Global Weekly: The next chapter?

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As most Western European countries are past the peak of the Covid-19 outbreak, the current focus is on the cautious reopening process. In the US, this is decided state by state (on grounds of the federal constitution). As a consequence, economic data may present a distorted picture of the US economy as a whole.

The coming weeks should therefore be seen as a transitional phase. Nonetheless, risky assets should perform well as we are moving towards the end of the lockdown period (provided that the spread of the virus will be contained). Therefore we keep our overweight position in both investment-grade credits and emerging market debt, with the latter segment having recovered half of its virus-induced losses, already.

By the time we have reached the end of the lockdown period, investors’ attention might turn to the question whether all or some of the aggressive fiscal and monetary measures – put in place by governments and central banks to counter the economic impact of the virus – could be withdrawn? Technically, reversing these measures would be easier in the case of fiscal policies. A reversal of monetary policies would be more difficult, as they would involve risks – not just reputational risk for central banks but also the risk of yields rising to undesirably high levels. Central banks and governments have no interest in seeing rates rise or facing a new debt crisis.

The next step that market participants already expect from the US central bank is the imposition of a Bank of Japan-type of yield curve control, by fixing the Treasury yields or part of the yield curve. Such an announcement might come even before the US economy is really starting to recover from the Covid-19 crisis. Hence, core government bond yields should keep moving sideways even in a broader range of 0.50% - 1.0%, for the time being. We stick to the old market adage “Don’t fight the Fed!” and expect rates to remain (artificially) low for longer.

Road to vaccine will be bumpy

This week started well with a 3% rise of the S&P 500 Index on Monday, fuelled by promising data from one of the first of many trials of a possible vaccine against Covid-19. Moderna, Johnson & Johnson, Pfizer, AstraZeneca and several other vaccine makers are all racing to develop a critically needed vaccine against the coronavirus. A vaccine holds the potential to reopen normal activities globally and could be one of the big catalysts for a broad recovery of equity markets. Moderna kicked off with early data from its vaccine in a phase 1 trial, which was encouraging. Equity investors should bear in mind that the road to an approved vaccine will probably be very bumpy; only a small percentage of possible vaccines which are successful in phase 1, reaches the finish line of an FDA approval.

The oil price recovered on hopes of a quick turnaround of the Chinese economy. Rising oil demand from China could tighten the oil market sooner than expected. This optimism contrasted with European car registration figures that nosedived in May; this news weighed heavily on stocks of car manufacturers and suppliers. The end of the short-selling ban on several European stocks also caused strong daily moves. News from the semiconductor industry also was rather downbeat due to a possible flare-up of the technology conflict between the US and China. The US ban on delivering chips to Huawei could harm suppliers and manufacturers exposed to the Chinese company.

At the earnings front, Baidu published results. The dominant Chinese search engine saw it sales decline by almost 7% in the first quarter, against a background of a slowing Chinese economy. But by reducing its costs, Baidu’s first-quarter earnings per share were much higher than in the first 3 months of last year. As China has already opened up after the lockdown, the company expects a small improvement in the coming quarter. The strong results were rewarded with a 15% rise in two days.

Walmart expanded its presence in e-commerce in recent years. This week, Walmart reported first-quarter earnings, which showed US e-commerce sales spiked by 74% because of the lockdowns. Big e-commerce players were already gaining ground at the expense of offline retailing – and the coronavirus outbreak only accelerated this trend. Both Walmart and Amazon – a much bigger player in e-commerce than Walmart – saw their stocks reaching all-time highs in recent weeks.

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