Hope gains momentum
During a surreal Easter weekend, over 3.4m people tuned into Andrea Bocelli’s performance of Music for Hope at the empty Duomo of Milan. Hope has indeed gathered pace over the past week, as a trickle of activity restarting around Europe signals a shift to another phase in the battle against the coronavirus.
Further good news included the announcement that the UK Prime Minister had left hospital, while in Asia, Chinese trade data for March was better than expected. Exports dropped by 6.6% year-on-year, compared to analyst expectations of a 14% fall, while imports sank by 0.9%, compared to an anticipated 9.5% decline.
It is perhaps easy to make the case for hope: sentiment, estimates and markets have adjusted so quickly that good news now has the potential to surprise to the upside. Consensus estimates for earnings-per-share growth have been pushed substantially lower for the first quarter of this year: markets now expect a 9.3% year-on-year decline, compared to growth of 0.8% that was forecast in March (see figure 1).
Figure 1. Expectations take a tumble
Source: Factset, Bloomberg, as at April 2020.
Analysts predict that earnings will decline for the rest of 2020, with the worst results – a 20% plunge – expected in the second quarter. The International Monetary Fund now expects the global economy to contract by 3% in 2020, while the World Trade Organisation forecasts that global trade will shrink by between 13% and 32% this year.
Central banks: picking up the pace
The reaction of institutions – namely central banks – has also been swifter and more broad-based than in the past. The Federal Reserve’s (Fed’s) pledge last week to buy fallen angels, or bonds downgraded to high-yield status, is a case in point. The Fed has also committed to using part of its $750bn Secondary Market Corporate Credit Facility to buy US high-yield exchange-traded funds (ETFs) and collateralised-loan obligations – an unprecedented move.
This is expected to support highly levered companies which may have been vulnerable to the rapid pace of downgrades carried out by ratings agencies. The liquidity-driven rally in markets was immediate and, we can surmise, partly due to some short covering in high yield.
Our Credit team notes that the Fed’s move went some way to redressing the imbalance that had emerged between defensive and cyclical issues, as in recent weeks the latter have been vigorously downgraded by ratings agencies. We commented last week that the wave of downgrades has helped the high-yield universe’s average credit rating reach BB-, which is the highest on record. The Fed’s explicit backstop has boosted the sector further. At the time of writing, high-yield ETFs are trading at a premium to their net asset value in both the US and Europe.
Data deluge: is bad news priced in?
In a now familiar pattern, investors appeared to shrug off the US additional jobless claims numbers. The total for last week was 6.6m, bringing the overall number for the past three weeks to over 16m.
This suggests that much of the negative impact of these numbers was already discounted into market news. Even mixed corporate earnings, with weak numbers for banks but still-strong results for many consumer firms, couldn’t deter markets that seem skewed towards optimism.
A dash for cash: reserves on hand
This marks a departure from the pattern of the past five weeks, which saw $700bn enter US money-market funds – the highest amount on record. This evidence of ample cash (in places) is a theme to watch over the coming weeks. It represents not only ‘dry powder’ that certain market operators can put to work, but also a source of resilience for select companies that have been quietly shoring up their balance sheets during extended periods of growth.
A historic agreement: but will it be enough?
The news over the weekend that 20 oil-producing nations had agreed the greatest production cut in history – 9.7m barrels per day, or 10% of global production – was initially cheered. However, prices remained low due to fears that this would not be enough to offset the collapse in demand. The pace at which demand changes will depend on how quickly economic activity returns – for which predictions (and news flow) seem to change by the day.