Deep Recession Fears Cause Market Jitters
Data Sourced from FE Analytics, and Bloomberg Finance LP
MARKET VOLATILITY EBBS LOWER AS POLITICAL NARRATIVE SHIFTS TO EASING CONTAINMENT MEASURES
This week markets have retained most of the equilibrium that has characterised the last two weeks. Record volatility seen in March has been replaced with comparatively calmer conditions. Equities have continued to gain ground and corporate bond spreads tightened. Perhaps markets have become desensitised to the continual diet of bad news – both on the coronavirus and economic outlook.
The political narrative this week has been focussed on how and when countries will begin reopening for business and it may be a case of markets looking for things to be positive about. The rhetoric has been loudest in the US, where Donald Trump has said the US may begin re-opening from 1st May. In the UK, the government is considering more financial support for struggling firms a week after saying the government “can’t save every single job or protect every single business”, the Chancellor is expected to unveil measures to support start-ups as well as more government guarantees for loans to businesses not covered by the £330bn of funding already announced.
GLOBAL: DEEP RECESSION FEARS CAUSE MARKET JITTERS
Positive sentiment in equity markets, spurred by a decreasing number of coronavirus cases within pandemic hotspots, is starting to sour due to the increasingly negative economic news flow this week.
In the US 5.2 million more Americans filed jobless claims. Unemployment levels are forecasted to hit between 15-20 per cent this year – well above the last recession and could end up not too far off the Great depression levels. Retail sales for non-essential items fell off a cliff, while manufacturing levels hit lows not seen since the end of WW2. In Asia, the IMF warned that the region could see no growth breaking a sixty-year run, sending Asian equities into retreat.
The one pocket of positive equity movement this week was Europe as some countries like Germany eased restrictions returning to some semblance of normality.
OIL: CUTS MAY PROVE TOO LITTLE TOO LATE AS PRICES SLUMP
The bitter yet unsustainable oil price feud between Saudi Arabia and Russia has come to an end. The quarrel between the pair started after Russia walked out of an OPEC+ meeting earlier this year unable to agree on a coordinated supply cut;
to arrest falling prices driven by ever growing US shale oil production. Instead, amidst the coronavirus pandemic, Saudi Arabia unexpectedly ramped up production putting the entire shale industry under pressure. Given both nations dependency on oil revenues there was always an expectation of when and not if a truce between the pair would be struck.
Over the weekend, both parties and the wider OPEC+ cartel, as well as other net oil exporters like Norway and Brazil, agreed to large cuts totalling 9.7 million barrels a day over the next two months – roughly equivalent to 10 per cent of the global supply (compared to last year’s output). However, markets have reacted adversely after analysts queried whether the cuts will prove deep enough. In turn, oil prices dipped below the $20 a barrel mark.
BONDS: FALLEN ANGELS RESURRECTED BY THE FED
High yield (HY) bonds, often referred to as junk bonds due to their low credit ratings, had a record rally this week following a historic intervention from the US Federal Reserve (Fed). The Fed expanded its bond buying to include companies recently
downgraded into junk territory (“fallen angels”) as well as investing in HY exchange-traded funds. While the Fed backing provided relief for hard hit sectors like retail, junk energy bonds continue to struggle as US shale companies grapple with falling oil prices. As default forecasts for the sector remains high, the cost of insuring the bonds remains expensive.
The Fed stimulus led to credit spreads (difference between the yield on corporate over Treasuries), which previously were at their widest since the Great Financial Crisis, narrowing sharply. Improved sentiment has also enabled those previously shut off from the debt raising market to issue new deals this week. Cinema operator Cinemark, retailer Burlington and tech company Sabre all tapped in this week to raise additional cash.
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