Market Flash 18 May

What happened?

- Equity markets closed the week just in the green, with both the S&P500 and the Stoxx50 up about 0.4% on Friday. Nonetheless, both regions were down over the week, as concerns over a second wave and tensions between the US and China weigh on sentiment. Flows have continued to follow the same trend, out of equities, out of EM, into credit and still widely into money markets. This morning, future are up on hopes for a vaccine.

- Sovereign yields bounced on Friday after falling throughout the week, with the 10-year Treasury yield at 0.63% and the 10-year Bund yield at -0.53%. Credit spreads remain broadly flat, with US IG at 208bp, US HY at 757bp, EU IG at 200bp and EU HY at 680bp. Italian spreads over Germany have also remain stable around 240bp, but still over 100 bp above this year’s lows.

- Oil prices rallied sharply into the end of the week, with WTI at USD30 per barrel and Brent at USD33 per barrel as production continues to be cut. At the same time, gold prices have also broken out of the recent range, with the shiny metal at USD1763 per ounce, while the US dollar index remains underpinned. With tense Brexit negotiations in the spotlight again, the pound had its worst week since March, with GBPUSD down to 1.20.

- In the US, the House passed a USD3 trillion package called the HEROES Act, which will be dead on arrival at the Senate, as Republicans are in no rush to pass the next phase. In China, the National People's Congress gathers later this week, with expectations for more news on stimulus programs as markets have recently stalled.

- Earnings releases were light at the end of the week, with JD.com (China e-commerce company) seeing increasing revenue and Petrobras posting its worst quarter since the corruption scandal. This week sees Walmart, Marks & Spencer, Home Depot, Ryanair, Alibaba, Baidu, among others.

- Chinese industrial production rebounded 2.3% for April (up 3.9% year-on-year), but retail sales show services demand remains fragile with 7.5% year-on-year drop. The same data for the US showed the delay in the shutdown in the US, with industrial production down 11% and retail sales down 15% for April. Initial jobless claims were again close to 3 million last week, with continuing claims close to 23 million. However, preliminary data for May showed a more upbeat picture, with the University of Michigan sentiment index ticking up. In Europe, early Q1 GDP estimates for Germany showed some resilience compared to Southern countries, with -2.2% growth quarter-on-quarter. Flash PMIs for Europe this week should show improvements.

- Investors remain caught between better virus news and stimulus versus the earnings and economic reality. Sentiment has become more fragile compared to the optimism. 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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