Market Flash 7 May

What happened?

- Equity markets have been broadly stable, with both US and European markets retreating about 1% yesterday, as earnings news and economic data releases weigh on sentiment. This morning, futures are just in the green.

- US sovereign yields rose yesterday as the US Treasury announced its quarterly funding needs, before retreating this morning. The 10-year Treasury yield stands at 0.69% and 10-year Bund yields at -0.50% after rising throughout the day yesterday. IG credit spreads have remained flat, while HY spreads have tightened, especially in the US thanks to higher oil prices. Oil prices’ rally stalled yesterday, with WTI retreating to USD24 per barrel (from 26) while Brent fell back to USD29 per barrel (from 32).

- The long-awaited German court ruling on the European Central Bank’s QE program said the ECB has three months to prove the proportionality of its initial QE program. We do not anticipate this to be a problem, and markets have reacted relatively mildly to the news. Italian spreads over Germany have risen over recent weeks to 248bp, from a pre-crisis low of 129bp and a March high of 278bp.

- Earnings releases for the first quarter continue to paint a mixed picture, with GM announcing better results than Ford and Fiat Chrysler with a profit in Q1 (though down compared to Q1 2019), and all three companies raising cash to cushion the impact of the crisis. BMW cut its auto profit outlook, Paypal disappointed and withdrew guidance even as new accounts rose, Disney income dropped due to park closures, Total is set to cut 2020 capex by at least 25%, Infeneon revenue fell and BNP Paribas net income dropped 33% over Q1 2019. Uber, AB Inbev and ArcelorMittal are among those still reporting this week.

- Preliminary April Markit services PMIs remained as low as March, indicating a still very dire outlook. The surveys ask for month-on-month comparisons, suggesting the outlook deteriorated further. European retail sales were worse than expected in March, down over 11% month-over-month, and US ADP payrolls saw a drop of over 20 million in April, in an early indication of tomorrow’ non-farm payroll data. Consensus is -21 million, and today’s initial jobless claims are expected to show another 3 million new claims. Chinese data surprised this morning, with an unexpected rise in exports over April, though imports dropped further.

- Sentiment remains fragile, as markets may have priced in too much optimism to confront the reality ahead of us with current levels and valuations. We may not re-test the lows, but we continue to believe that plenty of risks remain as progress against the virus and stimulus battle bad economic and earnings releases and rising geopolitical tensions. We remain prudent 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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