19 cases rose to more than 785.000 across 177 countries and regions, and deaths increased to 38.000 worldwide, China’s major industrial provinces are resuming production. China’s vice-minister of industry and technology said nearly all of its major industrial companies have resumed production, together with more than three-quarter of small- and medium sized companies.

The revival of economic activity can also be seen in the Chinese activity resumption indicators we are tracking on a daily basis. Daily coal consumption (based on six power plants), is close to normal levels, while also transport and property sales are gradually normalising.

In addition, China’s official PMI manufacturing jumped back into expansion territory to 52 in March, recouping all of February’s declines. Both production and new orders surged back to expansion levels. Although the rebound seems overdone, it confirms that the Chinese situation seems to be under control and activity is gradually returning to normal levels. In an accompanying statement, the NBS noted that “while manufacturing PMI rebounded rapidly in March, the survey showed companies still face relatively big operational pressures” and that “the global virus spread will hit the world economy and trade seriously”.

Stronger virus containment measures in the West

While China’s economic activity appears to be gradually returning to normal levels, containment measures are becoming stronger in the West. In the US, containment measures have been extended to the end of April, while the UK mentioned stricter measures for up to six month.

In the meantime, Italy sets to extend containment measures until Easter at least, while Spain extended its measures on Monday, forcing all workers in nonessential sectors to stay at home for two weeks.

We already know that the economic downturn will be deep, and a report by the German Council of Economic Experts yesterday warned for the worst recession in Germany since 2009 if restrictions last longer than mid-May of production is further halted.

Our view

In our main scenario, we maintain the idea the pandemic will result in a deep, but temporary shock. Weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts. Central banks’ and government’s policy responses, that are strong, will stay longer than the virus.

Equity markets are attractively valued compared to their historical average and the negative economic news flow is integrated to a great extent in todays’ market prices.

Volatility is nevertheless here to stay. Therefore, we will continue to further increase our equity exposure gradually with the objective to become neutral in the coming weeks.

30-Mar-2020

MORNING COMMENT

Equity markets had another though day on Friday (S&P 500 -3.37%, Eurostoxx 50 -4.18%), paring some of this week’s strong gains. The S&P 500 had nevertheless one of its best weeks in more than 10 years, remaining 25% of its February high though. Separately, commodity prices dropped, with the price of a barrel of Brent oil declining further on Monday to the lowest level since November 2002, leaving the market between rapidly falling demand and a rising surplus of crude.

This morning, Asian equities mostly headed lower (Nikkei -3%, Hang Seng -1.5%). Australian equities nevertheless gained on the back of the government’s additional stimulus plans that should be revealed in the coming days.

The COVID-19 epidemic

With the exception of China in particular, COVID-19 reports remained broadly negative over the past days, especially in the United States, where new cases have increased to more than 140.000. The US has now clearly overtaken China to become the country with the largest number of confirmed coronavirus cases in the world. US president Trump extended the guidelines for social distancing to 30 April.

New York remains the epicenter with 60.000 confirmed cases and around 1.000 deaths (figures of last Sunday). Despite that, President Trump decided against a quarantine on New York, New Jersey and parts of Connecticut after raising the idea earlier during the weekend.

In Europe, the pace of new inflections seems to slow in both Italy and Spain. Italy recorded another 756 deaths on Sunday while 838 more perished in Spain. The rate of new fatalities and the pace of new infections has nevertheless slowed in both countries in recent days, indicating that containment measures may be working in flattening the curve.

Lockdown taking a toll on the economy and companies’ earnings

Over the past week, we have witnessed the strong negative economic impact of the measures taken to contain the spread of the virus. The impact on companies’ earnings is also starting the become visible ahead of the upcoming Q1 earnings season. Analysts have sharply reduced earnings estimated for Q1 and Q2 2020 over the past weeks. .

  • According to Factset, the estimated earnings decline for the S&P 500 for Q1 2020 is -5.2%. It would mark the largest year-on-year decline reported since Q1 2016.
  • Estimations for Q2 2020 are even more negative, as the S&P 500 would report the first double-digit decline in earnings in ten years.

We will closely watch the upcoming developments on companies’ earnings and the publication of economic figures with this week:

  • The publication of the global services and composite PMI’s that should confirm the sharp deterioration in soft data, shown by the preliminary PMI’s.
  • The US will publish its job report for March, a week after initial jobless claims skyrocketed close to 3.3 million.
  • The Eurozone will publish final consumer and business confidence indices.
  • Japan will publish its Q1 Tankan survey.

Our view

In our main scenario, we maintain the idea the pandemic will result in a deep, but temporary shock. Weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts. Central banks’ and government’s policy responses, that are strong, will stay longer than the virus.

Equity markets are attractively valued compared to their historical average and the negative economic news flow is integrated to a great extent in todays’ market prices.

Volatility is nevertheless here to stay. Therefore, we will continue to gradually increase our equity exposure with the objective to become neutral in the coming weeks.

27-Mar-2020

MORNING COMMENT

Despite an extremely weak jobless claims report in the afternoon, global equity markets rose further in another volatile session (S&P 500 +6.24%, Eurostoxx 50 +1.7%). US equities realised the best performance on the back of the government’s decision to expand unemployment benefits for a share of workers to nearly 100% of their salary.

Separately, the US dollar dropped for a third consecutive day after the publication of the initial jobless claims reports, supporting the price of gold that ended the day at 1650 USD/troy ounce. Oil, in the meantime, deepened losses, as a US government plan to buy oil for its emergency reserves fell through.

The COVID-19 epidemic

News regarding the spread of the COVID-19 virus was mixed throughout the day.

  • The US now leads the world in confirmed coronavirus cases (85,991). New York reported an alarming number with a rise in the daily death toll of 35%.
  • In Europe, Italy reported its biggest increase in new cases in the past five days with most infections in the northern regions near Milan. Confirmed cases in Italy should also pass China today.
  • From China we are receiving mixed signals. Economic activity has clearly picked up this week. China remains nevertheless cautious, closing the border to foreigners as of March 28 and restricting the arrival of Chinese citizens from overseas as of March 29, to prevent another outbreak.

Macro continues to deteriorate

Macroeconomic data continues to feel the brunt of the strict containment measures all over the world, as French business confidence and German consumer confidence plunged

The biggest news nevertheless came from the number of initial claims for unemployment benefits in the US. Claims surged to more than 3 million or around 2% of the US labor force in the week ending March 21. The level surpassed the peak reached during the Great Recession significantly, when claims increased to 665.000 in March 2009. With weekly data going back to 1967, the historical peak was hit in October 1982 (695.000).

We note that Pennsylvania and Ohio saw the biggest increase in claims, with a rise of 363k and 181k respectively vs. the prior week. Both are states in the US “rust belt” and are traditionally swing states in presidential campaigns. Looking forward, this is certainly a development to watch over the coming weeks, as claims should continue to rise significantly.

We nevertheless also recognised a positive point. The US government has decided to expand unemployment benefits for a large share of unemployed workers, assuring the payment of nearly 100% of their prior salary. As a result, unemployment will be less of a financial shock in the near-term for households compared to typical economic downturns.

Our view

In our main scenario, we maintain the idea the pandemic will result in a deep, but temporary shock.  Weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts. Central banks’ and government’s policy responses, that are strong, will stay longer than the virus.

Equity markets are attractively valued compared to their historical average and the negative economic news flow is integrated to a great extent in todays’ market prices.

Volatility is nevertheless here to stay. Therefore, we will continue to gradually increase our equity exposure with the objective to become neutral in the coming weeks.

26-Mar-2020

MORNING COMMENT

Global equity markets fluctuated in a volatile session. Both the European and US equity market opened significantly higher, gave away part of their gains throughout the day, but finished on a positive note (S&P 500 +1.15%, Eurostoxx 50 +3.48%).

US stimulus package, that has been approved by the Senate by now, and weighed the approval of the very large stimulus programme of EUR 750 billion by German parliament that sent the euro higher.

The epidemic is unfolding forcefully in the US

In the meantime, the epidemic is still with us in Europe, where official numbers on Wednesday showed that, although Italy’s growth rate of new infections continues to slow, the total number of diagnosed cases rose further to above 74.000. In Spain the situation continues to deteriorate. New cases jumped in the last 24 hours with already a higher death toll than in China.

On the other side of the Atlantic, the epidemic is unfolding rapidly. The total number of diagnosed cases in the US has increased to just below 70.000 and more than 1000 people have already deceased from COVID-19.

Economic impact

In terms of economic data, yesterday was a light day. The final wbWGerman Ifo Business Climatew/bW index was revised down significantly. The index dropped towards 86.1 in March from 96 in February. Business confidence also dropped in Belgium. Yesterday’s BNB Business Confidence index fell the most on record in Mach to -10.9, the lowest reading in more than 6 years.

Today we will closely watch the publication of the initial jobless claims in the US (at 1:30 PM CET). Consensus expectations point to an increase of claims for unemployment benefits of 1.5 million, although there is a huge dispersion in economists’ estimates. In Europe, the EU council holds a video conference. Among others, heads of state or government will focus on promoting research, including research into a vaccine, and tackling socio-economic consequences.

Our view

In our main scenario, we maintain the idea the pandemic will result in a deep, but temporary shock. Weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.

Central banks’ and government’s policy responses, that are strong, will stay longer than the virus. In a legal document released late on Wednesday, the ECB said the self-imposed issue-limits “should not apply” to its new Pandemic Emergency Purchase Program. This decision is a significant boost to the credibility of the ECB’s commitment, including after 2020.

Equity markets are attractively valued compared to their historical average and the negative economic news flow is integrated to a great extent in todays’ market prices.

Volatility is nevertheless here to stay. Therefore, we will continue to gradually increase our equity exposure with the objective to become neutral in the coming weeks.

25-Mar-2020

MORNING COMMENT

Global equity markets rallied on Tuesday, ending the day more than 9% higher (S&P 500 +9.30%, Eurostoxx 50 +9.24%). This morning, American and European stock futures climbed, while Asian equities saw their best day since 2008. Markets were weighing the progress over the US stimulus bill against the significant rise in new coronavirus infections. It was the best day for the S&P 500 since 2008. The Dow Jones Industrials did even better with an 11% gain, the best day since 1933.

Also other asset classes realised an impressive rebound. The price for a barrel of Brent crude oil jumped by almost 13% to 30.6 dollar, while gold rallied almost 6% to 1660 USD/troy ounce.

Bad coronanews remained in the background

Equity markets ignored high infection and death numbers in Italy and Spain, and even the warning from the World Health Organisation that the US might become the new epicenter of COVID-19. Instead, markets focused on the progress made over the US stimulus bill, on which Senate leaders and the Trump Administration finally reached an agreement on Wednesday.

The stimulus package should reach USD 2 trillion to limit the economic fallout of the measures taken to contain the spread of COVID-19. It contains, amongst others, sending a check of USD 1200 to many Americans, a USD 367 billion loan programme for small businesses and a USD 500 billion fund for industries, cities and states.

Markets digest weak economic figures

In the meantime, economic figures look extremely weak, although equity markets already seemed prepared for it and barely moved after their release. The Eurozone flash Composite PMI fell to 31.4 in March from 51.6 in January, the weakest figure since records began in July 1998. Markit highlighted the strong deterioration in services activity and said readings imply a GDP contraction of 2% in the first quarter.

Also the US’ Flash Composite PMI came in below consensus expectations. It hit a new low of 40.5 from 49.6 in February, the steepest reported decline since at least October 2009.

Today, we will closely monitor the publication of Germany’s final Ifo Business Climate and preliminary durable goods orders in the US. We will watch whether US and global equity indexes can post their first back-to-back daily gains since mid-February on Wednesday.

Our view

In our main scenario, we maintain the idea the pandemic will result in a deep, but temporary shock. Central banks’ and government’s policy responses, that are strong, will stay longer than the virus.

Equity markets have now reached more attractive valuations compared to their historical average and the negative economic news flow is integrated to a great extent in todays’ market prices, witness the limited market reaction after the release of yesterday’s disappointing PMI’s.

Therefore, we will continue to gradually increase our equity exposure with the objective to become neutral in the coming weeks.

24-Mar-2020

MORNING COMMENT

Global equity markets ended lower on Monday (S&P 500 -2.93%, Eurostoxx 50 -2.47%) in another volatile trading session. After a negative opening, US equities jumped on the back of a new wave of important monetary support initiatives, but paired gains later on as investors remain cautious around the impasse on stimulus negotiations in the US.

This morning, equity market futures point to a positive market opening in Europe and the US, after strong gains in Asia (Nikkei +7.5%).

Strong policy reactions continue

While the US Senate continued to fail to advance the coronavirus stimulus bill, the Federal Reserve has announced additional monetary support measures, including the unlimited buying of Treasury bonds and mortgage-back securities, to keep borrowing costs at rock-bottom levels. It also announced that it would buy corporate bonds, including the riskiest investment grade debt, for the first time in its history.

In Germany then, the government stepped up its fiscal efforts, approving a very large EUR 750 billion package through an economic stabilisation fund of EUR 600 billion (or 17.5% of GDP) and a supplementary budget of EUR 156 billion (4.5% of GDP).

In addition, Germany followed-up on last week’s discussions, announcing that is ready to help Italy get through the pandemic by preparing to support an emergency loan from the Eurozone’s bailout fund. However, Germany doesn’t appear ready to issue joint coronavirus bonds.

Updating possible economic scenarios: “U-shaped recovery” possible

It comes as no surprise that economic figures are weak, as various countries all over the world are in a sort of lockdown to contain the spread of the virus. The Eurozone’s consumer confidence, that was published yesterday, deteriorated and Markit’s Flash PMI’s, that are due for today, are bound to show a sharp drop in economic activity.

In this context, our economists have already adjusted their economic growth scenarios for the coming two years. These scenarios are based on the time confinement measures are in place.

  • One full month of containment that is progressively lifted implies a fall in the GDP of the Eurozone of 4% for 2020, followed by a strong rebound of 6.5% in 2021. This would result in a cumulated GDP loss of 2.5% for 2020/2021.
  • In the US, where only few states are confined for the time being, one month containment would lead to a fall of 2% of GDP in 2020, followed by a strong rebound of 5.4%. This would result in a cumulated GDP loss of 1.3% for 2020/2021.

Given the expected economic rebound and stimulus measures in place, a “U-shaped” recovery is nevertheless not excluded. Read all about it on https://www.candriam.com/en/professional/market-insights/topics/macro/an-update-on-our-macro-scenarios/.

Our view

In our main scenario, we maintain the idea the pandemic will result in a deep, but temporary shock. Central banks’ and government’s policy responses, that are strong, will stay longer than the virus.

As equity markets have now reached more attractive valuations again compared to their historical average and the negative economic news flow is integrated to a great extent in todays’ market prices, we have already started to increase our equity exposure.

We will continue to gradually increase it with the objective to become neutral in the coming weeks.

23-Mar-2020

MORNING COMMENT

Equity markets showed mixed performances last Friday. European equities gained almost 4% (Eurostoxx 50), as ECB President Lagarde said to do all it takes to combat the economic downturn related to the coronavirus. US equities pared gains through the day, ending the last day of the week with a loss of more than 4% (S&P 500).

We are likely entering another volatile week with extremely high fluctuations. Futures for the S&P 500 fell 5% at the opening in Asia, while Eurostoxx 50 futures are also down.

Fiscal response stepped up

In addition to the central banks’ monetary stimulus measures, governments have continued to step up efforts to limit the short-term economic damage as a result of the drastic measures taken to contain the global spread of the coronavirus.

  • In the US, the Trump Administration is ready to inject USD 1.200 billion in the economy. Various politicians want the bill to be passed today (Monday 23rd).
  • The UK pledged to do all it takes with GBP 330 billion of government backed loans (15% of GDP).
  • The French government intends to support companies by providing loan guarantees worth of EUR 300 billion (12% of GDP). Additional measures are expected.
  • Italy and Spain have announced fiscal support packaged of similar size (1,4% of GDP).
  • Germany is setting up a rescue package worth of around EUR 600 billion and is adding 156 billion euros (4.5% of GDP) in supplemental spending financed with debt.

The upcoming week

This week, markets will not only focus on the progression of the coronavirus all over the world, but also on the publication of various economic figures, like

  • Global PMIs on Tuesday;
  • Business (German Ifo) and consumer sentiment (Eurozone Consumer Confidence Index, GfK German Confidence Index, US Michigan Sentiment);
  • US initial jobless claims.

Although a serious deterioration is expected, financial markets might already have integrated parts of it.

Our view

In our main scenario, in which we maintain the idea the pandemic will result in a deep, but temporary shock, this negative economic news flow is already integrated to a great extent in todays’ market prices, but with a fat tail risk.

We have already started to increase our equity exposure, and we will continue to gradually increase it with the objective to become neutral in the coming weeks.

20-Mar-2020

MORNING COMMENT

Equity markets globally stabilised on Thursday (Eurostoxx 50 +2.86%, S&P 500 +0.47%) and bond markets recovered after the European Central Bank announced its Pandemic Emergency Purchase Programme on Wednesday evening.

Also oil prices registered their biggest-ever one-day rebound (+24% on WTI) after a three-day sell-off, as investors assessed the impact of massive central bank stimulus measures, and China’s and the US’ decision to increase strategic oil reserves. In addition, President Trump said to intervene in the oil price war between Saudi Arabia and Russia when needed.

Western economic data impacted by coronavirus

Central banks have continued to announce additional stimulus measures around the globe.

  • China is set to unleash trillions of yuan to revive an economy that is expected to shrink for the first time in four decades through infrastructure investments of almost USD 400 billion. .
  • Central banks in Great-Britain, Australia, Brazil, Peru, South Africa, Taiwan, Indonesia and the Philippines all cut rates and the Reserve Bank of Australia launched its first QE ever.

The economic impact of the spread of the corona pandemic cannot be underestimated. The first activity indicators now show the advent of it in the developed world too.

  • The US Philadelphia Fed index, that measures overall business activity in the region, dropped strongly towards -12.7 in March from 36 in February.
  • US initial claims for unemployment benefits surged last week by 70K to 281.000, the highest level since September 2017, as companies in the services sector laid off workers because of the coronavirus pandemic that has fractured economic activity.
  • The preliminary German Ifo business climate index fell to 87.7 in March, from 96 in February, the biggest decline since 1991. The index is now at its lowest level since August 2009.

Our view

Yesterday’s economic data comes as no surprise. Economic activity has been severely impacted around the globe in order to contain the spread of the coronavirus. Growth expectations will be well below our initial estimations. In the corporate sector, this will be followed by downward revisions in earnings and cuts in dividends.

In our main scenario, in which we maintain the idea the pandemic will result in a deep, but temporary shock, this negative economic news flow is already integrated to a great extent in todays’ market prices, but with a fat tail risk. We have gradually started to increase our equity exposure with the objective to become neutral in the coming weeks.

19-Mar-2020

MORNING COMMENT

After Tuesday’s rebound, equity markets tumbled again on Wednesday (Eurostoxx 50 -5.7%, S&P 500 -5.2%) near their worst levels. The relentless worldwide spread of the coronavirus and a series of profit warnings related to activity disruptions overshadowed the additional announced economic support measures, that resulted in a bond market sell-off

Fiscal stimulus plans pressure bond markets?

Governments continued to work on additional measures to support businesses and contain the economy from the pandemic.

  • In the Eurozone, leaders are discussing the activation of the European Stability Mechanism(ESM) to deal with the impact of the coronavirus. However, not all member states are convinced of this measure, as they fear it would negatively impact confidence. Instead, Chancellor Merkel suggested that European finance ministers are considering joint debt issuance. This would be a turning point as Germany has been perennially resistant to it and represents genuinely good news for the European periphery.
  • In addition, the ECB announced a EUR 750 billion Pandemic Emergency Purchase Programme (PEPP) that runs until end of 2020 at the earliest. PEPP will involve purchases of private and public securities and include all assets eligible under current asset purchase program. A waiver of the eligibility requirements for securities issued by the Greek government will be granted for purchases under PEPP. While announcing a ceiling, there is effectively no limit to the ECB’s actions as the ECB will terminate net asset purchases under PEPP once it judges that the coronavirus Covid-19 crisis phase is over.
  • In the UK, the Bank of England is creating a Covid-19 Corporate Financing Facility to provide funding to businesses, and an additional programme to help preserve the banking system capacity to lend to smaller and medium-sized companies.
  • In the US, economic relief is gaining traction and could reach levels worth of USD 1000 billion. Upcoming measures might include helicopter money. As discussed in the yesterday’s morning note sending a check of USD 1000 directly to US families is part of the proposition.

Concerns about the magnitude of these fiscal stimulus plans pushed global interest rates higher and resulted in a global bond market sell-off. Long-term bonds underwent a strong decline since the beginning of March. For the 30-year US Treasury Bond for instance, the price decline already exceeds 10%. Also corporate bond spreads increased as markets fear rising defaults. Overall, the rise in volatility is now widespread among all asset classes.

Especially Italian government bonds had an extremely volatile day. The closely watched gap between Italian and German 10 year government yields widened to more than 320 basis points before ending the day at 266 basis points i.e. 12 basis points tighter than the day before!

Oil price war sends Brent to lowest since 2003

In the meantime, oil remained strongly under pressure. Brent crude oil dropped another 10% to below 26 USD/barrel, the lowest level since September 2003. Oil continued to be hit by both global demand worries due to the coronacrisis and supply concerns related to the price war that followed the failed cooperation between the OPEC and Russia.

Our view

In our central scenario, the expected upcoming negative news flow linked to the pandemic is already to a great extent integrated in todays’ prices, but with a fat tail risk. We are gradually looking to further increase our equity exposure with the objective to become neutral, in combination with a limited protective derivative strategy, where possible.

Equity markets now have a better risk-reward but we know that any positive news flow around the epidemic and confidence in the authorities’ actions will be key for a more durable market rebound.