Exit strategies the latest focus of attention
The phrase of the week seems to be "exit strategies", that is, how various countries plan to resume more normal activity. More and more countries are preparing to restart their economies – a balancing act between the promising trend in the coronavirus pandemic and prevention of large-scale economic repercussions from the lockdowns.
US Treasury Secretary Steven Mnuchin predicts that the economy will "really bounce back" when it reopens in May or June. Various American governors have already begun the reopening process or are planning to start it soon. Meanwhile electric carmaker Tesla is among the manufacturers that are asking their employees to resume production. Europe will begin its big (though gradual) reopening process next week. Italy is easing its restrictions, Spain will start letting people go out for long walks and Germany will reopen its schools. British Prime Minister Boris Johnson has returned to work after recovering from his own case of COVID-19 and is warning against reopening the United Kingdom economy too soon, given the risk of a second wave of coronavirus infection.
Weak economic data and downward earnings revisions
As expected, incoming economic data are very weak. In the United States, at least 26 million people have lost their jobs in the past five weeks. European car sales have fallen by 50 per cent. Countermeasures to soften the effects of the downturn and speed up the recovery are also being reported. For example, the European Central Bank is accepting more kinds of bonds as collateral for loans, and Germany is providing EUR 10 billion to the restaurant sector. The US Congress approved a bill appropriating an additional USD 484 billion to crisis programmes, and President Donald Trump signed it into law. Most of this money will go towards replenishing the Paycheck Protection Program, which lends money to small businesses; the loans need not be repaid if the recipient companies keep their employees on the payroll.
Globally, full-year corporate earnings forecasts for 2020 have been adjusted about 20 per cent lower, but forecasts also predict a powerful recovery next year. In the US, there have been especially large downward revisions for banks, such as JPMorgan Chase. At the same time, first quarter earnings reports are perhaps less interesting than usual, since second quarter earnings are already expected to be far worse. The Q1 reports now being published are thus probably not the most important stock market drivers.
Continued oil price squeeze
Last week we wrote about how West Texas Intermediate (WTI) futures for physical delivery of oil in May were trading at negative prices − due to an acute shortage of US storage space combined with a sharp decline in demand for oil, as large parts of the world economy were locked down. This past week, the US price squeeze shifted to contracts for June delivery, with the price of WTI oil dropping briefly below USD 11/barrel. Brent crude, the main oil price benchmark in Europe, also fell and is trading at a bit above USD 20/barrel. Although the OPEC oil cartel, Russia and other exporters have agreed to cut production starting on May 1, the problem of a wide gap between supply and demand – with growing oil stockpiles around the world − remains. Our Oslo-based chief commodities analyst, Bjarne Schieldrop, explains the situation in global oil markets as of April 27:
Video (4 minutes)
Supportive central banks
Today Sweden's Riksbank left its key interest rate unchanged at 0%. According to the central bank's press release, the Executive Board did not deem it justified to lower the repo rate in order to boost demand, since the economic downturn is due to restrictions that have been imposed and people's concerns about the spread of infection. However, the Riksbank will continue buying government and mortgage-backed bonds until the end of September 2020, within the framework of its decision in March to purchase up to SEK 300 billion worth of securities. Meanwhile the Riksbank says it has not ruled out the possibility of a key rate cut at a later date, "if this is deemed an effective measure to stimulate demand and support the development of inflation in the recovery phase." Our forecast is that the Riksbank will keep its repo rate unchanged for a long time but will expand its stimulative purchases of securities.
The Riksbank's April 28 press release
We believe that at its policy meeting this Thursday, the European Central Bank will continue to declare its willingness to do whatever it takes. The ECB will take advantage of the flexibility of its new Pandemic Emergency Purchase Programme (PEPP) to address wider yield spreads (gaps between the yields on government and corporate bonds) and will further relax the requirements on what bonds its purchases may include.
Our market view
Indications that the spread of the novel coronavirus has been slowing in recent weeks have shifted the focus of attention away from how large and rapid lockdowns are needed towards how quickly countries and their economies can reopen. Together with continued signals of further stimulus measures, this has helped pave the way for a return of risk appetite in financial markets. Stock markets have now regained a large proportion of the downturn since their February peaks. The trend is largely similar for corporate bonds.
The fact that a return to a more normal situation is discernible − combined with large fiscal and monetary stimulus measures − will probably drive the coming recovery. This undoubtedly justifies a rebound in share prices from their sharp declines during March. But the scale of this rebound is a source of concern.
The dramatic economic slowdown means that corporate earnings forecasts for 2020 will be revised sharply lower, and further downward adjustments can probably be expected. Most observers, including us, expect earnings to regain a lot of lost ground during 2021 and probably also set the stage for earnings to continue increasing after next year. But already driving up share prices towards their earlier peaks is challenging, given the prevailing uncertainties and the sizeable dips in earnings curves we are now seeing.
Decent growth prospects on the other side of the crisis, along with continued ultra-low interest rates, are laying a good long-term foundation for equities. The credit market has stabilised, which will generate potential for corporate bonds.
But in the short run, share price upturns are creating room for new disappointments. We thus remain cautious about buying more equities at present, but given their long-term potential, any downturns are likely to create new buying opportunities.
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