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In April, global equity indices continued their way north. We do not want to think that the market is just brushing aside all the social and economic problems and continues to operate from “buy the dip” perspective, hoping for the support of central banks. It is also quite hard to believe that all the negative scenarios (current and future) are already “taken into account” and we have only positive news ahead, be it easing of quarantine measures or the emergence of a vaccine to treat the virus.
If one tries to graphically compare what is happening now with the financial crisis of 2008, she will see that the first wave of decline occurred in early 2008 followed by the correction upwards, which shave off 50-61.8% of the fall. It ended in May and we saw a devastating decline, which ended only in March of the following year. The situation is different now – world governments and central banks have reacted almost instantly by further inflating their balance sheets and providing fiscal assistance. Will these measures be sufficient to save markets and economies we will soon find out. Of course, it is still too early to talk about the long-term implications of such measures.
As expected, manufacturing activity in the Eurozone collapsed in April amid government-imposed lockdown. IHS Markit’s final PMI sank to 33.4 from March’s 44.5, its lowest level since the survey began in mid-1997, below an earlier flash reading of 33.6. The slump came despite the European Central Bank easing policy and ramping up its quantitative easing program alongside fiscal stimulus from governments. With shops closed and consumers concerned about their health and employment, demand in April sank to the lowest in survey’s history – the new orders PMI came in at 18.8, almost half March’s already weak reading of 37.5. The Eurozone economy contracted at a record rate of 3.8% in the first three months of the year and inflation slowed sharply. It was the sharpest quarterly decline since the time series started in 1995.
The US manufacturing sector’s contraction accelerated in April, with activity sinking to an 11-year low. IHS Markit said its final US manufacturing PMI dropped to a reading of 36.1 in April. Manufacturers cut their workforce numbers at the sharpest pace since March 2009. US personal spending plummeted in March by the most on record. Household outlays, which account for about two-thirds of the economy, plunged by 7.5% from the prior month, also the sharpest drop in records. The US economy shrunk by an annualized 4.8% in the first quarter of the year, according to Bureau of Economic Analysis, posting the first contraction since 2014 and the deepest since 2008. The number of Americans applying for initial unemployment benefits decreased to 3.83 million in the week ending April 25. Continuing claims, which record the number of people already receiving benefits jumped to a record 17.99 million in the week ending April 18 (data is reported with a one-week lag). The number of jobs in the US according to the ADP report fell by 20.24 million in April. This figure is several times higher than the 2008-2009 data when monthly declines have never exceeded 1 million. Unemployment has already grown far beyond 10%, and analysts forecast a decrease in earnings per share of the S&P 500 companies in the second quarter by 36.7%.
China’s factories suffered a collapse in export orders in April. Official Purchasing Managers’ Index (PMI) eased to 50.8 in April from 52.0 in March, but stayed above the neutral 50-point mark that separates growth from contraction on a monthly basis. Worryingly, a sub-index of export orders dived to 33.5 in April from 46.4 in March with some factories even having their orders cancelled after reopening. China’s economy took a heavy blow in the first quarter, shrinking by an annual 6.8%, the first contraction since current quarterly records began almost 30 years ago. The service sector, which accounts for 60% of China’s GDP, saw an expansion in activity, with the official non-manufacturing PMI rising to 53.2 from 52.3 in March. Chinese authorities have rolled out more support to revive the economy – The People’s Bank of China earlier in April cut the amount of cash banks must hold as reserves and reduced the interest rate on lenders’ excess reserves.
FX market calmed down in April and settled back in its old trading range. EUR/USD had once again defined «cheap» and «expensive» levels – 1.0750 and 1.1100 accordingly. RUB and CAD did not react to a historic oil drop too. Still there are more questions than answers. From purely dollar perspective (USD index) we might see a following scenario: first part of May USD might be well supported in 101-101.50 level (EUR/USD 1.0750) and then as month progresses dollar might get under pressure with possible levels well below 98 (EUR/USD 1.1250-1.1300). Market is still looking for a larger direction and, again, it does take time.
Gold keeps on shining and posting new recent highs (at 1730 dollars per troy ounce), confirming its safe haven status in the current volatile environment. Technically though, chart does not look that safe and the market is quite overbought too. We still think that gold might see some selling ahead and even drop closer to recent XAU/USD 1450 lows. We would use that dip (if seen) to go long. If any meaningful sell-off does not occur in May, then probability is high that gold will challenge its all-time highs of 1920 dollars per ounce in the coming months.
The roaring rebound witnessed in equity markets was quite muted for the fixed income space. Benchmark yields were mostly flat for the month of April. However, high yield indices gained about 5%, based on risk premiums contracting by about 130 basis points. Currently the yield to maturity of both the Bloomberg Barclays Pan-European High Yield Index and the Bloomberg Barclays US Corporate High Yield Total Return Index stands at 8%. Bond investors are a much more pragmatic crowd, which is especially true for the high yield investors, whose livelihood depends on their ability to assess correctly the creditworthiness of issuers.
Investors need to see tangible proof that a trustworthy recovery has ensued before jumping back on the risk bandwagon. Alas, companies are rescinding their guidance for 2020, citing too many unknowns for any credible forecast. Additionally we are also witnessing bond term changes, restructurings and the first defaults. High yield investors remain cautious and largely on the sidelines for the time being.