Latest from the Markets - 1st April 2020

Market update

Q1 was the worst quarter for international stock markets since 2008 and, for Eurozone stock markets, the worst quarter since 2002. Nonetheless, the situation seems to have somewhat stabilized over the last six trading sessions, while waiting to better understand how the pandemic will evolve in the western world.

February Eurozone inflation data came out yesterday. The overall figure, which includes energy and food, rose by +0.7% year-on-year, compared to consensus expectations of +0.8%. Within the Eurozone, energy contracted sharply due to the drop in oil, while food rose. The figure net of these two volatile components is +1.2% year-on-year, in line with expectations and down from +1.3% in January. Given the evolution of the pandemic, we expect to see a further decline in inflation in March; the real risk is that we are heading towards deflation, i.e. a negative growth rate in consumer prices, should the halt to production and services continue for an extended time. In the US, consumer confidence data on for March, down to 120 from 132.6 in February, the lowest level since July 2017 (but still higher than expectations, which stood at 110).

Overnight PMIs (Purchasing Manager Indices) were published Asia, confirming the adverse effect the pandemic is having on Asian economies. The only exception is China, whose final Caixin manufacturing index for March posted 50.1 versus 45 forecast, confirming the recent positive data seen. In Japan, the PMI index fell to 44.8 from 47.8 in February, in South Korea to 44.2 from 48.7 in February and the same directionality can be seen in the rest of South East Asian countries. Important to note that indices such as the PMI indicate expansion of activity above the level of 50 and contraction below that level.

Our view:

The support to financial markets deriving from the significant monetary and fiscal policy manoeuvres carried out by international authorities risk being frustrated in the short-term if there are no tangible signs of reaching a peak contagion.

Incidentally, yesterday’s Italian data - seen by many as a test case of the evolution of the pandemic in the western world - is moderately encouraging, but it is clear that the containment measures will need to be extended at least until after Easter, in order to avoid dangerous rebound effects.

How the markets performed yesterday

Wall Street closed positive on Monday and the encouraging Chinese data for March had a mixed impact on Asian markets. Australia closed down by -2% and the Japanese Nikkei 225 by -0.9%. Other markets were positive, with China up 0.3%, Hong Kong up 1.8%, Korea up 1.9%, India up 3.6%.

European markets closed with the Eurostoxx 50 index up by +0.77%, the French CAC 40 at +0.4%, the German Dax at +1.2% and the Italian FTSE MIB at +1.06%. The UK stock exchange performed well with the FTSE 100 up +1.95%, thanks to the strengthening of sterling.

However, the US stock market closed down, close to the daily low, with the S&P 500 index closing at -1.6% and the Dow Jones Industrials down by -1.84%, thus closing the worst quarter since 1987.

Yields on the ten-year US Treasury fell slightly to 0.66% and those on the 10-year Bund were stable at -0.48%. The Italian differential with Germany remained unchanged at 198 basis points.

In commodities, oil remained stable after the sharp falls seen the previous day with Brent crude closing at $22.7 per barrel, while gold corrected by -2.9% at $1,575 per ounce.

Finally, the US dollar further strengthened against the Euro, closing at 1.1025.

Today’s opening bell

Asian market opening was mixed on the back of Wall Street’s negative closing and the aforementioned PMI indices. Australia is up by +3.6% and China by +0.6%. On the other hand, the Japanese Nikkei 225 was down -1.9% half an hour after closing and the other main markets with Hong Kong -1.1%, Korea -1.4%, India -2.7%. Oil again fell by -2.2% to 25.8 dollars a barrel Brent while gold recovered 0.8%. European futures down -2.5% while the future on the S&P 500 is -1.8%.