Market Flash 30 April
What happened?
- Equity markets had a strong day on news that some treatments are showing encouraging results on early trials and positive earnings news even as US Q1 GDP come in at -4.8% on an annualised basis. Both European and US markets were up more than 2%, ready to close one of the best months in 30 years as the S&P500 has bounced 31% from its 23 March lows, while the Stoxx50 has rebounded 26% since its 18 March lows. The rally is also broadening (finally), adding to confidence. Any news on treatments or vaccines would of course change the outlook completely as we could reopen much faster and with less restrictions and reduce fears over a second wave.
- Facebook, Microsoft and Qualcomm had strong results, with Facebook stating they are seeing “signs of stability” in advertising revenue. Tesla surprised markets with a Q1 profit, but MasterCard pulled its guidance despite a jump in contactless transactions and GE and Boeing both announced plans to cut costs. Today, we get Amazon, Royal Dutch Shell, McDonald’s and more.
- The Federal Reserve did not make any changes to its policy, but warned that more stimulus would be needed for the recovery. Today, the European Central Bank will be in the spotlight as European GDP numbers come in, highlight the start of the recession. US 10-year Treasury yields have remained broadly stable around 0.6%, while German 10-year Bund yields fell, to -0.5%. Credit spreads were again flat to a few basis points tighter across segments.
- Oil prices recovered further on hopes for reopening and as Norway said it would cut production for the first time in nearly 20 years. WTI is trading at USD16 per barrel, while Brent is at USD24 per barrel. Gold has remained in a USD1700-USD1720 per ounce range in recent days, while USD continues to retreat.
- We continue to believe that current levels and valuations (back to February levels) still under-estimate the risks ahead, though better news on treatments and a stronger breadth to the rally suggest it could last for some time. Nonetheless, we remain prudent for now as the transition to the “after corona” is unlikely to be seamless and we are likely to see higher volatility at some point again.
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 also look to see if recent encouraging news on treatments materialises.
- 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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