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Ok. Got itPurchasing Managers’ Index numbers reached historic lows, unemployment reached record highs and Q1 GDP figures for the leading economies provided a sobering glimpse. Read our latest market review.
Weak data, strong markets
The impact of the current health crisis continues to permeate the world, with global activity indicators deteriorating as the various stages of lockdown persist globally. Purchasing Managers’ Index (PMI) numbers reached historic lows, unemployment reached record highs and Q1 GDP figures for the US, China and Eurozone provided a sobering glimpse of the state of the world’s major economic hubs.
Markets were however buoyed by fiscal support and liquidity from policy makers, a stabilisation of daily global infection rates, partial reopening of several countries and an antiviral drug that showed promise. The S&P 500 rallied by +12,8% over the month, recovering some of the previous month’s losses and bringing the 12-month returns into positive territory at +0,9%. The MSCI World Index ended the month up +11,0%, while emerging markets gained +9,2%. This hides wild swings in risk sentiment as markets tried to look through the fog of near-term disruption.
Storage wars
In early April oil producers (OPEC+) agreed to cut production by a historic 10 million barrels a day, equivalent to an average of 10% of annual supply. This did little more than provide a floor for the oil price against a collapse in global demand and a lack of storage capacity. Indeed, these dynamics would also be the cause for another unprecedented moment in the oil markets. On 20 April the price of the first futures contract for WTI crude plunged into negative territory, reaching a record low of -$40,32. The nearing expiry date for the US benchmark contracts, which require physical delivery, against a backdrop of limited storage capacity, left traders scrambling to sell and the price in negative.
Weak foundations
The IMF provided sobering forecasts in its spring World Economic Outlook. The institution expects global GDP to contract by 3% in 2020, much worse than the 0,1% contraction during the Great Financial Crisis (GFC). Alternative scenarios provided for a worse outcome, depending on the evolution of the crisis. First-quarter corporate-earnings season is underway, and results confirm that nobody has been left unscathed. Companies have taken to dividend cuts or suspensions, especially those with leveraged balance sheets.
Despite these fundamentals, risk assets have recovered sharply and swiftly since the lows in March. The role of policy interventions in that trajectory cannot be over-emphasised. The size of the US loan programmes and decision by the US Federal Reserve to initiate buying of certain high-yield corporate instruments and ETFs injected the credit markets with much-needed liquidity, preventing the meltdown that occurred during the GFC and providing a safety net for markets.
Arguably market participants may be underestimating the time it will take to reopen economies and improve activity. Indeed, we have already seen a second wave of infections in several countries. Data from China suggests that consumers have been reluctant to return to recreational activities and spending, while for many the financial impact of the lockdown leaves them unable to do so. The Economist postulates that we should consider a ‘90% economy’. Until the world has a vaccine or other treatment, this may be plausible, and therefore patience will be required.
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