Last week showed just how sentiment-driven markets can be when the outlook is this murky. In a week when almost half of the S&P 500 reported earnings, the index strikingly saw its smallest weekly change since the first week of the year (SPX -0.2%). Foreign equities put in a better performance, led by a rebound in emerging markets equities (MXEF +4.3%). International developed markets closed up 3.1% (MXEA). It’s worth noting, however, that many major foreign markets were closed on Friday for May Day, so these numbers don’t reflect the souring of sentiment we saw heading into the weekend. As markets opened Monday, we’re seeing some correction.
Short-lived rally driven by short covering
Under the hood, it was actually a fairly volatile week in the U.S., with shares rallying early on but fading as the week progressed. Based on the internals, it looks like the rally was driven by short covering (value over growth, small over large) that couldn’t hold in the end. By the end of the week we were back to the old trends.
Bond markets healthier
The yield curve steepened last week, somewhat ignoring the weak sentiment in equity markets. The 2-year yield fell 3 basis points (bps) while the 10-year and 30-year rose 1 and 8 bps, respectively. The Fed lowered its rate of U.S. Treasury (UST) purchases again this coming week. It’s been extraordinarily successful at restoring order to the UST market, so much so that the MOVE Index (VIX for bonds) is at year-to-date lows, down approximately 70% from the highs in early March [Figure 1].
Another positive for market functioning was revealed in the Fed balance sheet data — foreign central banks are buying USTs again. After selling bonds strongly in March to raise cash, their purchases are a healthy sign.
More bonds issued
Credit spreads fell last week, with Investment-grade (IG) and High-yield (HY) down 4 bps and 23 bps, respectively, and issuance remains strong. In search of liquidity, large companies are issuing more bonds, adding to already bloated debt piles that may be an overhang to profitability for years to come.
Fed Chairman negative on economic outlook
The Fed meeting last week came and went with nothing new to report. In terms of being able to offer a credible forecast? The Fed is on-hold for now. What was remarkable was how negative Chairman Powell was in his remarks, pointing not just to near-term but also medium-term risks. This cautiousness will likely keep policy loose even if economic growth returns to trend. As we’ve noted before, rate hikes are years — not months — away.
New ECB program may help but how much?
The European Central Bank (ECB) did make news with a new program to support banks and encourage lending. This led to lower rates across the core and periphery alike, as well as a stronger Euro and higher equities. But as we’ve noted in the past, these measures, while large relative to the history of the ECB, are less impressive relative to the scope of the problems in Europe. Political fragmentation doesn’t help matters either.
What’s moving markets now?
Coronavirus-related optimism – Optimism around potential therapeutics for the coronavirus, as well as the first U.S. states opening back up, drove the rally in the first half of last week. By this week, about half of U.S. states will have relaxed their lockdowns. We are monitoring these restarts extensively, both in the U.S. and abroad, to see how consumers and businesses react.
China tensions – Another issue reentered the market’s radar last Thursday: tensions with China. An article in The Washington Post about retaliation for China’s handling of the virus outbreak caused sentiment to sour, and the rhetoric on both sides is heating up. This Tuesday is the anniversary of the tweet that blew up the China trade deal last year. While we aren’t calling for a repeat of that this week, it’s clear that tensions with China are moving in one direction — higher. In an election year and with the global economy crippled, the market has to take this risk seriously.
Earnings – Despite the huge earnings week, investors didn’t learn much new. The outlook is just so uncertain — even Apple (AAPL), the second largest company by market cap in the S&P 500, declined to provide guidance for the first time ever!
Data this week
Global Purchasing Managers Indexes (PMIs) — COVID-19, which has infected approximately 3.5 million people globally and killed around 247,000, has severely impacted manufacturing and other economic activity across the world. On Monday, IHS Markit released its final Eurozone Manufacturing PMI. At 33.4, down from 44.5 in March, the reading is at its lowest ever since the survey began and strongly into contraction territory (index value below 50). Even as economies begin to reopen, IHS says it expects activity to remain low for some time. This followed last week’s ISM U.S. PMI report, in which ISM noted “a level of manufacturing-sector contraction not seen since April 2009, with a strongly negative trajectory.”1 Also, China Caixin PMIs, largely thought to offer a more independent view of manufacturing activity than the official China PMI, come out on Thursday.
Non-farm Payrolls (NFP) — Friday’s NFP will be closely watched, if only out of habit, as the expectations are universally terrible. Some are calling for a historically high unemployment rate (UR) north of 20%, with most projections closer to 15%. Wherever the final figure is, it will undoubtedly be the highest we’ve seen in recorded history, dating back to 1948 [Figure 2]. And again on Thursday, we’ll be watching the latest numbers for jobless claims, which have to date eclipsed 30 million in just six weeks.
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