Market Review 05/2020

We can say that the bearish trend in global equity markets was de facto broken in May, and in the next 3-6 months we can expect to see either range bound trading or an attempt to challenge the all-time highs. Along with risk assets in general, precious metals and energy sector also continued to grow. The growth in precious metals segment (in addition to the economic data itself) indicates the vulnerability of the global economy. The real economy and financial markets continue to be detached from each other, but it looks like we have to get used to it.

Bankruptcies hit US businesses

According to Bloomberg, the highest number of bankruptcies of companies with debts above $50 million is observed in the United States since 2009. In May alone, the number of such businesses amounted to 27 (29 in 2009) and now stands at 98 for the current year (142 in 2009). Among others, there are names like J.C. Penney Co. on the list (chain of department stores), J.Crew Group (chain of clothing stores), air carrier Latam Airlines Group SA, and car rental company Hertz.

US GDP in the first quarter fell by 5% compared to last year (for the first time in 6 years), and it is expected that in the second quarter the decline will be even stronger – Fed Chairman Jerome Powell, for example, operates with figures of a possible decline of 20-30%. The report from the Commerce Department in the United States showed an economy that is highly reliant on the government, with financial aid checks from the historic fiscal package worth nearly $3 trillion driving a record surge in personal income. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, plunged by 13.6% last month, the biggest drop since the government started tracking the series in 1959. At the same time, the savings jumped to an all-time high.

China has problems of her own; France and Germany struggle

China’s factory activity unexpectedly returned to growth in May as strict measures to contain the coronavirus outbreak were eased – PMI rose to 50.7 points from April’s contractionary 49.4. May’s reading was the highest since January, driven by a sharp increase in output as companies got back to work and cleared outstanding orders. Supply chains also steadied after massive disruptions early in the year. With many of China’s trading partners deep in lockdowns of their own, new export orders remained firmly in contractionary territory, although the drop was not as sharp as in April. China’s services sector, which includes many smaller, private companies, has not recovered from the crisis as quickly as manufacturing, with heavy job losses, pay cuts and fears of a second wave of infections making consumers cautious about spending again.

French economy contracted by 5.3% in the first three months of the year from the previous quarter – it was France’s deepest quarterly slump since 1968. A decrease in capital investments, private consumption and exports pushed the German economy into a recession in the first quarter – first-quarter contraction of 2.2%, the steepest rate since 2009.

Difficult trading environment in the metals spectrum

The graph of gold is becoming rather confusing for many market participants. We see a desire to push prices into/slightly above XAU/USD 1800 territory, but the whole construction stands on shaky legs. We still want to see more convenient purchase levels so we suggest waiting for any meaningful correction lower to add to long positions. As for silver, we wanted to buy the metal around XAG/USD 14, but it turned away from 14.60 and we missed that opportunity. Silver now looks for 19.00-19.50 mark again and might reach this level by mid-summer. We move our buy level to 16.20-16.40 area should silver not hold above XAG/USD 18.00.

Is oil cheap?

We understand that “oil-is-cheap-at-current-levels” way of thinking is quite old school nowadays and yet it appears to be so, based on the longer-term picture. Charts would suggest that right now we are in the turning point of the cycle – from decade of declining oil prices to decade of rising prices (inflationary period). Of course, this transition period might take months and even years and oil prices might oscillate between 20 and 50 USD per barrel mark for quite a while, but eventually we shall see new oil bull market. Therefore, for the months to come we might cautiously define 25 dollars per barrel as a buy level and 50 dollars per barrel as a level to liquidate those long positions.

Good times in fixed income space

The US Treasury 10-year notes were fluctuating around 0.67% yield level all month long. With an average yield of 0.17%, the US government bond curve is essentially flat for up to 2 years. The bond market is itching to go to negative yield territory, which is in sharp contrast to the explicit statements from various Fed officials. Meanwhile in Europe, the benchmark German government yields are slightly higher but remain locked in negative territory all the way up to the 30-year maturities. Although the last couple of weeks have witnessed signs that point towards higher yields going forward.

Investment grade bonds continued to recover from the March fallout, with the Bloomberg Barclays Euro Aggregate Corporate index gaining 0.17% and its USD counterpart adding 1.56%. The Fed’s commercial paper purchases have been a key beneficiary for the US bond markets, especially the high yield bond markets, as evidenced by the Bloomberg Barclays US Corporate High Yield Total Return Index’ second monthly gain of 4.4%. The Pan-European High Yield Index gains lagged with mere 2.3% returns.