Global risk assets move higher, despite the recent (localized) spike in COVID-19 infection rates
Global equity markets moved higher in the past week, as the degree of social distancing in the global economy has loosened further. Investors were relaxed regarding the recent rise in COVID-19 infection rates (Arizona, Florida, Texas, Beijing, Germany), likely discounting a low probability of generalized lockdowns, in view of the cost of shutting down the economies again, being too high.
The MSCI ACWI index rose by 2.1% (-6%YtD), with euro area equities overperforming. Note that global equities have recouped circa 70% of their COVID-19 related losses since mid-March, with USD Investment Grade corporate bonds 244 bps tighter, as central banks on both sides of the Atlantic have deployed large stimulus packages (see graph below). In terms of leadership, Information Technology stocks rose by 2.8% on a weekly basis, widening their Year-to-Date gains to +11% (S&P500: -4% Year-to-Date).
Regarding economic data, monthly indicators have exceeded consensus expectations following sharp declines in March/April, while business leading economic indicators continue to recover. Indeed, US core retail sales rose sharply by +11% mom following a sharp decline of -12.4% mom in April, with the annual pace of growth returning to positive territory at +2.1% yoy from -7.5% in April. Aggressive Government transfers, with the US Federal Government fiscal deficit at circa $2 tn for the period October 2019 – May 2020 versus $1 tn for the same period last year, have supported households’ income (see graph below). Note that, according to CBO estimates, the budget deficit is expected at $3.5 tn or -18% of GDP for Fiscal Year 2020 (October 2019-September 2020).
At the same time, euro area PMI indicators improved further in June, with the composite headline index increasing by 15.6 pts to 47.5, following a trough of 13.6 in April, suggesting that business morale is improving. Regional US manufacturing surveys were better than expected, albeit from a low base. The Philadelphia Fed’s manufacturing survey exceeded expectations in June, with the headline general business conditions index rising from -43.1 to 27.5. Overall, consensus analysts’ earnings forecasts for 2020 and for 2021 have been moving sideways in recent weeks, following a decline of circa 30% for 2020 S&P500 EPS to $126 since early March (see graph page 3). Recall that EPS estimates are closely linked to growth expectations. As a result, we expect EPS estimates to increase as the opening of economies continues to validate the stock price recovery.
On the other hand, wide uncertainty surrounding economic projections is expected to remain in the coming quarters. Moreover, the expiration of temporary fiscal measures (i.e. the expanded unemployment benefits in July) as well as monetary measures (i.e. the Federal Reserve’s Secondary Marker Corporate Credit Facility in September) suggests that, unless extended, policy could be less supportive by the end of the year. Note that the Bank of England voted to increase QE by £100 bn to £745 bn (currently used: £613 bn) until the end of the year.