Market Flash 14 April

What happened?

- Last week saw the best performance for US markets since 1974, with the S&P500 up 12%, as the virus appears to be peaking in some countries and additional stimulus was announced. However, US markets were open yesterday and retreated about 1% as new cases or number of deaths climbed again in some areas were peaks are happening, and as the reality of the economic cost might start to show with the beginning of the earnings season. European markets were closed for Easter Friday and Monday, but capped the short week up about 8%. This morning, both US and European futures are pointing up so far.

- The Federal Reserve announced yet another set of facilities totalling USD2.3 trillion, including backstops for small business lending, more corporate security purchases, including high yield fallen angels, some high yield ETFs and leveraged loans, as well as support for states and municipalities. Fed actions have helped relieve credit markets, with spreads narrowing throughout last week (and yesterday in the US). US IG is down to 213bp, EU IG to 211bp and EU HY 698bp. US HY spreads are down to 747bp from a high of 1100bp as the OPEC+ production cut announcement helped ease stress there too.

- OPEC+ agreed to cut oil production by nearly 10 million barrels per day starting on 1 May in a historic move that ends the weeks-long price war between Saudi Arabia and Russia. The US, Canada and Brazil are meant to cut another 3.7 million barrels and the rest of the G20 another 1.3 million, though these will prove slow to materialise as they are more a reflection of the impact on output from lower prices than a pro-active production cut. While prices jumped on the news, with Brent trading at 34USD per barrel and WTI at 25USD per barrel, both retreated since (to 31USD per barrel for Brent and 22USD per barrel for WTI) as questions remain about the collapse in demand, and if even such big cuts will be enough to offset them. In our view, given the standstill in the global economy, prices will remain capped for some time as supply remains ample and demand will be slow to recover.

- Eurozone finance ministers finally agreed on a EUR500bn fiscal package, though it does not include “coronabonds” but focuses mostly on the ESM (European Stability Mechanism). It does include common employment insurance, a liquidity facility for companies, and credit lines. There was also talk of a recovery fund, which might need ‘common issuance’, but the Netherlands and Germany still oppose this option. It now goes to EU leaders for approval and could see further obstacles.

- As markets have recovered from March lows, sentiment has become more bullish and flows have started to come back into equities, as well as high yield. Equities saw USD16.5 billion of inflows and high yield saw USD4.1 billion, while Treasuries and US IG saw USD2.3 billion and USD4 billion in outflows, respectively.

- US Treasury yields resumed their climb this week with the US 10-year now up to 0.77% as risk appetite improves. German 10-year yields retreated on Friday to -0.34%, ahead of the European Finance Ministers’ announcement.

- Earnings season starts this week, with still relatively optimistic expectations. Indeed, while the releases will be mostly backward-looking, we will still see the impact of containment measures on March data (and extrapolate what the next months might look like) and guidance for the rest of 2020 will be in the spotlight as well. In our view, markets are currently underestimating the impact on earnings from the complete halt to activity and particularly how slowly these will recover. As such, valuations might not be as cheap as they appear, especially following the recent market moves.

- As stated previously, we expect containment measures to last longer than anticipated, and measures to be only gradually removed, suggesting a slower, more gradual move back to ‘normal’. Indeed, France already extended measures to 11 May and said it would then look at gradually re-opening. As such, the ramp up in activity will be slower and staggered across countries, regions and industries, but also within a country. We believe that risks to growth and earnings remain. We consequently remain cautious on markets, as downside risks remain.

What we are watching

- We continue to monitor plateauing and peaking cases in countries more ‘advanced’ in the outbreak for signs of how long stringent containment will be necessary. The longer the economic standstill lasts, the bigger the damage and the higher the risk of negative consequences.

- We look at how stimulus can be deployed to avoid waves of bankruptcies and defaults, and at how defaults can be ring-fenced if/when they happen. Indeed, it is still too early to tell if these measures will be enough to avoid second-round negative consequences from the outbreak, though the Fed in particular is doing everything in its power – and beyond – to limit these risks.

- We will look closely at earnings estimates as they are revised down. Markets may not be factoring enough adjustment yet, especially as valuations would not look as attractive with a much lower “E”.

- We keep an eye on credit and funding markets to see if massive central bank measures, both in the US and Europe, help ease the recent stress. For now, we believe that central banks will succeed in keeping systemic risks low to prevent a credit crisis. 

For more market insights from Natixis Investment Managers visit https://www.im.natixis.com/intl/insights/market-outlook

This article is promotional material and is provided for information purposes only. It may not be used for any purpose other than that for which it was conceived and may not be copied, published or distributed to third parties, in whole or in part. The provision of this article and/or reference to specific sectors or markets within this material does not constitute investment advice, or a recommendation or an offer to buy or to sell any security, or an offer of services. Investors should consider the investment objectives, risks and expenses of any investment carefully before investing. The analyses, opinions, and certain of the investment themes and processes referenced herein represent the views of Esty Dwek as of the date indicated, and are subject to change. There can be no assurance that developments will transpire as may be forecasted in this material.