Weekly View - Jobs crash
With global equities having just closed their worst quarter since 2008, with oil prices at their lowest levels in 18 years, market jitters and uncertainty are far from over. Credit markets are under intense pressure, with US high-yield spreads at over 900 bps. As the first rounds of data revealing the impact of Covid-19 on sentiment and growth come through, so far we have seen plummeting European purchasing manager indices and 10 million US jobless claims – nearly equal to the GFC total - in the space of just two weeks. OPEC+ producers are meeting this week, but hopes of a major breakthrough on oil production cuts may be disappointed.
But there is some good news. The Federal Reserve has relieved bank funding stress through the introduction of swap lines. Treasury market liquidity has returned as a result and European periphery spreads have moderated. We could this week see the European Stability Mechanism applied without conditionality for Spain and Italy. The primary bond market is now wide open with record new issuances and renewed investor interest after central bank purchases have allowed for the return of inflows to credit markets for the first time in three weeks. And while we are seeing record issuance in the US, it comes at a rich price, with cruise company Carnival having issued a bond with a 11.5% yield. We emphasise buying quality in bonds and are positive on low-leveraged equities.
There is also hope around the new coronavirus, particularly around it having potentially passed a peak in contagion and the prospect of a treatment through chloroquine. However, the shutdowns are set to last longer than initially hoped. We are now moving into a new phase. After the initial shock, we are gradually starting to discover the virus’s consequences. Regulators are increasingly asking companies not to pay dividends. So far, this has been directed at the financial sector but other sectors may follow. Looking ahead, we are cautious on Q1 earnings results, which kick off in two weeks. We must prepare for significant negative numbers and the possible removal of full-year guidance. Last week, companies announcing bad news were penalised, indicating that those were negative surprises versus market expectations.