Economic Data Watch and Market Outlook
Equity markets over the past several weeks have forever proven the theory that they are leading economic indicators and forward-looking mechanisms. Despite the increase of COVID-19 cases in countries such as Russia, India, Saudi Arabia and Japan, and the release poor economic data around the global, from March 23 to April 17 the S&P 500 has rallied 22.87 % (2237.4 to 2749.18) from its recent bottom. The index has retraced more than half of the decline suffered between February 19 to March 23 of 33.92% (3386.15 to 2237.4). U.S. Retail sales in March declined by 8.7% which was the worst showing since March 1992, and Industrial Product fell by 5.4%, the poorest result since January 1946. The rally in equities are paradoxical to the realities of the coming releases of monumentally worsening global economic and corporate earnings data. The rapid V shaped price recovery seen in the S&P 500 may lead to a second leg down, as the forward P/E now stands at a generous 19 times (unknown) earnings and the VIX still remains at a panic level of 40.
As we enter next week’s trading sessions, financial markets will be in a tug of war for direction. The bulls are betting on a revival in global economic growth particularly as the U.S. plans to re-open its economy, while the bears will be fixated on the continued decline in global economic data and poor market technicals. Regarding the U.S. re-opening, President Trump in coordination with the nation’s governors announced the U.S. would re-open in three phases, beginning in areas with strong testing and seeing a decrease in COVID-19 cases. According to Citigroup research, they estimate 30% of the U.S. will reopen by mid-May, 30% by mid-June and 40% by late June. As to the latter point, the S&P 500 has 76% of its constituents trading below its 200-day moving average (according to Index Indicators), U.S. money market funds reached a new high in assets last week of an estimated $4 trillion, and hedge funds have been net sellers during the rally, so who is buying?
In turning to next week’s economic calendar, the releases on note will be Existing and New Home Sales and the University of Michigan Consumer Sentiment Index. We kick-off on Tuesday with Existing Home Sales where is call is for a decline of 5.5% to 5.45 million units on a seasonally adjusted annual rate. Housing activity saw a significant fall as the spread of COVID-19 weighted on the economy.
On Thursday we will get April’s flash for Markit’s Manufacturing and Services PMI reports. The Markit Manufacturing PMI composite is projected to fall by 16.5 points to 32. A wide number of regional measures have seen a sharp decline, and the PMI is expected to worsen over the next few months. The Market Services PMI is estimated to have fallen by 9.8 points for 30.0 in April. The series had already begun to weaken in March and additional declines are expected in upcoming reports.
The University of Michigan Consumer Sentiment Index on Friday is expected to decline to 68.0 in April, representing a steep 21.1-point drop from March’s reading. Several sentiment indicators have fallen sharply and there are few signs this will change as the US economy remains in lock-down.
The Week In Review
U.S. Equities
U.S. equity markets rallied last week on hopes that an effective treatment for COVID-19 was in sight, and as President Trump outlined a plan to re-open the US economy over the next several weeks.
- Dow Jones +2.21%, MTD +10.51%, YTD -15.05 B. S&P 500 +3.06%, MTD +11.32%, YTD -10.49%
- Russell 2000 -1.40%, MTD +6.64%, YTD -26.00%
Drives: I) President Trump issued last Thursday, a set of guidelines to reopen the U.S. economy, which will be guided by the nation’s governors. At present, there are 42 states and approximately 95% of GDP and individuals operating under containment and stay at home orders. It is estimated that some states may be back to almost normal activity by mid-May, while the densely populated Northeast and West Coast will take longer.
II) Phase One will encourage telework while returning to work in phases. Closed school will stay closed and socializing should be limited to groups of 10 or less. Large venues (restaurants, movie theaters, gyms) can open with strict social distancing. Bars will remain closed and no non-essential travels. Phase Two will reopen closed schools, increase socialization groups to 50 or less. Large venues such as sports stadiums will operate with moderate social distancing. Bars open with limited standing capacity and non-essential travel resumes.
III) Phase III will enable unrestricted staffing at workplaces, and low-risk individuals should minimize time in crowded areas. Large venues will operate with limited social distancing and bars can increase standing capacity. New York and New Jersey are still on stay at home orders and nonessential businesses are still closed through May 15, which implies the Northeast (NY, NJ, CT, PA, MA, DE, and RI) will not reach Phase III till June 15th.
IV) March U.S. Retail Sales plummeted by 8.7%, as essentially all categories fell with the except of grocery stores, where sales jumped by 26.9% on the month. The decline reveals the economic damage caused by COVID-19, led by the decline in food service (bars and restaurants) which plunged by 26.5% last month. On the plus side were healthcare and personal care stores up 4.3% and non-store retailers (internet) which rose 3.1%.
V) Equities Month to Date are higher with Large-Cap, Growth, Energy and Healthcare leading equity price performance. The laggards for the period are Small-Cap, Value, Financials and Utilities.
Capitalization: Large Caps +11.35% (YTD -11.16%), Mid-Caps +11.17%(YTD -18.93%) and Small Caps +6.64% (YTD -26.00). Style: Value +6.77% (YTD -31.44%) and Growth +7.99% (YTD -20.03%). Industry Groups: Healthcare +13.74% (YTD -0.63), Technology +11.12% (YTD -2.11%), Information Technology +10.98% (YTD -3.15%), Consumer Staples +11.05% (YTD -3.33%), Utilities +9.21% (YTD -5.38%), Consumer Discretionary +15.20% (YTD -9.49%), REITs +11.39%(YTD -9.97%), Communication Services +9.67% (YTD -10.77%), Materials +11.63%(YTD -17.57%), Industrials +6.91% (YTD -21.92%), Financials +7.86% (YTD -26.47%) and Energy +16.74% (YTD -42.17%).
European Equities
The MSCI Europe Index was higher last week by +0.04% as investors ignored the poor historic economic data coming out of China and focused on the potential for a COVID-19 vaccine and reopening of the US economy.
Drivers: I) The Euro-zone’s government deficits and debt and expected to sharply rise in 2020, as governments and ECB combat the dramatic decline in growth caused by COVID-19. The drop in Euro-zone GDP have pushed deficits and discretionary fiscal policy measures to approximately 2.2% of GDP, and this amount is expected to increase. Government deficits are projected to jump to 7.8% and debt to 100% of GDP, respectively.
II) Euro-zone industrial production fell by 0.1% in February, and production is expected to plunge in March as lockdown measures were put in place in various countries due to the Coronavirus. Data provided by the French statistic office, projects industrial production in France is coming in 50.0% below normal after France’s lockdown announcement in mid March. Confinement measures started two weeks earlier in Italy and one week later in Germany.
III) Performance of European Indexes for the week, month-to date and year-to-date. The MSCI Europe Index was higher by +0.04% for the week (MTD +3.20%, YTD -21.91%).
Asian Equities
Asian equity markets rallied last week as the drop in China’s Q1 GDP came in under the projected double- digit decline. The Dow Jones Asia Index was higher by +2.10% for the week (MTD +6.72%, YTD -16.11%).
Drivers: I) China’s GDP for Q1 2020 dropped by 6.8% after seeing 6.0% growth in Q4 2019, due to the spread of COVID-19. On an annual basis, the contraction is 34.7% on a quarter over quarter comparison. Activity has rebounded in March as economic activity has resumed as the pandemic has receded. Industrial Production fell 1.1% following a steep decline in January and February. Retail sales fell 15.8% and fixed investment by 24.5%.
II) In Japan, the April Reuters Tankan Survey of large Japanese firm’s sentiment plummeted to multi-decade lows amid the Coronavirus pandemic. Sentiment among large manufacturers plunged 10 points to -30, the lowest reading since the Great Financial Crisis of 2009. The large firm non manufacturing index fell 13 points to -23, the worst showing since June 2011. The pessimism is being caused by concerns over the virus’s impact on business. Demand had already been weakened by the October 2019 consumption tax hike and U.S.-China trade tension.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei was higher by +2.05% (MTD +5.18%, YTD -15.04%), the Hang Seng Index rose by +0.37% (MTD +3.33%, YTD -13.11%) and the Shanghai Composite advanced by +1.50% (MTD +3.21%, YTD -6.94%).
Fixed Income
Treasury yields fell last week, as investor are still seeking safe heaven assets as global economic data is worsening and the anticipated timing for a recovery of the global economy is still uncertain.
Performance: I) The 10-year Treasury yield was lower last week ending at 0.643% up from 0.729%. The 30-year yield declined last week finishing at 1.265% down from 1.349%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose +0.70% last week, MTD +1.54% and YTD +4.74%. The Bloomberg Barclays US MBS TR was lower by -0.22% last week, MTD +0.24% and YTD +3.07%. The Bloomberg Barclay’s US Corporate HY Index advanced by +2.35% for the week, MTD +5.52% and YTD -7.57%.
Commodities
The DJ Commodity Index was lower last week by -3.40% and is down month to date -0.57% (YTD -28.10%). The commodity index dropped last week as OPEC and Russia reduced daily oil output by a disappointing 9.7 million bpd down to an estimated 90 million bpd, while daily demand is estimated to be 70 million bpd.
Performance: I) The price of oil plunged last week by -20.38% to close at $18.12 and is lower month to date by -11.52% (YTD -70.32%). Oil slid as the production cuts by OPEC and Russia down to 90 million bpd, fell far short of the expected drop in current demand of 30.0%, sending crude to its lowest price level since 2002.
II) The ICE USD Index, a gauge of the U.S. dollar’s movement against six other major currencies, was higher by +0.24 ending at 99.72 for the week (MTD +0.67%, YTD +3.45%). The USD rose last week as capital flowed into U.S. assets, as the number of COVID-19 cases rose in parts of Asia and North Africa.
III) Gold dropped last week as supplies stored in COMEX warehouses have doubled in the last three weeks, as demand from the jewelry industry has dropped due to COVID-19’s. Gold was lower by -3.32% last week, falling to $1694.5 (MTD +6.13%, YTD +11.25%).
Hedge Funds
Hedge fund returns in April are higher with the core strategies, Equity Hedge, Event Driven, Marco/CTA, Relative Value and Multi-Strategy all in positive territory.
Performance:
- The HFRX Global Hedge Fund Index is higher at +2.07% MTD and down -4.93% YTD.
- Equity Hedge has advanced by +2.96% MTD and lower by -10.77% YTD.
- Event Driven is up MTD +1.73% and is down YTD -3.87%.
- Macro/CTA has risen by +0.74% MTD and is down -0.45% YTD.
- Relative Value Arbitrage has climbed up by +2.43% and is lower -3.14% YTD.
- Multi-Strategy is up MTD at +2.42% and has dropped by -3.13% YTD
Data Source: Haver Economics
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