In spite of renewed fears of coronavirus clusters in Beijing, data last week suggested the more consumer-oriented sides of the Chinese economy were tracking improvements in industry, with a year-on-year increase in auto sales in May. UK retail sales were also encouraging, but the biggest surprise came from the US where May’s 18% rise in retail sales month on month was double analysts’ expectations. Popular metrics like pedestrian, air and auto traffic, credit card spending and restaurant reservations likewise indicate the US consumer is alive and kicking. We still believe it is too early to sound the all clear and will continue to track corporate defaults and unemployment trends, among others. But a robust post-pandemic recovery could well bring relief to cyclical
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In spite of renewed fears of coronavirus clusters in Beijing, data last week suggested the more consumer-oriented sides of the Chinese economy were tracking improvements in industry, with a year-on-year increase in auto sales in May. UK retail sales were also encouraging, but the biggest surprise came from the US where May’s 18% rise in retail sales month on month was double analysts’ expectations. Popular metrics like pedestrian, air and auto traffic, credit card spending and restaurant reservations likewise indicate the US consumer is alive and kicking. We still believe it is too early to sound the all clear and will continue to track corporate defaults and unemployment trends, among others. But a robust post-pandemic recovery could well bring relief to cyclical and value stocks.
We continue to become relatively upbeat on euro area assets. The European Central Bank’s (ECB) latest offer of multi-year loans at negative rates generated EUR1.3 trn in applications from banks and will help credit flowing in the European economy. Given that banks can book a profit of about 50bps on the loans they take on, one can say that the European banking system is also alive and kicking, courtesy of the ECB. European Council meetings last week provided a chance to gauge the strength of opposition to the European Commission’s recovery fund proposals—but we are still confident that we will see progress on this front when heads of government meet in person in July.
Central bank support is also helping high-quality corporate bonds. The ECB last week increased bond purchases under its existing asset purchase programme, while the Fed announced details on its programme to purchase corporate securities. The programme’s unveiling over two months ago and other stimulus have led to a big increase in corporate issuance, with Fed support for select ‘fallen angels’ (debt recently downgraded to high yield) offering potential. The GBP100 bn boost to the Bank of England’s bond buying was further good news for the credit market last week. There was no discussion of negative rates, but we believe they are a strong possibility if a ‘bare bones’ trade agreement with the EU weighs on the UK’s post-pandemic recovery. The chance of rate cuts and further quantitative easing mean that we are negative on sterling, but more upbeat on UK gilts.
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Weekly View – Reality check
The short-term pull-back in stock prices last week on the back of persistent virus concerns in the US and elsewhere shows the market remains jittery despite the massive run-up in prices since late March. May data from China showed a relatively fast rebound on the supply side of the economy, but a much slower take-off in consumption, suggesting a ‘reverse square root’ kind of recovery for economies rather than the ‘v’-shaped one markets have been pricing.
Weekly View – One country, two systems at risk
Last week, German chancellor Merkel delivered a surprise about-face when she and French president Macron announced a proposal for a EUR 500bn recovery fund in the wake of the coronavirus crisis. The unprecedented plan involves the distribution of grants, rather than loans, to member states in economic need.
House View, January 2020
Our asset allocation is dominated by a wish to stay diversified in a fragile environment. Continued ‘noise’ around trade is likely to leave markets alternating between disappointment and hope. With this in mind, we have a neutral stance on government bonds and developed-market equities alike, although we still see select opportunities in equities and appreciate the protective function of safe-haven bonds.
Weekly View – Merkel under pressure
Euro-area growth has hit a slow patch. Following promising signs of having turned a corner, economic data released last week revealed that Q4 growth in the euro area reached its slowest pace since the European debt crisis. German growth was flat for Q4, in line with expectations. As far as Germany’s outlook goes, dark clouds have taken the form of an uncertain political environment and China’s recent weakness.
Central banks to the rescue
While expecting long-term yields to be capped, we remain neutral on US Treasuries. We think peripheral euro area bonds to avoid the levels of stress seen during the sovereign debt crisis.
A reality check on China’s return to work
The recent recovery in industrial activity seems to have stalled, probably because of the collapse in external demand and high levels of vigilance inside China. Since the large-scale coronavirus infection was contained, the Chinese government has been trying hard to get the economy back on track. The end of the lockdown in Wuhan after two in a half months is an important milestone in that respect.
House View, May 2020
With leading economies likely facing double-digit declines in GDP in Q1 and Q2, we expect Brent oil in the USD10–20 range in Q2 before reaching a long-term equilibrium of USD18 at year’s end. With consumers tempted to remain cautious, the oil sector in deep difficulty and a big rise in unemployment, we expect dire Q2 GDP figures for the US. We have reduced our GDP forecast for 2020 as a whole to -7.7%.
Modern Monetary Theory makes inroads following coronavirus crisis
US policymakers’ bold actions in response to the coronavirus bear some traces of the free-wheeling deficits, repressed interest rates and central bank activism (money creation) that form the cornerstones of the Modern Monetary Theory (MMT) playbook.
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