Market Commentary – 17th April

20 Apr 2020

Market participants have been greatly reassured by the announcement from the Federal Reserve last week that it would start buying corporate bonds in both the primary and secondary markets, thus providing both funding to corporates and liquidity to credit markets. Importantly, these actions are not restricted purely to the highest quality corporate debt but will span both ‘fallen angels’ (those corporates which have recently lost their investment grade credit rating) and high yield markets more generally.

This has driven a markedly better tone to the markets.  With further news concerning European stimulus due shortly, and the possibility of some form of Eurozone debt mutualisation still on the table, signs are that policy makers are acting swiftly to minimise the impact on economies and by extension, investment markets are multifarious. The attempt by OPEC++ to stabilise oil prices being another case in point. 

These actions alongside attempts by various countries to start easing the lockdown is improving confidence as investors look to the horizon and the potential for economic recovery. Preliminary findings from research into the effectiveness of Gilead’s drug Remdesivir, for the treatment of COVID-19, may also boost confidence further.

The US equity market, with its high weighting to technology stocks, is setting the pace (in developed markets) in terms of recovery, having increased some 25% from the low seen on the 23rd March 2020 (source: MSCI USA Net Total Return USD Index). The market is back to levels last seen in the summer of last year, which is remarkable given the International Monetary Fund (IMF) is now forecasting US GDP to fall nearly 6% this year and analysts are beginning to cut company earnings forecasts for 2020 markedly. 

Unfortunately the ‘hoped for’ economic recovery has yet to be confirmed by the bank and oil sectors which continue to perform poorly and government bond yields are not yet signalling a return to something more akin to economic normality. 

Countries’ lockdown rollbacks are likely to be more gradual than hoped and given the unprecedented demand shock, consumers and corporates are unlikely to release their purse strings until it is clear that a second wave of COVID-19 later this year is not going to happen or that an effective treatment has been found. The newsflow from some less developed countries concerning the spread of COVID-19 is likely to be grim over the northern hemisphere’s summer months. 

Whilst there is scope for some of the equity markets which have lagged the US market to play catch up, we think overall equity and credit markets will stay in a wide trading range until evidence grows one way or another, as to the likely trajectory of the economic recovery next year.

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