Markets last week 22/04/2020

Last week saw reductions in the number of new COVID-19 cases in some countries, but the beginning of the full impact of shutdowns on economies.

Amid flattening of the number of infections in some areas, governments are talking about re-opening. Spain allowed some non-essential businesses to reopen, such as construction companies, despite reporting the biggest increase in the number of confirmed coronavirus cases in more than a week. Italy reopened bookshops and children’s clothing stores, while Austria opened hardware and garden stores. France remains on lockdown but expects to reopen (including schools) by mid-May. Germany is re-opening some small shops. The UK, New York and New Jersey extended their lockdowns. In Japan, the virus has spread, forcing the government to extend the state of emergency and to give 100,000 yen (£750) ‘helicopter money’ to all adults, in a country that has so far, the lowest death rate in the developed world.

There were limited data releases in most countries. Only the US has been providing a full set of data recently. With 22 million unemployed, the US has now wiped out a whole decade of job gains. In that context, President Trump has been pre-announcing the possible re-opening of the economy, although State Governors ultimately have the responsibility to do so. There is quite a lot of opposition to the shutdowns in several states, such as Michigan, Ohio and Virginia, and the debate has taken a heavy political flavour.

Markets were bullish last week on the expectation of an early US re-open and news that the Remdesivir therapy for COVID-19 had some positive trials in Chicago.

The US was the strongest equity market last week, with the UK and Europe the weakest. Since the beginning of the rally, consumer discretionary, healthcare and information technology has led the upward moves with banks lagging. Oil prices fell sharply again, led by implementation concerns for the output cut announced a week ago. Government bond yields were lower again in the US and Europe but stable in the UK. Currencies were also relatively unchanged.

The week ahead

Tuesday: German ZEW (March)

Our thoughts: the German ZEW is a monthly sentiment index which assesses the views of 350 financial experts. As we have reported before, this reading had been on a downward trend after the US trade war with China caught the German export market off-guard. Having peaked at nearly 100 at the start of 2018, it fell to -20 by the end of 2019. The index actually began to move back up at the start of this year, such was the confidence in economists and analysts that the German export industry would pick up again. That confidence was short-lived as the effects of COVID-19 began to play out and in February, the index had plunged to -43.1. The March reading is forecast to improve to -30, which perhaps reflects a country that has dealt with the fallout from the virus better than others.

Tuesday: US Existing Home Sales (March)

Our thoughts: whilst US consumers are not as inextricably linked to the housing market as they were in 2008, their underlying purchasing strength can be reflected in a buoyant housing sector. Whilst this data can be relatively volatile (and should really be seen in conjunction with other housing data like new home starts) there has been a material pick-up in sales over the past 18 months. Given the timing of the data set, the forecast is for a small downward revision to 5.39 million from 5.77 million – this number could, however, be materially lower. Should this be the case, the negative knock-on impact for the price of assets linked to US residential property could be substantial.

Friday: Eurozone Manufacturing PMIs (Prelim April)

Our thoughts: the data for March was understandably weak. At 44.5, the index had fallen to lows not seen since the eurozone crisis and even then, the index only hit a low of 44 in July 2012. These are precarious times for the European economy which relies heavily on exporting goods to achieve economic growth. With various member nations reacting at different speeds to the coronavirus, the political environment has turned hostile again as governments grapple with the new possibility of debt-sharing obligations. The April data is forecast to fall to 40.2 which would be a new low for this economic cycle however, it is worth noting, in the depths of the financial crisis, this figure fell to the low 30s.

The numbers for the week

Central banks

No meaningful announcements from central banks.

United States

22 million jobs lost in the last four weeks

Inflation: the export price index for March fell 1.6% with the import price index down 2.3% (but ex petroleum it was almost flat at -0.1%).

Housing: MBA mortgage applications bounced back 7.3% in the week to 10 April. The NAHB Housing Market Index slumped from 72 to 30 in April. Housing starts fell 22.3% and building permits 6.8%.

Sales and production: retail sales for March fell 8.7%, but ex auto and gasoline, they were only down 3.1%. Industrial production fell 5.4% in March, with manufacturing production collapsing more, 6.3%. Capacity utilisation fell from 77% to 72.7% in March.

Surveys: the Empire Manufacturing survey collapsed from -21.5 to -78.2, the lowest since the survey’s inception. The Philadelphia Fed Business Outlook survey also fell from -12.7 to -56.6.

Employment: Initial jobless claims amounted to 5,245K, down from 6,600K the week before with continuing claims rising from 7.4 million to nearly 12 million, adding up to 22 million jobs lost in the last four weeks.

United Kingdom

The BRC (British Retail Consortium) like-for-like sales fell 3.5% year-on-year in March, down from -0.4% the previous month.

Europe

Stable prices but car sales collapsing

Inflation remained stable. The EU harmonised CPI (consumer price index) went from 0.7% year-on-year to 0.8% in March for France, from 0.2% to 0.1% in Spain and remained at 1.3% in Germany. For the eurozone as a whole, it was also stable at 0.7% with core CPI (ex energy, food, alcohol and tobacco) remaining at 1.0%.

The EU27 new car registrations for March fell 55.1%.

China/India/Japan/Asia

Chinese GDP fell close to 10% in Q1 from the previous quarter

China: foreign direct investment fell a further 14.1% in March after -25.6% in February. China revised up the death toll by 1,290 people in Wuhan. The drop in GDP growth numbers for Q1 show the way for other countries; -6.8% for Q1 year-on-year, -9.8% quarter-on-quarter. This is the first time in four decades that the Chinese economy has shrunk.

Oil/Commodities/Emerging Markets

The follow-up to the agreement between OPEC and non-OPEC oil-producing countries seems to have failed in its implementation, as crude prices fell sharply during the week, despite the output cuts, particularly the US price gauge, WTI.

 

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Andrew Hipshon

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