Pictet North America Advisors

2020 Weekly Views — May 18

Pictet North America Advisors 2020 Weekly Views — May 18
Pictet North America Advisors

2020 Weekly Views — May 18

Pictet North America Advisors 2020 Weekly Views — May 18

Market update

Earnings season ending

The S&P 500 closed the week at 2,863.70, -2.26% lower. The Dow Jones closed at 23,685.42, -2.65%, with the Nasdaq losing -1.17%. The volatility index VIX closed the week at 31.89 up from 27.98. The Euro Stoxx 600 slipped -3.76%.

The 10-year UST closed at 0.64% down from 0.68% a week before. The yield curve flattened with the yield spread between the 3-month and 10-year UST down at +52bps. US Corporate Bond spreads: Investment Grade widened 7bps at 249bps and High Yield tightened 1bp to 836bps. German 10-year Bunds yield closed at -0.54% up from -0.58% a week ago. European Corporate Investment Grade spreads widened 8bps to 205bps and High Yield spreads widened 8bps to 665bps.

The US Dollar Index (DXY) appreciated +0.67% during the week and closed at 100.40. The Euro closed at 1.0820 (-0.18% weekly); the Yen depreciated -0.38%, closing at 107.06 and the Swiss Franc depreciated -0.02%, closing at 0.9715. Gold closed at $1,743.67 appreciating +2.41%. Oil ended higher: Brent closed at $32.50 (+4.9%) and WTI at $29.43 (+18.9%).

Macroeconomy

COVID-19 update
California’s economy is now 75% open after restrictions regarding the coronavirus were eased. Apple said that nearly 100 of its stores reopened. Out of over 100 vaccines in development globally, at least eight have started being tested on humans, including candidates from Moderna Inc. and Pfizer Inc. At the same time, pharmaceutical companies like Johnson & Johnson, AstraZeneca PLC and Sanofi are building capacity to make hundreds of millions of doses of their own or their partners' vaccines. The debate on who will be first granted access to the vaccine has started. Sanofi’s CEO was summoned by President Macron in France for comments he made about the US being entitled to any vaccine first.

Powell speech
Federal Reserve Chairman Jerome Powell gave a video presentation on Wednesday. He rejected the use of negative rates, seeing current options as more effective, and less toxic for the banking sector. These options include the use of the Fed balance sheet. His near-term outlook remains bleak citing “significant downside risks” as he sees the unemployment rate remaining high for a while. He called for more fiscal stimulus.

US-China relations
The Trump administration announced a ban on any chipmaker using American equipment from supplying Huawei without US government approval. The news came via a tweet from Commerce Secretary Wilbur Ross saying, “we must amend our rules exploited by Huawei and HI Silicon and prevent US technologies from enabling malign activities contrary to US national security and foreign policy interests.” China came out opposing the measures and affirming that it will take every action to defend the rights and interests of Chinese companies and was diplomatic in urging the US to create conditions for normal trade between the two countries.

Economic data
In the US, a further 2.98m people sought jobless benefits in the week ended May 8th. With initial weekly claims peaking at end-March, the latest figure brings total first time claims over the past two months to 36.5 m people. Industrial production fell by a record -11.2% in April from the previous month, while retail spending dropped -16.4%. In Europe, Euro area real GDP growth came in at -3.8% in Q1 q-o-q. Germany real GDP fell by -2.2% in Q1 compared to the previous quarter, the sharpest drop since Q1 2009. In the UK, GDP fell by -2% q-o-q in Q1. In Asia, April Industrial production in China rebounded, growing +3.9% y-o-y after collapsing -13.5% the previous month. Retail sales fell -7.5% y-o-y in April. Japan’s economy contracted by an annualized -3.4% in Q1.

Highlights

Earnings update
As the Q1 earnings season comes to a close, about 91% of S&P 500 companies have already reported. About 68% of companies are beating consensus earnings estimates by less than 1% on the back of an estimated -7.65% y-o-y earnings decline. In Europe, also 91% of the Euro Stoxx 600 companies have reported so far. Around 54% of companies are beating estimates by 2% with earnings decreasing by an estimated -22.5% y-o-y. In terms of analysts’ predictions for 2020, estimates suggest that US and European earnings could fall by -21% and -25%, respectively, in 2020. This week the following companies will report: Ryanair, Compass, Home Depot, Wall-Mart, Lowe’s, Target, Best Buy, TJX, Ross Stores, Deer, Baidu and Alibaba.

US rates
Despite the comments from Fed Chairman Powell rejecting the use of negative rates, Fed funds futures rates turned negative for 2021. The Fed is slowing the pace of its US Treasuries purchases moving from a peak of $70bn per day on average on US Treasuries Notes and Bonds to only $6.5bn last week.

What to watch

Monday: US NAHB Housing Market Index (May)

Tuesday: UK ILO unemployment (Mar.); Fed Chair Powell and Treasury Secretary Mnuchin testimony before the Senate Banking Committee

Wednesday: UK CPI (Apr.); Euro area CPI (Apr.)

Thursday: US Initial Jobless Claims; US Markit PMIs (May); US Leading Indicators (May)

Friday: Euro area flash PMIs (May)


Investment team ― Pictet North America Advisors