Last week was the worst week for equities since the 2008 financial crisis. Thursday was the worst day for equities since the October 1987 crash. Energy and financials led the plunge, but nothing was spared. Even defensive government bonds and gold saw a correction last week. The recovery on Friday was quite violent but mostly helped US equities, not other markets.
Joe Biden is starting to look like the shoo-in for the Democratic nomination in the US, winning Missouri, Mississippi, Idaho and Michigan, with North Dakota going to Bernie Sanders. This week, there will be more primaries in Florida, Ohio, Illinois and Arizona, which could effectively clinch Biden’s nomination.
In the UK, Chancellor Rishi Sunak’s first budget delivered a long list of promises to help companies, councils and workers, a £5 billion emergency response to support the NHS, a £30 billion package to combat coronavirus and the start of a multi-year infrastructure spending package to fund broadband, research, flood defences and transport. The budget was well received, but the markets did not react much given the virus impact on global risk sentiment.
On Friday, Germany announced a large package of loans to companies, pledging unlimited loans to businesses suffering from the virus. This could amount to 0.4% of GDP, which is actually less than the packages proposed in Italy and Spain this week too.
Yesterday, the US Federal Reserve (Fed) announced a 1% cut in rates bringing the Fed funds rate close to zero and a massive Quantitative Easing (QE) programme (purchase of US treasuries and mortgages).
Economic statistics have become less relevant, especially as European and US data seem to lag the spread of the virus, but in China industrial production, retail sales and investment slumped beyond already pessimistic expectations.
At the end of the week, equities were down very sharply, with Europe and the UK faring worst. The rally in US equities came too late for the European trading day. Once again, Asian equities were more defensive than the rest of the world. Government bond yields rose by 20 basis points after hitting all-time lows the previous week. Oil prices fell 25% and gold corrected 8% from its winning streak. The US dollar rallied strongly from its month of falls, as the covering of carry positions using euros and yen as the funding currencies, exhausted itself and risk-off markets boosted the US dollar, as usual.
The week ahead
Tuesday: German ZEW Survey
Our thoughts: on Tuesday, we receive the latest German ZEW Survey – it is the March reading and so incorporates the recent coronavirus-impacted environment. February’s survey also included data from the beginning of the pandemic, which resulted in a sharp drop in sentiment – we expect more of the same. The virus’s effect on supply chains will hit export-intensive sectors and countries, Germany included. The euro area’s largest economy appeared to be beginning to move onto a positive trend at the end of last year, but this has been stopped severely in its tracks.
Thursday: Bank of Japan (BoJ) Meeting
Our thoughts: towards the tail-end of the week we shift our attention to the BoJ as the central bank meets. Much like the European Central Bank (ECB), the BoJ has less room to manoeuvre when it comes to stimulating the economy by pulling monetary policy levers than the Fed or even the BoE. Having said that, the BoJ Governor, Haruhiko Kuroda, has said the central bank was ready to respond, following a meeting with Prime Minister Shinzo Abe.
The numbers for the week
Many supporting moves from central banks fail to impress markets.
On Wednesday, the Bank of England (BoE) cut rates from 0.75% to 0.25%, leaving the corporate bond target unchanged at £10 billion and the asset purchase target also unchanged at £435 billion.
On Thursday, the US Federal Reserve (Fed) shifted its US$60 billion monthly purchases of asset from treasury bills to anywhere across the treasury curve and added liquidity to the markets. The Fed’s announcement did not stop the rout in equities that day. Yesterday, the Fed cut rates by 100 bps (1%) to near zero and announced a QE programme of US$700 billion (quantitative easing is the purchase of government bonds and mortgages).
Also on Thursday, the European Central Bank (ECB) left interest rates unchanged. with its main deposit facility rate at -0.5% its main refinancing rate at 0.0% and its marginal lending facility 0.25%. The additional stimulus package included more bond purchases and loans for banks (an additional €120 billion of asset purchases). The ECB will now pay banks 0.75% to borrow from them in certain circumstances. The ECB statement also disappointed markets.
The People’s Bank of China (PBoC) announced a 50 bps cut for the reserve requirement ratio, the second cut this year.
All these steps in monetary policy have added liquidity to the markets, but did not stop the market falls, due to the feeling that monetary policy is close to being exhausted and that the time is now for fiscal policy to take over.
Only a small move in surveys so far
Housing and trade: MBA mortgage applications soared 55.4% during the week from +15.1% the previous week as many homeowners are taking advantage of low rates to refinance their mortgage. The import price index and the export price index fell 0.5% and 1.1%, respectively, although a large part of that drop is probably due to oil prices.
Inflation: The CPI (consumer price index) was softer at 2.3% in February vs. 2.5%, with the core reading (ex food and energy) up from 2.3% to 2.4%. The PPI (producer price index fell to 1.3% in February from 2.1% the previous month with the core reading ex food and energy down to 1.4% from 1.5%.
Employment: Initial jobless claims fell from 215K to 211K with continuing claims down from 1733K to 1722K.
Surveys: The University of Michigan sentiment survey fell from 101.0 to 95.9 with expectations dropping more than the current conditions and expected inflation at 2.3% for 1 year and 5-10 years. The NFIB small business optimism index for February up from 104.3 to 104.5.
Housing is looking better but other parts of the economy are slowing.
The British Retail Consortium sales like-for-like year-on-year fell 0.4% for February vs, 0% the previous month. Bear in mind that this is a very volatile series.
The monthly GDP fell from 0.3% to 0.0% in January, with the 3 month/3 month change at 0.0% down from 0.1%. Services came down from 0.3% year-on-year to 0.1%, industrial production from -1.8% to -2.9% led by lower manufacturing production and construction output fell from 5.0% to 1.6%.
The trade balance in January fell from a deficit of £1.418b to -£3.72bn.
The RICS house price balance improved from 18% to 29%, above expectations.
European numbers were looking a little better before the virus hit.
German industrial production was up 3.0% in January and down 1.3% year-on-year vs. -5.3% previously. French industrial production was down in January 2.8% year-on-year vs. -3.0%. Italian industrial production was -0.1% vs. -4.4%.
The Bank of France industrial sentiment index for February was unchanged at 96. For the eurozone as a whole, the Sentix investor confidence for March fell from +5.2 to -17.1. Eurozone industrial production was less bad at -1.9% year-on-year in January vs. -3.6%.
Eurozone employment during Q4 was up 0.3% or 1.1% year-on-year vs. 1.0%. GDP was up 0.1% for Q4 or 1.0%.
The German CPI (consumer price index) was unchanged at 1.7% year-on-year, the French CPI also unchanged at 1.6% and the Spanish CPI a little lower at 0.7% from 0.8%.
Some big drops in numbers in China and in Japan too.
China: The PPI (producer price index) fell 0.4% in February vs. +0.1% in January, indicating a fall in industrial activity. The CPI (consumer price index) was slightly less at 5.2% vs. 5.4%. Chinese money supply has been rising: M2 at 8.8% vs. 8.4%.
Foreign direct investment into China fell sharply, down 25.6% in February. Industrial production fell 13.5% in February, retail sales 20.5%, property investment 16.3% and fixed asset ex rural (i.e. overall investment) 24.5%.
Aggregate financing in China was half of estimates in February. The surveyed jobless rate jumped to 6.2%.
Japan: The eco watchers survey (current) fell to 27.4 in February from 41.9. The Eco watchers survey (outlook) fell more from 41.8 to 24.6. Money supply increased a little from 2.8% to 3.0% for M2 and from 2.3% to 2.5% for M3. More importantly, machine tool orders recovered a little, from -35.6% to -30.1% year-on-year. The PPI (producer price index) fell from 1.5% in January to 0.8% in February.
The BSI business conditions survey (large company all industry) for Q1 fell -6.2 to -10.1 with the large manufacturing survey dropping more from -7.8 to -17.2. The tertiary industry index was up 0.8% in January, up from -0.3% previously.
Crude oil prices fell 25% during the week, as it became obvious that the price war between Russia and Saudi Arabia would not be called off soon. Industrial metals were better behaved.
Gold fell sharply, together with government bonds, as market participants needed to sell liquid investments to meet margin calls. We had already seen this situation the previous week.