Economic Data Watch and Market Outlook
US equity markets defied the old adage “sell in May and go away”, by posting its second consecutive monthly gain. Equity markets continue to de-couple from current flow of historically poor economic data, and instead are focused on the re opening of cities and countries around the globe. Also supporting risk assets are positive news that more than 115 COVID 19 vaccines are being tested globally, and governments including the US, Japan and the EU continue to put forth fiscal stimulus to support their depressed economies. The S&P 500 since hitting bottom at 2237 on March 23rd, has rallied an impressive 820 points (approximately 37.0%) to close last Friday at 3057.25. The positive uptrend in equities has brought the VIX down from a historical high of 82.69 in mid-March, to 27.51 on Friday, the seventh out of last eight trading days the index closed below 30.0. The S&P 500 now stands only 329 points (10.7%) below its all-time high of 3386.15 achieved just this past February 19th.
As we enter next week’s trading sessions, we will close out the Q1 corporate earnings season with technology companies reporting such as Broadcom and Zoom Video, along with retail stalwarts including Campbell Soup, Dick’s Sporting Goods, Gap Inc., and Tiffany & Co. With 490 (98.0%) S&P 500 having reported, 65% and 50% having beaten their Q1 earnings and revenue estimates, respectively. For the quarter, S&P 500 earnings have declined by 7.7% year over year, while revenues have increased by 1.09% according to FactSet. With corporate earnings in the rear-view mirror, investors will be turning their attention to any further escalation of the US/China geopolitical tensions and any progress on a COVID-19 treatment.
In turning to next week’s economic calendar, the key data releases will be centered around the employment picture in the US and the manufacturing and non-manufacturing surveys. We start off on Monday with the ISM Manufacturing survey which is projected to rise by 2.5 points to 44.0 for May. Manufacturing activity is beginning to pick up as the “stay at home” COVID-19 restrictions are being lifted.
On Wednesday, the ISM non-manufacturing survey is estimated to have improved by 3.2 points to 45.0 for the month of May. Once again, the lifting of restrictions in many areas are beginning to support the business survey.
The all-important non-farm employment report on Friday is expected to show a decline of another 8 million in May, raising the unemployment rate from 14.7% to 18.0%. The decline in in employment is being driven by an increase in unemployment, a drop in the labor force participation rate and a rise in the number of people employed but not at work.The labor force participation rate is projected to fall from 60.0% to 59.0%.
The Week In Review
U.S. Equities
US equity markets rallied last week as optimism surrounding the reopening of cities around the country and progress on a COVID-19 vaccine out-weighted growing tensions between the US and China.
- Dow Jones +3.85%, MTD +4.66%, YTD -10.06
- S&P 500 +3.04%, MTD +4.76%, YTD -4.97%
- Russell 2000 +2.87%, MTD +6.51%, YTD -15.95%
Drivers: I) The National People’s Congress in China last week, passed legislation that would impose national security laws on Hong Kong and essentially cut off the territory’s limited autonomy. The legislation permits Beijing to implement legal and enforcement measures in Hong Kong just as they are in mainland China. This action prompted President Trump and the US State Department to declare Hong Kong is “no longer autonomous” and possibly invoking higher tariffs on Hong Kong imports and creating uncertainty for US companies that have a corporate presence in the territory.
II) Sales of new homes in April rose by 0.6% to a seasonally adjusted annual rate of 623,000. The uptick in sales was a welcome rebound from the sharp declines seen in both March and February of 13.7% and 7.4% respectively. The April sales rate is far below the trend seen before the COVID-19 pandemic. While total new home sales rose, the sale of completed units fell by 13.6%, but sales of units to be started actually rose by 26.5% in April.
III) In May, the Conference Board consumer confidence index rose from 85.7 in April to 86.6. The slight rise in May follows steep declines for both March and April. The uptick in confidence was driven by the improvement in consumer expectations index, as cities and regions across the US begin to open back up. The survey’s labor market differential upgraded in May after a sharp drop in April, with the current reading coming in at -10.4 (versus -15.7 and +29.5 for April and March, respectively.
IV) Durable goods orders in April declined by 17.2%. While the large drop is historical, the orders came in close to expectations after seeing similar declines in other economic indicators. The fall was seen across many major categories, with the exceptions being computers and electronics. The core reading ex-defense and aircraft, saw new orders drop by 5.8% in April, while related shipments also fell by 5.4%. This disappointing reading provides a weak base as it relates to capital expenditures for the second quarter.
V) Equities Month to Date are higher with Mid-Cap, Growth, Tech, and Information Tech leading equity price performance. The laggards for the period are Large-Cap, Value, Consumer Staples, and REITs.
Capitalization: Large Caps +5.28% (YTD -4.91%), Mid-Caps +7.03% (YTD -10.73%) and Small Caps +6.51% (YTD -15.95%). Style: Value +4.43% (YTD -23.45%) and Growth +8.08% (YTD -8.94%). Industry Groups: Technology +7.03% (YTD +7.27%), Information Technology +7.04% (YTD +6.37%), Healthcare +3.27% (YTD +1.60%), Communication Services +7.06% (YTD -0.54%), Consumer Discretionary +6.60% (YTD -0.37%), Consumer Staples +1.66% (YTD -5.34%), Utilities +4.35% (YTD -6.70%), Materials +6.94% (YTD -9.06%), REITs +1.90% (YTD -9.87%), Industrials +5.46% (YTD -16.27%), Financials +2.70% (YTD -23.30%) and Energy +2.06% (YTD -33.89%).
European Equities
The MSCI Europe Index was higher last week by +5.06%, on news that the EC will propose a €750 billion ($825 billion) fiscal stimulus package to help the region recover from in COVID-19 induced recession.
Drivers: I) The Euro-zone economic sentiment index for May posted a slight gain of 2.6 points to 67.5. The increase was welcome after the sharp drop of 38.5 points seen in March to April when COVID-19 restrictions were in place. This positive sign may provide clues that the nadir of economic activity may have occurred in April and has started to rebound as restrictions have been lifted. The primary drivers of May’s increase were the manufacturing sector (+5.0 points for -27.5) and consumer confidence (+3.2 points to -18.8).
II) Euro-zone core inflation in May remained stable, coming in line with expectations of a slow down of 0.2% on an annual basis. Inflation for services increased by 1.3%, while the drop in headline inflation was mostly influenced by the declines in energy (lower by 2.3% to an annualized rate of -12.0%) and food prices (down 0.3 points to a 3.3% annualized rate). The assumption moving forward is the COVID-19 economic shock has caused a significant drag on demand, which should lead to a lower rate of core inflation. Economists are projecting core inflation will end the year at a 0.6% annual rate, far the below the ECB target of 2.0% annualized.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was up by +5.06% for the week (MTD +4.55%, YTD -16.19%).
Asian Equities
Asian equity markets were higher last week, rallying on news that Japan was lifting its pandemic state of emergency measures, offsetting the rising geo-political tensions involving China, Hong Kong, and the US. The Dow Jones Asia Index was higher by +3.15% for the week, (MTD -1.88%, YTD -14.99%).
Drivers: I) China’s National People’s Congress (NPC) announced it was adding National Security legislation into the Basic Law of Hong Kong, which heightened geo-political tensions between the US and China. This increased investor worries over geo-political risk, particularly over the annual US review of Hong Kong’s special status as a separate customs territory. This procedure follows the passage in October 2019 of the Hong Kong Human Rights and Democracy Act by the US Congress, which requires the US review Hong Kong’s autonomy annually.
II) Japan’s Industrial Production in April plunged by 9.1% on a month over month basis, marking the third consecutive monthly decline. The drop in auto output was the primary drag, falling by 33.3%, following a decline of 5.1% in March. The supply chain disruption caused by COVID-19 which began in April, has caused many auto makers to temporarily shut down factors in order to adjust their production. The high inventory to shipment level, which rose in April, is expected to be a drag on the short-term recovery in production.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +7.31% (MTD +8.34% YTD -6.58%), the Hang Seng Index was higher by +0.19% (MTD -6.86%, YTD -18.19%) and the Shanghai Composite advanced by +1.37% (MTD -0.27%, YTD -6.48%).
Fixed Income
Treasury yields rose last week, as longer dated maturities saw rates rise as the yield curve steepened due to the sharp increase in Treasury issuance prompted by the COVID-19 fiscal rescue plan.
Performance: I) The 10-year Treasury yield was lower last week ending at 0.659% down from 0.660%. The 30-year yield advanced last week finishing at 1.412% up from 1.374%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose +0.23% last week, MTD +0.47% and YTD +5.47%. The Bloomberg Barclays US MBS TR was higher by +0.11% last week, MTD +0.12% and YTD +3.60%. The Bloomberg Barclay’s US Corporate HY Index was higher by +1.80% for the week, MTD +4.41% and YTD -4.73%.
Commodities
The DJ Commodity Index was higher last week by +2.45% and is up month to date +10.80% (YTD -24.88%). The commodity index jumped higher as countries around the global were beginning to lift COVID-19 restrictions, which in turn, should revive economic growth and the demand for energy and industrial metals.
Performance: I) The price of oil increased last week by +5.24% to close at $35.32 and is higher month to date by +87.47 (YTD -42.15%). Oil prices rose by a record 87.47% in May as continued production cuts and news that the US was not pulling out of the Phase I China trade deal sent crude prices higher.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was lower by -1.50% ending at 98.30 for the week (MTD -0.73%, YTD +1.98%). The USD declined last week as investors were heartened by the US’s decision not to pull out of the trade deal with China, and the rally in risk assets.
III) Gold rallied last week as rising geo-political tensions between the US and China prompted a higher bid for the safe haven metal. Gold was higher by +0.48% last week, climbing to $1743.0 (MTD +2.89%, YTD +14.44%).
Hedge Funds
Hedge fund returns in May are higher with all of the core strategies Equity Hedge, Event Driven, Marco/CTA, Relative Value and Multi-Strategy in positive territory.
Performance:
- The HFRX Global Hedge Fund Index is higher at +1.43% MTD and down -2.80% YTD.
- Equity Hedge has advanced by +1.28% MTD and lower by -8.28% YTD.
- Event Driven is up MTD +1.96% and is down YTD -1.03%.
- Macro/CTA has risen by +0.17% MTD and is lower by -0.53%
- Relative Value Arbitrage is higher by +1.96% and is lower -0.68% YTD.
- Multi-Strategy is up MTD by +1.96% and has dropped by -0.80% YTD
Data Source: Haver Economics
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