Weekly View - No victory yet
The first-quarter reporting season started last week with a number of large US banks increasing loan-loss provisions as they prepare for a spike in loan repayment delinquencies. Large banks’ reported earnings came down sharply as a result, which could serve as a prelude of more to come over the next few weeks as earnings season ramps up. More sombre news came from the IMF, which predicts that global output will fall by -3% in 2020 - the first global contraction since the 2008 financial crisis. China’s GDP declined in the first quarter for the first time in over four decades, shrinking by -6.8% year-over-year, even as some manufacturing data came down less than expected. This could provide a glimpse of what lies ahead for Europe and the US after their economies start to reopen. Within emerging-market equities, we continue to prefer Asia.
Despite all of the discouraging signals, markets were quick to celebrate the prospect of a Covid-19 treatment after a report was released touting the benefits of Gilead’s remdesivir drug on a small study of severely ill patients. In the absence of any definitive developments, further data and analysis in coming weeks is essential before any conclusions can be drawn. Perhaps more relevant, pharmaceuticals company Roche hopes to launch a coronavirus antibody test as soon as early May. Such a test could reveal who is immune to the new coronavirus and potentially allow those people to return to work. In the current context, we favour the healthcare sector.
Finally, the week ahead is a critical one for Europe to reach a unified response to the coronavirus pandemic. While it may yet be too soon for coronabonds, the European Central Bank’s EUR 750bn Pandemic Emergency Purchase Programme combined with the EUR 500bn made available through the European Stability Mechanism and the European Investment Bank’s EUR 60bn development finance proposal mark promising first steps to soothe some of the continent’s impending economic pain. Markets would like to see even more, however, which is why we are underweight European sovereign bonds. In the weeks ahead, geopolitics and their unintended consequences could spike along with volatility.