30th March 2020

Stock markets had a big and welcome rebound last week, but still remain firmly down for the year. Amongst the catalysts was a huge stimulus package from the US government, which saw the US market have its biggest three day rally since 1931. The Dow Jones Index entered into “bull market” territory following a 20%+ gain but it still remains down over 23.5% for the year! This week, like last is likely to be driven by the push of new COVID-19 cases and the counter-acting pull of policy responses.

Last Week

  • Stocks staged a big rebound: Japan led the way.
  • Good gains for the UK share market with value stocks winning.
  • Bond markets were mixed: sovereigns were subdued, but credit was very strong.
  • Further stimulus was welcomed by markets: in particular from the US government and the Federal Reserve.
  • Economic data was dire: signalling a severe contraction.
  • Oil continued to trade lower.

This Week

  • As has been the case recently, the focus this week is likely to remain on the number of new COVID-19 cases and the associated global policy responses from governments and central banks.
  • In terms of economic data, we have US jobs data (nonfarm payrolls are due on Friday along with the unemployment numbers: particularly key given the dire jobless claims data from last week) and wage data (also Friday). There’s also the much- watched ISM manufacturing survey due out on Wednesday.
  • In the UK (and other developed nations) we have the final PMI numbers out towards the end of the week: likely to cement the “flash” numbers we saw last week as being firmly in “contractionary” territory.
  • We also have the Chinese PMI data due out tomorrow, where markets will be looking to see some improvement following the record low February figure of 28.9 (any number below “50” is deemed to be “contractionary”). Markets are expecting a number around the 44 level.

Last Week’s Highlights​

Stock markets staged a good bounce-back last week, with global equities rising by 8.8% over the week. This rise in overseas stocks came despite the pound strengthening over 7% versus the US dollar, such that global equities in sterling hedged terms were up over 14% on the week. The US, which makes up over 60% of the global index, was the biggest contributor (with the index up over 14% – and enjoying its biggest three day gain since 1931), but Japan was the best performing of the major countries; with the market up over 17% last week. For the Nikkei, this marked the best weekly gain in its 70 year history. From a sector perspective, energy fared best (up over 20%), with industrials also posting some strong gains. However, despite last week’s “bull market” for the sector, energy still remains down 44% for the year in US dollar terms.

The UK FTSE All Share Index was up by 8.5% last week, with the FTSE 250 Index leading the way; up over 9.5%. Despite the decent week, the 250 still lags the large-cap 100 index year-to-date and was down by 31.65% to the close of Friday. Value stocks strongly out-performed growth stocks in the UK market last week, with the value index up by 14.8% vs 7.6% for the growth index. This was driven largely by the oil and gas index being up over 33% for the week (still down 34% for the year). Restaurant group was the best performing stock in the All Share last week (up 90%), followed by Aston Martin (up 81.5%) and Lookers (up 68.2%). These very cyclical stocks very much reflected the value bounce, and their returns should be viewed in the context of the year-so-far where they are down 72.5%, 46.5% and 66.4% respectively (to Friday’s close).

Bond markets were very much a mixed bag. Sovereign bonds were much more stable than they’d been the previous week, with the UK 10 year bond yield falling from 0.43% on Monday to close the week out at 0.37% on Friday. This equated to a rise of 1.3% for the UK sovereign bond market. It was in credit markets, however, where the real action was following the huge policy announcement (see below) from the US Federal Reserve. Global High yield bonds rose by 4.5% on the week but were trumped by US investment grade bonds which rose by a staggering 8.3%; boosted by the Federal Reserve saying they would start buying that part of the market. Emerging market bonds also had a decent bounce and were up by 3.7% but remain down circa 10% for the year.

Despite failing at the first couple of hurdles (early on in the week), the US Congress finally agreed on a $2.2trn stimulus package which was signed off on Friday. This dwarfs the amount of government stimulus that we saw in the Global Financial Crisis (it is nearly two times greater) and equates to about 10% of US GDP. Furthermore, it included roughly $350bn in support for small businesses (loans that will be forgiven at year-end if they don’t fire staff) and $1.200 direct payments to lower- and middle-income adults and $500 per child.

Having already cut interest rates by 1.4% (to 0.1%), the Federal Reserve announced yet more stimulus last week; effectively saying that they would be doing unlimited quantitative easing (QE). In addition to purchasing Treasuries and agency mortgage backed bonds, they also said that they would start to purchase investment grade corporate bonds (hence the huge rise in this index last week). They followed this up with $500bn of bond purchases last week (and have said they will continue with this amount indefinitely). For context, this weekly number is a bigger amount than the total package of the entire round of Quantitative Easing 2 back in November 2010.

The US economic data was particularly grim last week, with a record number of people filing for jobless claims: 3.283 million new people put in jobless claims last week which was nearly twice more than expected and likely severely pushes up the US unemployment rate. For context, this number is more than five times the number of people that filed for unemployment in the US during the GFC and there has never been a previous weekly reading above 700,000.

Unsurprisingly, survey data on economic activity (in the form of PMIs) was also weak. Many of the developed world countries came in with their lowest readings since the GFC, with the eurozone having its biggest monthly fall since records began back in July 1998.

The Bank of England met last week and took no action. This was not surprising given that they have already made two rounds of emergency interest rate cuts (from 0.75% to 0.25% and then from 0.25% to 0.1%). They did however say that they were ready to increase their £645bn bond buying program if needs be. The European Central Bank also came forward with more stimulus last week; widening the net on bonds that it can buy within its €750bn stimulus package.

Oil had another poor week, with futures slumping further this morning and briefly trading below $20 a barrel. This reflects the severe lack of demand caused by the Covid-19 lockdowns as well as the increased supply due to lack of any production cuts from Russia or Saudi Arabia. Oil is on track for its worst quarter ever.

Asset Returns

Equities & Oil: returns are all in base currency, save for Global and Emerging which are in GBP. Bond returns are all shown in GBP. Gold in GBP. Source: Bloomberg.

Another bad week for oil saw it fall to its lowest level in 17 years

Source: Bloomberg

Rory McPherson
Head of Investment Strategy