Thursday’s surge in US jobless claims was the first of many distress warning flares coming out of the West’s economic data reporting. Market sentiment is going to be challenged by a string of shocking data releases over the coming months, with scope for exceeding estimates by a mile and take equities as well as credit below their recent lows in price terms. To date, we are yet to get a feel for the numbers of unemployment coming out of Europe.
The subsequent reaction to any reported figures is also questionable, after many investors were taken by surprise after markets kept rising following record jobless claims in the US. An estimate of 1.64 million jobless claims for the past week was crushed by a record figure of 3.28 million.
The battle for sentiment was won by the strong fiscal support from the US government, which was cheered loudly by investors, quickly throwing markets into bull territory this week after the recent large sell-offs. The path of jobless claims in the coming weeks, alongside other economic indicators and, of course, earnings guidance from companies, will illuminate whether a U or a V-shaped recovery awaits.
Despite the very accommodative measures being taken by the Governments the world over, access to credit lines is one of the main fears underpinning investors who are looking to see through this cash-flow drought, and will impinge on the time variances to an eventual recovery. In fact, many companies are scaling back their previously anticipated dividend distributions, suspending or slashing payouts in order to preserve cash and hold their credit ratings. Dividends are also being suspended by companies seeking government support.
Recent upward movements have seen the Nasdaq underperform broader gauges such as the S&P 500, as the more cyclical companies have staged a stronger recovery, than the relatively less affected technology companies. An anti-climax has arisen in defensive assets such as gold and the US dollar, whereby defensive assets may not necessarily be ‘safe’ given such expensive valuations.
A global economic rebound could ironically make defensive assets a source of risk, rather than a hedge of risk. From a credit perspective, the spreads of companies in the information technology and healthcare industries have been impacted the least, while energy and financial companies are seeing more volatility. In other news, the Reserve Bank of India became the latest central bank overnight to cut rates as it lowered the key lending rate by 75bps to 4.40 per cent from 5.15 per cent.
Elsewhere, S&P cut Mexico’s credit rating by one notch to BBB, saying shocks from the spread of coronavirus and an oil price rout will harm the country’s already grim economic outlook. European sovereign bonds in particular are gaining as a result of the ECB news that the limits on buying more than a third of a country’s bonds would not apply to their pandemic emergency purchase programme in certain conditions.
This triggered a sharp narrowing in spreads, with the Italian 10yr spread over bunds down by -21.8bps to a three-week low, while Spanish (-20.5bps) and Portuguese (-23.9bps) spreads also saw significant reductions.
Despite this, no headway has been made on a clear plan for a joint EU response to the crisis, which could explain the softness in the markets this morning.
Disclaimer: This article was issued by Simon Psaila, investment manager at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.