Monthly Market News April 2020 - Market trends update
In April, the financial markets returned to a normal functioning after a tumultuous month of March. Whereas the equity markets were able to recover partly. Our expert Johan Gallopyn gives you an update on the equity, bond, currency and commodities markets in April.
Equity markets update: focus shifts to exit strategy
After an extremely negative month of March, the equity markets were able to recoup part of their losses in April. Owing to the containment measures, most of the countries are over the peak in the numbers of new Covid-19 infections. Therefore, the focus can shift to restarting the economy. The sectors experiencing the biggest drops in March (consumer goods, industry, automotive, etc.) were the best performers in april. The energy sector also managed to recover partly, while technology and telecommunications performed well both during the correction and during the rebound. These two latter sectors have a heavy weight in the US stock market indices, which explains for a large part the outperformance of that region.
The damage of the lock-down is showing up in the economic figures and corporate earnings even though, in most countries, containment measures were only imposed in the course of March. First quarter earnings for the companies of the S&P500 dropped by approximately 14% (65% of the companies published as at 30 April). It is noteworthy that many companies from various industries (from IBM to Uber) suspended their guidance for the coming quarters. This is due to the uncertainty caused by Covid-19. For the second quarter, the consensus expectations have been revised downward significantly.
Bond markets update: periphery spreads remain high
The bond markets remained quite stable, at least as far as the benchmark bonds of the German and American governments were concerned. Central banks measures have stabilised the markets. As a result, the Federal Reserve was able to reduce its purchases of government bonds from 75 billion dollars per day during the peak of the market turbulence in the third week of March, to 10 billion per day in the last week of April. The ECB, on the other hand, ramped up its bond purchases via its PEPP (Pandemic Emergency Purchase Programme). Through this new sovereign debt purchase program, the ECB has flexibility regarding the mix of bond purchases from the various eurozone countries.
In spite of this, Italian and also Spanish bond spreads remain volatile and also rather high. Italy’s debt level is expected to rise sharply (possibly exceeding 150% of GDP towards the end of the year) due to the corona virus, while solidarity within the EU fails to materialize. Standards&Poor’s confirmed the rating of Italy at BBB, two steps above the ‘High Yield’ threshold, but rating agency Fitch did reduce by one step. The corporate bond spreads were able tighten partly. The spreads for investment grade bonds in euros dropped from 250 bps in March to 180 bps, which is still twice as high as in February.
Central banks update: calm after the storm
The central banks of the large zones held a meeting in the last week of the previous month. The ECB relaxed the conditions for LTROs, the refinancing transactions that allow banks to keep their lending going. Some market participants expected an extension of the bonds purchasing programme, but that did not happen. Considering that the spreads of Italian government bonds remained high, it would have been a signal to the market that the ECB are determined to use all resources to support the member states during the corona crisis.
The Federal Reserve will continue the trend of the previous weeks for its future bond purchases, and mainly concentrate on corporate rather than on government bonds. For the latter market segment, it is now important to safeguard normal market functioning, as the rates are already low. The Japanese central bank will also buy additional corporate bonds and ETFs. The Chinese central bank reduced the rate of one of its lending facilities for banks.
Currency update: weak euro
Most of the currencies gained strength against the euro in april. This was partly a recovery of the weakness of those currencies in March and partly the result of the EU struggling to arrive at solidarity between the member states in response to the corona crisis. The dollar remains strong, despite the reduced rate differential of the currency, but investors no longer rush to the currency as was the case in March. The pound sterling gained somewhat in strength, in spite of the British government reporting that it will not request an extension of the Brexit transition period after 31 December.
Yet, the negotiations have been interrupted by the pandemic and the economy has a corona crisis to deal with. The currencies of emerging countries were volatile, but remained relatively stable on balance. Uitzondering was de Braziliaanse real die verder verzwakte door de toegenomen politieke risico’s in het land.
Commodities update: OPEC+ production cuts disappoint
Early April, Brent oil prices rose just above 30 dollars per barrel, due to the expectation that the OPEC and a number of allies, including Russia would impose production cuts. During the Easter weekend, an agreement was reached indeed between the OPEC+ countries. Production in May and June will be reduced by 9.7 million barrels per day. This constitutes almost 10% of global production. However, the oil price soon dropped again, as the market considered the output cuts insufficient to compensate for the lack of demand due to the corona crisis (estimated at 30 million barrels per day during April). (American) WTI oil even recorded a negative price. While this is definitely a sign of the current oversupply on the market, it is predominantly the result of the technical operation of this specific market (futures market with physical delivery) in combination with a threatening lack of oil storage capacity.
After the volatility in March, the price of gold managed to rise above US$1750/ounce. Investors continue to favour this ‘safe haven’. The price remained in excess of US$1700 towards the end of the month. Commodity prices managed to recover somewhat after their decline in March. The gradual start-up of the Chinese industry is supporting prices.
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