Weekly View - Immune markets
Last week was a revelatory one in terms of to what extent coronavirus shutdowns across the developed world have impacted GDP growth. In both the US and Europe, GDP in the first quarter was worse than expected. The US economy shrank by nearly -5% annualised, in its sharpest fall since 2008. Personal consumption dried up in particular, with US shoppers under orders to stay home as jobless claims hit 30mn and unemployment breached 12%. Meanwhile, the euro area economy contracted by the fastest rate on record at over -14%, annualised. While even worse is expected in the second quarter, encouragingly, economies have started to progressively reopen for business as infection rates decline. At the same time, pharmaceuticals and academic researchers are racing to validate potential treatments or a vaccine. Markets are hopeful that if Gilead’s remdesivir reduces Covid hospital stays from 15 to 11 days, it will alleviate pressure on healthcare infrastructure.
Central banks around the world convened last week, with Japan’s joining the QE-to-infinity club. Fed chairman Jerome Powell delivered a grim outlook, citing numerous risks to the economy over the medium term, but stopped short of offering new policy guidance. The ECB lowered the TLTRO rate to do whatever is needed to support banks. While rating agency Fitch downgraded Italy, it moved Italy’s outlook to stable due to EU and ECB support. Bond markets remain wide open with no shortage of debt buyers snapping up new issues and US investment-grade issuance up 85%, year-to-date. We are underweight European sovereign bonds ahead of the German constitutional court’s ruling on ECB QE this week.
We are now midway through the earnings season, which has been so far so good, albeit based on very low expectations. Among the tech giants, Amazon disappointed on higher costs related to the coronavirus measures, despite a jump in sales. Consensus expectations for 2020 earnings are now for a fall of -17% in the US and -23% in Europe. Royal Dutch Shell shocked markets after cutting its dividend for the first time since the Second World War, sending its shares down -10%. All the same, US equities had their biggest monthly rally since 1987, with valuations now significantly above pre-coronavirus crisis levels. We remain underweight equities.