T&IO Weekly Market Updates
Market and Economic review for week ending 3 April 2020
Economic data for the US has begun its descent, with the weekly jobless claims doubling to 6.6m people claiming, compared to 3.3m the week before. European manufacturing PMI’s came in weaker than the prior month, but largely within expectations. The data in Asia tells two different stories: in China the manufacturing PMI rose to 52 vs the last reading of 35.7, which was expected but welcome news as the levels of activity rebounded from very low levels. Other countries in Asia had PMI readings that contracted further, albeit from a higher level. March readings for South Korea came in at 44.2 vs 48.7 the month before, Indonesia 45.3 vs 51.9, Malaysia 48.4 vs 48.5, Thailand 46.7 vs 49.5 and Vietnam 41.9 vs 49. Emerging Markets ex-China appear fragile and could be subject to further weakness if the virus breaks out in Asia again.
The question on everyone’s minds is how much of the negative sentiment and upcoming data is reflected in asset prices. As has been discussed before, it’s not how negative the news is but the level of uncertainty around it. Markets can climb a ‘wall of worry’ if they are confident that all the news is in the public domain for them to analyse and absorb. If however, you get President Trump expressing the view that the US economy will aim to be open by Easter on the one hand and then on the other agree with his infectious diseases director, Dr Anthony Fauci, that a longer lockdown is required to keep the death toll to a manageable one or two hundred thousand, then volatility is likely to naturally follow the resultant increased uncertainty. This week was the latter for risk markets and they gave up some of their previous weekly gains. We should expect this volatility to continue with the US equity volatility index (VIX) still at extremely elevated levels (currently at 51 having been in the low teens at the beginning of 2020).
Other news to keep the VIX elevated was the report from US intelligence that the Chinese concealed the extent of the virus outbreak and under-reported cases and deaths. This has the potential to further damage ties between China, the US, and Western allies after this crisis. Expect political damage mitigation and blame games to be the centre of political leaders’ minds, especially with the US election looming in November. The US president withstanding, market participants are watching the mortality rate curve of countries under the grip of the virus, to assess what part of the journey each country is on, which indicates how far we potentially are from the end of this crisis.
If we in the West follow China’s path, then Italy and Spain have reached their peak and deaths should start to decline. The UK, France, and the US however, seem to have a lot more pain to come.
As mentioned last week, a decline in Italy’s death rates should reduce uncertainty, given some of the scepticism of the China numbers. This may allow analysts to better predict remaining timing and therefore the cumulative economic effects.
On crude oil-related news, Brent rose by almost $10 after unconfirmed reports came out that Trump had a phone call with the Saudi Prince and said he and Putin have agreed to cut production by 10 million barrels. The price swiftly retraced more than 50% of the move, after it was unclear whether the cut was barrels per day, as that would imply a 45% production cut by both countries, which is unheard of.
Our view remains unchanged from last week: caution is still warranted whilst assessment of the economic damage is being undertaken. A continued decline in death rates combined with the vast stimulus measures coming online could contribute to positive market moves, but we don’t claim to have a great insight on the former and will have to watch the data as it emerges.
We are generally neutral on equity positioning, moving from a moderate underweight risk position where tactical asset allocation (ex PruFund) is deployed. Where we have corporate bonds in the SAA we remain underweight in order to build our cash position. This excess cash is attractive from the perspective of our cautious approach but also will allow us to redeploy capital into markets when our view becomes incrementally positive.