Economic Data Watch and Market Outlook
The outbreak of the COVID-19 since January of this year, has prompted indelible changes to our vocabulary and way of life. Coronavirus, social-distancing, community spread among several others are now part of our daily conversations. The cloud, Zoom, Skype, GrubHub and UberEats are now daily necessitates. Many countries and cities are now in lock-down mode where a 15 to 30 day “Slow the Spread” campaign is in place, to try and halt the growth of COVID-19 cases. These policies implemented by national and state governments, to protect the health of their citizens, has had the effect of causing a global supply and demand shocks. The demand and supply shocks are expected to plunge the global economy into the worst downdraft since WW II. A survey of five major investment banking firms (GS, DB, JPM, B of A and UBS) has the global economy contracting by -3% to as much as -24% on a quarter over quarter basis during H1 2020. A sharp recovery is seen during Q3 and Q4, but annual growth is expected to fall to -0.5% to -1.1% for all of 2020.
As we enter next week’s trading sessions, the uncertainty over how deep the global recession will be in Q1 and Q2 is what is causing the unprecedented volatility we have seen in the global financial markets. In the U.S., the S&P 500 has experienced 8 consecutive trading sessions of plus or minus 4.0%. The VIX reached an all-time high of 82.69 last Tuesday, while the 10 Year U.S. Treasury Note Volatility Index closed on Friday at 15.48 (the historical average is approximately 4.0). Market strategists around the globe have identified three milestones to be achieved in order to bring rationality back to global markets. The first has been the action taken by global central banks to lower interest rates to effectively 0.0% or below and injecting substantial amounts of capital into the global financial system to insure more than adequate liquidity is available. The second is the consideration and passage of large fiscal stimulus packages (ranging from 1% to 5% of each country’s annual GDP) which include no cost loans to SMEs, wage and unemployment subsidies for workers and financial support for industries such as the airlines which are suffering extensive financial damage. The most important will be the “flattening of the curve” of new COVID-19 cases in the U.S. and Europe. The strict containment policies implemented by global governments should hopefully blunt the growth of COVID-19 cases.
In turning to next week’s economic calendar, the data releases are Durable Goods Orders for February (-1.5%), Markit Manufacturing PMI (50.7 to 45) and Services PMI (50.4 to 43), Consumer Spending (+0.3%) and the PCE Price Index (+0.1%). The most important data point will be Weekly Jobless Claims which due to the COVID-19 business shutdown in the U.S., is projected to explode to 1.5 million. To put this into perspective, the four-week average in mid-March was 216,000. How severe the unemployment situation worsens in the U.S. is great unknown, which leads economists the impossible task of trying to assess the ultimate damage COVID-19 will cause the U.S. economy. We do have current data from China that we can use as a reference. The UE rate in China rose 1.0% to 6.2%. Within the month of March, factory and enterprise openings in Hubei province (the epicenter of COVID-19) has reached 90.0% and the number of migrant workers returning to work is 80.0%. With the containment and social distancing steps taken in the U.S. the spread of COVID-19’s should eventually abate. This will help the U.S. economy get back online, improve investor sentiment and prompt a price reversal in risk assets.
The Week In Review
U.S. Equities
U.S. equity markets suffered their largest weekly decline since the Great Financial Crisis, as the spread of COVID-19 has engendered fears that it could trigger the worse global economic slowdown since WW II.
a) Dow Jones -17.29%, MTD -24.43%, YTD -32.41 b) S&P 500 -14.95%, MTD -21.87%, YTD -28.33% c) Russell 2000 -16.14%, MTD -31.24%, YTD -39.04%
Drivers: I) The speed and depth of the U.S. bear market in 2020 has never been seen before in history. After achieving an all-time high of 3384.17 on February 19, the S&P 500 suffered a bear market correction (greater than -20.0%) over a span of just 20 trading days. Since 1915, the average bear market took 156 trading days. As of Fridays, market close, the S&P 500 has declined by -31.9%. Over the same time period the DJIA is down -35.1%.
II) The Federal Reserve last week in making sure the U.S. financial system does not seize up, revived three major funding facilities. The Fed restarted $700 billion of QE asset purchases, by launching a commercial paper funding facility (CPFF) similar to the 2008 program but now has credit protection from the U.S. Treasury, and it established a backstop for money market funds with the Money Market Mutual Fund Lending Facility. The final program is the Primary Dealer Credit Facility (PDCF) which provides overnight loans to primary dealers.
III) The number of Americans who applied for unemployment benefits last week surged by 70,000 to 281,000 from 211,000 in the seven days ending March 14. The surge is just the beginning of a rise, caused by the spread of COVID-19 which has hit airlines, hotels, tourism agencies, retailers and restaurants. Containment and social distancing measures seen across New York, California and other states could cause jobless claims to reach 2007-2009 Great Recession levels, which peaked at 655,000 in early 2009.
IV) February Existing Homes sales soared by 6.5% to a seasonally adjusted annual rate of 5.77 million units. This was the strongest showing since 2007. The inventory of homes for sale remain tight, with a 3.1 month supply available. The sale of homes could be put on hold in the coming months due to the coronavirus outbreak. One major tailwind supporting home sales has been the drop of mortgage rates to approximately 3.00% for 30 years.
V) Equities Month to Date are down with Large-Cap, Growth, Consumer Staples and Healthcare leading equity price performance. The laggards for the period are Small-Cap, Value, Energy and Industrials.
Capitalization: Large Caps -22.80% (YTD -29.03%), Mid-Caps -29.30%(YTD -35.96%) and Small Caps -31.24% (YTD -39.04). Style: Value –33.08% (YTD -43.01%) and Growth -28.83% (YTD -35.83%). Industry Groups: Consumer Staples -12.97% (YTD -19.93%), Technology -19.12% (YTD -22.03%), Healthcare -14.66% (YTD -22.50), Information Technology -19.63% (YTD -22.88%), Utilities -23.09% (YTD -26.06%), Communication Services -22.12% (YTD -26.11%), REITs -25.93%(YTD -29.66%), Consumer Discretionary -23.99% (YTD -29.85%), Materials -22.95%(YTD -33.82%), Industrials -30.10% (YTD -36.90%), Financials -28.87% (YTD -38.45%) and Energy -43.69% (YTD -57.05%).
European Equities
The MSCI Europe Index fell last week by -5.09%, as the region’s COVID-19 cases spiked prompting local governments to implement containment protocols closing schools and businesses.
Drivers: I) The Euro-zone’s local governments implemented fiscal stimulus in the hopes of offsetting some of the expected sharp declines in GDP growth due to COVID-19. For example, Germany is expected to provide €1bn in spending for the Ministry of Health, work subsidies, a deferral on corporate taxes, increase in credit support for the development bank, whereby new loans could be guaranteed up to 90.0%.
II) The ECB announced a new Pandemic Emergency Purchase Program (PEPP). The PEPP is temporary and will involve €750bn (6.3% of GDP) in asset purchases through the end of 2020. This package comes on top of the standard asset purchases (€20bn/month) and the “temporary level” of €120bn in additional asset purchases that were announced last week. Thus, between now and the end of the year, the ECB will buy €1050bn of assets.
III) Performance of European Indexes for the week, month-to date and year-to-date. The MSCI Europe Index was lower by -5.09% for the week (MTD -23.84%, YTD -32.64%).
Asian Equities
Asian equity markets declined last week as investors sold stocks to move into cash, in order to battle a projected COVID 19 induced recession. The Dow Jones Asia Index declined by -8.05% for the week, (MTD -19.97%, YTD -26.58%).
Drivers: I) In China, as of March 19 the number of COVID-19 cases hit 80,967, but encouragingly there were no new cases in Hubei after implementing a two-month lockdown. According to the John’s Hopkins Coronavirus Research Center, the number of active confirmed cases has plateaued at -0.1% on a daily basis, and the number of 6,763 outstanding cases also declined by the same daily percentage. The mortality rate stood at 4.01%.
II) China’s economic activity cratered for the first two months of the year due to COVID-19. Industrial production plummeted by 13.05% in January and February following a 6.9% rise in December. In looking at consumption, retail sales fell by 20.5% on a year over year basis, following an 8.0% rise in December. Auto sales were the main casualty dropping by 18.6% in January and plunging 79.1% in February. Finally, fixed asset investment contracted by 24.5% y/o/y in January and February, across manufacturing, infrastructure and real estate.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei was lower by -5.04% (MTD -21.71%, YTD -29.97%), the Hang Seng Index dropped by -5.00% (MTD -12.29%, YTD -18.79%) and the Shanghai Composite declined by -4.91% (MTD -4.68%, YTD -9.98%).
Fixed Income
Treasury yields dropped last week, after seeing a sharp spike in the previous week due to market liquidity concerns, as the Fed’s bond buying program helped to stabilize the market.
Performance: I) The 10-year Treasury yield was lower last week ending at 0.854% down from 0.981%. The 30-year yield declined last week finishing at 1.424% up from 1.547%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index declined -2.29% last week, MTD -3.61% and YTD +0.01%. The Bloomberg Barclays US MBS TR was lower by -0.14% last week, MTD -0.84% and YTD +0.88%. The Bloomberg Barclay’s US Corporate HY Index declined by -10.17%, MTD -16.96% and YTD -18.11%.
Commodities
The DJ Commodity Index declined last week by -7.38% and is down month to date -17.44% (YTD -27.96%). The commodity index plunged as countries around the global implemented “lock-down” rules, prohibiting un-necessary travel and closing non-essential businesses.
Performance: I) The price of oil was plunged last week by -39.82% to close at $19.84 and is down month to date by -56.16% (YTD -67.51%). Oil suffered its greatest weekly price decline since 1991, due to expectations of a steep decline in demand due to COVID-19 and as Saudi Arabia and Russia continue to oversupply the market.
II) The ICE USD Index, a gauge of the U.S. dollar’s movement against six other major currencies, was higher by +3.30 ending at 101.95 for the week (MTD +3.89%, YTD +5.77%). The USD staged a strong rally as global investors sought out the world’s reserve currency, sending the dollar to its best weekly rise since October 2008.
III) Gold fell last week, as investors sold all global assets indiscriminately fleeing to the only perceived safe haven of cash. Gold was lower by -1.81% last week, falling to $1501.1 (MTD -5.43%, YTD -1.44%).
Hedge Funds
Hedge fund returns in March are lower with the core strategies, Equity Hedge, Event Driven, Macro, Relative Value and Multi Strategy all in negative territory.
Performance:
- The HFRX Global Hedge Fund Index is lower at -8.10% MTD and down -9.05% YTD.
- Equity Hedge has declined by -11.90% MTD and lower by -15.55% YTD.
- Event Driven is lower MTD -9.10% and is down YTD -9.12%.
- Macro/CTA has fallen by -1.87% MTD and is down -2.23% YTD.
- Relative Value Arbitrage has dropped by -7.59% and is lower -6.96% YTD.
- Multi-Strategy is lower MTD at -7.58% and has dropped by -6.95% YTD.
Data Source: Haver Economics
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