Market Flash 2 June

What happened?

- Markets continue to prove immune to negative headlines, as they climbed into the end of the week and were in the green yesterday as well, even as protests grapple the US and tensions between the US and China rise again. Yesterday, the S&P500 was up 0.4% and the Stoxx50 up 0.9%. This brings the rally to 36% for the S&P500 and 29% for the Stoxx50 from their respective lows.

- After China vote for the National Security Law for Hong Kong, President Trump had strong rhetoric against China, but little concrete measures. As we had been expecting, there is more bark than bite, and we hope that will continue. Indeed, Trump needs to sound tough on China for his re-election campaign, but if he acts too tough he can worsen economic conditions and a stock sell-off that could cost him a second term.

- The second estimate of the Q1 GDP for the US was revised down to 5% annualised, still stronger than most other regions. Initial jobless claims were still above 2 million for the past week, but continuing claims fell back to 21 million (versus an expectation of 25.5 million). This week’s non-farm payrolls will be in the spotlight following April’s 21 million headline figure. The consensus is for another 8 million drop. In Europe, inflation was 0% but confidence indicators improved from last month’s lows. The spotlight will be on this week’s European Central Bank meeting, with expectations for the emergency PEPP QE program to be increased, possibly by a further EUR500 billion.

- US Treasury yields remain in their broad 0.6%-0.7%, with the 10-year Treasury yield around 0.66%, while 10-year Bund yields have risen back to -0.40%. Credit spreads tightened a few more basis points, with US IG at 171bp, US HY at 627bp, EU IG at 170bp and EU HY at 567bp. Italian debt benefit further from the European Commission’s Recovery Fund proposal, with spreads over German debt down to 188bp.

- Oil prices benefitted from the equities’ advances, with WTI back to USD35 per barrel and Brent at USD38 per barrel ahead of this week’s OPEC meeting, where focus will be on maintaining production cuts to support to price recovery. Gold prices bounced from last week’s lows to USD1736 per ounce, and the US dollar continued to fall.

- In recent days, investors appear to be more focused on reopening plans than on remaining risks, and the rally has broadened beyond growth and defensive sectors. It is still early, but this could give the rally a further boost if confirmed. Overall though, we believe that US-China tensions and the upcoming Q2 earnings season could weigh on sentiment in the coming weeks, and we choose to remain prudent.

What we are watching

- We look at high frequency data to see if reopening is translating into re-growing. And we keep an eye on deaths and intensive care unit cases to ensure the virus remains contained as we gradually reopen. In Europe in Asia, so far so good. We also look to see if recent encouraging news on treatments materialises.

- We continue to watch for bankruptcies and defaults, though the Fed in particular is doing everything in its power – and beyond – to limit risks of contagion.

- We will look at earnings estimates as they continue to be revised down. After a sharp drop in earnings in Q1, expectations for Q2 are even worse and could weigh on sentiment.

- 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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