Market Flash 14 May

What happened?

- Equity markets have been retreating in recent days, as sentiment has softened on fears of a second wave and possibly slower reopening plans. Re-ignited tensions between the US and China have added to market concerns. Yesterday, the S&P500 was down 1.75% and the Stoxx50 was down 2.55%. This morning, Asian stocks are down and futures are still in the red.

- Sovereign yields have fallen, with the 10-year Treasury yield at 0.62% and the 10-year Bund yield at -0.54%. Credit spreads have remained broadly flat, though US HY spreads have widened to 735bp even as oil prices have stabilised. WTI is at USD25 per barrel, while Brent is at USD29 per barrel.

- Additional stimulus talk continues, with the European Commission making progress on its “ambitious” recovery fund. In the US, Congress is discussing phase 4. This week, the Federal Reserve started its corporate bond buying program, even as Mr. Powell and a number of other Fed presidents pushed back against growing market expectations for negative rates. Indeed, the Fed funds futures market is pointing to negative rates by December, but we believe that there are other tools the Fed would prefer to use and do not expect negative rates at this point.

- Economic data releases remain poor, with UK Q1 GDP down 2% QoQ. US headline and core inflation both fell last month, on weaker demand and the drop in oil prices. European industrial production was down a better-than-expected -11% in March. Today’s initial and continuing jobless claims will be in the spotlight yet again, with another 2.5 million new and over 25 million continuing jobseekers expected.

- Earnings releases continue on the same path, with Marriott net income dropping and the company halting share buybacks and suspending its dividend; Under Armour had a worse-than-expected Q1 loss; Simon Properties profit dropped 20%; Toyota saw a 86% drop in net profit while Honda had a net loss; Cisco revenue was down on the previous year and Tencent beat expectations with revenue up 26%.

- Sentiment remains caught between better virus news and stimulus versus still worsening economic and earnings. We still believe that markets may have become too optimistic about the current reality, and expect higher volatility at some point again. However, given the strength of the rebound so far, and the fact that expectations for a second leg down is consensus, we may not re-test the lows. Nonetheless, disappointment risk remains and we choose to remain prudent.

 What we are watching

- We are looking at reopening plans across different regions, countries and industries, as the recovery cannot just be switched on. We look to see if the number of deaths remain contained with softer confinement measures to see if the path can be smooth. We also look to see if recent encouraging news on treatments materialises.

- We keep an eye on how stimulus is 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

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