Global Weekly: New all-time highs in tech

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After a strong run, equity markets gave back ground this week. Investors had become more optimistic lately about the reopening of major economies and the possibility of finding a Covid-19 vaccine. However, with the US state of Texas reporting the largest one-day rise in new Covid-19 cases this week, fears of a possible second wave of infections could cause market sentiment to deteriorate.

Central banks have played a big role in the recent rally in equity markets, as they have taken huge steps to support the global economy. Federal Reserve Chair Jerome Powell struck a dovish tone after a two-day meeting this week, when he predicted interest rates would remain close to zero until 2022. It still remains to be seen how consumers and corporates will emerge out of this crisis and whether there will be a sustainable economic recovery.

In Europe, unprecedented steps have been taken as well. This includes measures on both the monetary and the fiscal side. These actions have been one of the drivers of the outperformance of European equity markets, compared with the US, over the past few weeks. Cyclical sectors, such as financials, energy and industrials, have performed well, while defensive sectors, such as consumer staples and health care, have lagged. With additional stimulus on its way in Europe, we will have to see whether this cyclical rally can go further. We currently do not favour (underweight) the financials and utilities sector, while we maintain a preference (overweight) for the IT and health care sectors.

Meanwhile, the US tech sector has regained some momentum. A lot of milestones were reached this week, such as the Nasdaq Index closing above the 10,000 mark. Apple and Microsoft led the way by reaching new all-time highs and even rising past market capitalisations of USD 1.5 trillion. Amazon also reached a life-time high in its share price, while Tesla’s closed above USD 1,000, after reports of ramping up production for Semi, its commercial truck. But, it wasn’t all good news. Coffee-chain Starbucks was under pressure after reporting that they expect a massive sales hit this quarter, and fashion-giant Inditex reported their first-ever quarterly loss. The company has plans to accelerate online sales to become more than 25% of total sales by 2022, and it is closing some stores.

Bonds: Fed continues to provide support

Fed policymakers struck a dovish tone this week, as they indicated that they are going to remain incredibly accommodative for the foreseeable future. Fifteen of seventeen Fed policymakers see the key overnight interest rate and federal funds rate remaining near zero until 2022.

The Fed will also be maintaining its bond purchases at least at the current pace of around USD 80 billion per month for Treasuries and USD 40 billion per month for agency and mortgage-backed securities. At the same time, the Fed encouraged the US government to do more on the fiscal side. With the Fed buying Treasuries, the financing of more fiscal stimulus should be less of a problem.

The Fed also updated its economic projections. It reports an expected 6.5% drop in real US GDP this year, followed by a 5% increase in 2021 and a 3.5% advance in 2022. It is therefore no surprise that the Fed sees no movement in interest rates until 2022.

It looks like the central banks of Japan, Europe and the US are aligned in their commitment to an accommodative policy stance and that this could put a floor under financial markets. This should improve clarity and certainty for investors. As a result, liquidity and stress indicators are normalising further.

If you translate this information into your fixed-income asset allocation, an opportunistic allocation towards a combination of high-yielding bonds and emerging-markets debt is a strategy that could add value. The low default cycle, that was seen before the outbreak of the corona virus, will, however, likely be challenged, especially among corporate high-yield bonds. We therefore prefer emerging-markets debt over high yield.

The Fed is adjusting their outstanding programmes so that more borrowers are able to apply. As markets are being restored, governments and non-distressed companies can build up their liquidity buffers and refinance their liabilities over longer periods, which can reduce balance sheet risks. This means that refinancing risk could be limited to distressed companies. The big emerging-market governments are even able to adopt more or less the same asset purchase programmes as developed markets. And some emerging-markets countries have even bigger and deeper local markets. Both of which support emerging-markets debt.