Market Flash 25 May

What happened?

- Equity markets eased into the end of the week, though they just managed a performance in the green on Friday, ahead of the long weekend in the US and the UK. The S&P500 was up 0.24% while the Stoxx50 was up 0.02%, as rising US-China tensions weigh on sentiment. In addition, plans by Beijing to tighten China’s grip on Hong Kong with its Security Law led to widespread protests and opposition, and weighed on markets across the region. Flows continue to come out of equities, into bonds and, for the first time since February, just out of money markets.

- Sovereign yields fell throughout the end of the week, with the 10-year Treasury yield at 0.65% and the 10-year Bund yield at -0.49%. Credit spreads were flat, with US IG at 186bp, EU IG at 188bp, US HY at 680bp and EU HY at 637bp. Spreads between Italian and German debt remain stable around 210bp since the Franco-German Recovery Fund proposal. Oil prices have also stabilised, with WTI at USD33 per barrel and Brent at USD35 per barrel. Gold prices retreated to and the week at USD1730 per ounce, and the US dollar is finding some support this morning after softness last week.

- Flash PMIs for May showed a rebound, though the surveys remain well below 50, indicating a slower level of decline rather than a return into expansion territory. The US bounced more than Europe. US initial jobless claims showed another 2.4 million new jobseekers, and 25 million continuing claimants. UK retail sales were down 15.2% month-on-month in April. And China announced it was abandoning a growth target for this year given the uncertainty surrounding the pandemic. Flash inflation data for Europe is coming this week, as well as US consumer spending and German retail sales for April.

- Talk of negative interest rates continues, with the UK ‘contemplating’ the move, even as Federal Reserve members and Chairman Powell have taken a much stronger “not happening” stance.

- In earnings, Nvidia gave a revenue forecast for Q2 in line with expectations, bringing a boost to the sector, especially as HP revenue dropped 16% for this quarter last year and the company announced a cost-cutting plan and IBM announced job cuts across the US. Expedia revenue dropped 15% and Footlocker posted a bigger-than-expected quarterly loss.

- Investors remain caught between better virus news and stimulus versus the earnings and economic reality, as well as rising China-US tensions. Sentiment has become more fragile compared to the optimism of April. 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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