Global Weekly: Rally amid uncertainty

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Global equity markets rallied this week, recouping some of the losses of the previous days. Since the lows seen in March, the S&P 500 Index has rebounded by more than 20%; and European indices by more than 15%. Investors carefully returned to the equity markets on hopes that another round of US stimulus could be unleashed and that coronavirus cases might be peaking. In Europe, Italy and Spain have reported a slowdown in new infections, leading to speculation that the lockdown may be eased in the coming weeks. Moreover, countries such as Denmark and Austria have already announced that some activities will be able to reopen around mid-April. In the US, the White House is developing a plan to reopen the economy, probably starting in small cities not heavily hit by the pandemic.

Cyclical sectors, such as consumer discretionary, information technology and materials, were leading the market rally, while traditionally defensive sectors underperformed. Consumer staples and health care were among the laggards.

Market volatility is expected to remain at high levels, as the US earnings season will resume next week. Given business disruption resulting from the stringent lockdown policies, it is understandable that company activities will get hammered. According to Bloomberg, analyst consensus estimates call for an 8% year-on-year first quarter earnings drop for the S&P 500 Index. This projection appears conservative, given the expectations for a strong decline in economic growth for many countries. It is therefore likely that this estimate will be revised downward, as analysts are waiting for the first-quarter results in order to adjust their yearly forecast.

Germany and France are expected to experience a sharp slump in their output, confirming the severity of the economic shock. French gross domestic product is expected to fall by 6%, according to the French central bank. The German economy is expected to shrink by almost 10% this quarter, according to the country’s top economic research institutes.

In this volatile environment, we continue to take a neutral stance toward stocks and continue to favour the US over Europe. At the industry level, we favour the technology and health care sectors.

Bonds: Corona impact continues

This week, bond markets were driven by the media coverage about the coronavirus pandemic, as well as by the disagreements among the EU countries regarding the question of how to handle the financial burden arising from the crisis. Although worldwide numbers of new infections and deaths persisted at high levels, organizations such as the Robert Koch Institute, the German government’s central scientific institution in the field of biomedicine, indicated that the strict guidelines that have been imposed are having an impact.

The rising hope towards a decline in infection numbers, in combination with fiscal measures to significantly increase 2020 bond issue volume, caused sovereign yields to increase significantly. Germany’s intention to increase its 2020 issue volume towards a record amount of EUR 439 billion, saw ten-year Bund yields increase towards -0,3%. European investment-grade corporate bonds benefitted from the decreasing risk aversion. Despite a strong supply, the secondary market was not disrupted, which is an indication of a well-functioning market.

We believe that the bond market will continue to be driven by the pandemic. And, especially in the eurozone, markets will be affected by the question of how countries, such as Italy, might be relieved when it comes to their heavy financial burden. The debt sustainability of such countries is back on the agenda and will be thoroughly monitored by investors and rating agencies.

Some EU members strongly favor a solution that, at least temporarily, extends a joint liability. This solution, however, is refused by the Netherlands, Austria and Germany. A failure to find an agreement would certainly lead to further widening spreads in the peripheral countries that are, albeit with support from the ECB, trading far from their lows.

We remain confident regarding our overweight stance towards corporate bonds and emerging-markets sovereign bonds. Our overweight towards emerging markets is supported by their attractive diversification qualities compared to their high-yield peers. High yield is highly correlated to equity markets.

Several events of investor interest are pending next week. Given the globally weakening economy, the markets will certainly be interested in the retail sales data, as well as in the industrial production in the US and the EU. Another point of interest will be the French and German consumer price index data, as they will capture the impact of the pandemic.