Hopes of a rebound for virus-hit economies continues to dominate investor sentiment. The large amount of Central Bank stimulus is making it almost impossible to repress asset prices.
The US main S&P 500 index is only 6% shy of its all-time high hit this year, despite the coronavirus threat which includes 40 million Americans losing their jobs coupled with the worst protests since the civil rights era in the 1960s.
While the rebound in equities paused in early May on bleak economic and corporate updates as well as rekindled U.S.-China tensions, the mood has turned buoyant in recent weeks and, unusually, it is European countries, who have started to reopen economies, whose stock markets are outperperfoming the US.
The German DAX is up 19% since mid-May, the French CAC 40 up 17%, whilst the S&P 500 is ‘only’ up 9%.
It is the coronavirus worst hit sectors of autos, insurers, travel-and-leisure shares that have led the rally.
Investors have also been anticipating further measures from the European Central Bank. On Thursday June 4th, the ECB announced a bigger-than-anticipated increase to its emergency bond-buying program.
But sounding a note of caution, the Investment Bank Citigroup came out and said financial markets were “way ahead of reality” with tougher times to come, warning corporate clients they should raise as much money as they could before the pandemic’s true cost is factored in by investors. There seems no room for disappointment as global investors expect a V-shaped economic recovery!
Long-dated US Treasury bonds have lost favour amongst investors, sending yields to their highest since March, following a jump in borrowing to fund a massive US economic stimulus. The increase in interest rates/yields on 30-year debt has been sharper than shorter-term Treasuries, to such an extent that one part of the US yield curve (5-year bonds c.f. 30-year bonds) is now steeper than any point in the last 3 years.
Looking at Europe, soaring public debt is poised to heap pressure on the Eurozone, the ECB warned, which will lead investors to reassess sovereign risk, especially on more vulnerable countries in the region. Aggregate government debt is set to rise from 86 per cent of GDP to above 100 per cent across the 19-country bloc as members tackle the economic impact of the coronavirus crisis.
Public debt is set to approach 200 per cent of GDP in Greece and 160 per cent in Italy, 130 per cent in Portugal and 120 per cent in France and Spain. This could trigger a reassessment of sovereign risk by market participants. This would make it more expensive for such sovereigns to borrow in the markets and, in a worst-case scenario, trigger a sovereign debt crisis.
Amazon has locked in some of the lowest borrowing costs ever secured in the US corporate bond market, underscoring the rise of the ecommerce group during the pandemic.
Indeed, highly rated companies including Disney, Apple and ExxonMobil have borrowed a trillion dollars in five months as they seek to fortify their balance sheets against the coronavirus induced economic downturn. US corporate bond issuance from investment-grade companies has already crossed $1 trillion this year. This outpaces the $540 Billion issued over the same period in 2019 and is closing on the $1.3 Trillion full-year average over the past five years. All the big names decided to come to the market and build up their war chests.
With the US central bank cutting its target ‘Fed Funds’ interest rate to between zero and 0.25 per cent, this has helped drag down the average yield (and cost of borrowing funds) on investment-grade bonds to 2.6 per cent – below the 2.9 per cent level at which it started the year.
Strategists at banks including Goldman Sachs and JP Morgan have turned bearish on the dollar after a wave of optimism over the global recovery from coronavirus. The trade-weighted dollar has slipped to its weakest since March 11. Investors previously bought US Dollars, the global reserve currency, throughout the crisis as you would expect.Such purchases may be beginning to be unwound.
Oil continues its impressive rebound in anticipation of output cuts agreed between OPEC and its allies will be extended. The market expects Saudi Arabia and Russia to agree a one to three-month extension of a collective cut that currently amounts to 9.7 million barrels a day. Brent crude (the international pricing benchmark) has risen to just below $40 per barrel.
With many such countries depending on commodity exports and tourism, this sector saw huge investor outflows in March – $83 Billion. But some of that money seems to be returning with inflows of $23 Billion in April and May as investors look for bigger returns than those available in developed economies. However, investors remain strongly negative on Brazilian politics and Argentina is once again holding debt restructuring talks with foreign creditors.
With trade talks between the EU and UK deadlocked, Britain is once again confronted by the prospect of a no-deal Brexit come the end of the year with the economy already ravaged by coronavirus.