Global Weekly: Lower outlooks

News item -

After some less volatile days on the stock markets, the start of the second quarter was marked by a new wave of risk aversion. Both in eurozone and UK, the important economic indicator PMI showed a steep decline. In the eurozone, the industrial indicator even dropped to a seven year low.

A growing number of companies lowered the outlook for 2020 or downgraded their figures for the upcoming quarters. Luxury goods producer LVMH sees a 10% to 20% revenue drop compared to last year. An increasing number of financial institutions followed the ECB advice to suspend dividend payments; this demand concerns dividends for 2019 and 2020. The ECB has also asked banks to refrain from proceeding with share buybacks. European banking stocks lost more ground after this demand. ECB also took additional steps itself by announcing unlimited bonds purchases like the Fed already did.

The oil price dropped to another new low, due to the combination of lower demand and the lack of agreement between oil-producing countries on production restrictions. Rumors that the US is willing to negotiate between Saudi Arabia and Russia, and the Chinese plan to buy oil for strategic reserves, offered some relief.

In China, signs that the coronavirus could be contained in the near term, sparked hope that the worst may be over. Some companies already commented on prospects after the crisis. ASML does not experience a collapse in demand at the moment. Although revenue projections for the current quarter have been downgraded, the company expects to compensate this in the upcoming quarters.

Bonds: Rebound in extremely volatile markets

Over the last week, the bond market experienced some relief with a rebound following the ECB announcement of a EUR 750 billion Pandemic Emergency Purchase Programme and the massive US government USD 2 trillion stimulus package. Nonetheless, financial markets remain extremely volatile and show a very weak year-to-date (YTD) performance.

In this context full of uncertainties, core sovereign bonds barely played their safe-haven role, except for American treasuries which presented an overall return of 8% year to date.

Although investment-grade (IG) bonds experienced a slight rebound, the performance of European investment grade remains daunting at -6.2% so far this year. US investment grade, which benefited more from the emergency programme announcement, reduced its losses to -4.3% this year after hitting a -10.5% YTD performance ten days ago.

The high yield (HY) market also took advantage of the political and monetary announcements, with European high yield reducing its losses to -14.7% so far this year, 5% higher than its low point, while US high yield brought its losses down to -13.2% year to date, 7.5% higher than its low point.

Though this may seem encouraging, the high-yield market remained globally very illiquid and concerned about the lack of explicit support for the asset class from central banks. March’s new high-yield issue volume marked the lowest volume for a single month since December 2018.

At this stage, any soft or hard data published or to be published in either Europe or the US, only hold a relative importance, given the depth of the current crisis. What matters to markets is how central banks and governments can support the economy in preparation of the ‘day after’. However, this unfortunately remains the major unknown element in the equation. Attention is also given to Asian publications (having passed the worst part of the epidemic as of today), which could set a timeframe to overcome the epidemic and signal the economic recovery pace.

The volatility combined with the market’s illiquidity favors a cautious investment approach. We therefore made, for the time being, no changes to our current bond allocation.