Market Flash 22 April

What happened?

- Equity markets fell as oil prices dropped and earnings releases continue to show how difficult it is for businesses to give guidance on when and how smoothly the situation will improve. The S&P500 retreated 3%, while the Stoxx50 dropped 4%. This morning, futures are in the green, following the latest stimulus announcement in the US.

- The Senate passed a phase 3.5 support package to give more ammunition to the SBA (Small Business Administration), which ran out of its initial USD350 billion in less than 2 weeks. The add-on package totals about USD480 billion to help the SBA, testing and hospitals, and goes to the House for a vote on Thursday. If approved and signed by Mr. Trump, the SBA could get re-funded as early as Friday or Monday.

- Oil prices dropped again, with the WTI contracts for June plunging more than 50% to below USD10 per barrel before stabilising at USD11 per barrel. While the WTI woes were initially linked to Cushing, Oklahoma storage concerns, the general lack of demand for oil dragged Brent prices down as well, to USD16 per barrel (from USD25 per barrel at the start of the day). President Trump is looking into support for the shale industry to protect the 10 million jobs in that sector. 

- US Treasury yields retreated further amid the oil and equity sell-off, with the 10-year at 0.55%, while the German 10-year Bund yield fluctuating between -0.45% and -0.50%, ending the day at -0.47%. Italian spreads continue to widen (above 260bp) versus Germany as concerns over funding persist and political tensions rise again. Tomorrow’s EU Council meeting will be in the spotlight to see if they can follow through with increased support for the Eurozone as a whole, though little is expected in terms of concrete results for now.

- Credit spreads widened across the board, with the IG segment holding in better than HY. Indeed, US HY widened the most (+48bp) as expected given the collapse in oil prices, while European HY widened 16pb. US IG widened 5bp and EU IG 3bp.

- Earnings results continue to point to a lack of guidance for Q2 and for the year as businesses struggle to assess the severity and the length of the damage from the crisis. Netflix surprised on the upside for Q1, but warned ‘de-confinement’ would weigh on future numbers and Coca Cola withdrew 2020 guidance even though Q1 benefited from grocery stocking and China is staring to recover. In Europe, Danone benefited from increased Q1 shopping in Europe and the US even as China fell, but said it expected Q2 to be impacted by the global lockdown and it didn’t know how ‘supply and demand’ might be impact for the year, while SAP (the German software giant) beat for Q1, expects Q2 to be bad, but is looking for improvements in the second half of the year. Today’s announcements include Roche and Heineken, among others.

- While markets have retreated for a few days, we believe that current levels and valuations (back to February levels) still under-estimate the risks ahead – whether in terms of the impact of the crisis on growth and earnings; how staggered and gradual the recovery will actually be; the risk of a second wave of contagion with de-confinement; and the more permanent loss of jobs if we see more bankruptcies. In short, we do not expect a seamless transition to the ‘after corona’ and therefore believe that downside risks remain.

What we are watching

- We are looking at gradual reopening announcements to see how they unfold across different regions, countries and industries, as the recovery cannot just be switched on. We look to see if cases remain contained with softer confinement measures to see if the path can be smooth.

- We keep an eye on 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

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