Global equity markets brushed aside US Q1 GDP data and the Fed’s downbeat economic assessment and instead focused on a potential new drug which helped coronavirus patients recover faster. As a result, the Dow Jones closed 532 points higher, or 2.21%, while the broader S&P 500 index rose 2.66%. In the UK, the FTSE-100 closed up over 150 points or 2.6% yesterday – although this morning it is, as we write, trading sideways.
While we have long argued that the coronavirus outbreak is likely to be a transient issue, we would caution against this week’s euphoria as it feels like equity markets are being slightly too complacent that the potential new drug, Remdesivir, can quickly stop the coronavirus spread. Although we still believe that we will see a V-shaped recovery and we remain positive on equity markets, we do need to be mindful that market volatility will remain elevated in the short-term.
US GDP data showed that the economy contracted by 4.8% in the first quarter, the biggest slide since 2008 and the first contraction since 2014, thanks predominantly due to a slump in consumer spending as the coronavirus spread closed shops and restaurants.
Given that the US economy was running as normal for the vast majority of the 3 months, this decline gives us a good taste of what we can expect during the second quarter, given the lockdown restrictions. In fact given this reading, we wouldn’t be surprised if Q2 GDP contracts by 30 or even 40% on an annualised basis given the rapid rise in unemployment we have seen during April – such a large GDP decline would have been unimaginable just a couple of months ago, but is now simply accepted by equity markets!
The Fed Chair, Jay Powell, was not particularly optimistic on the economic outlook by talking about the unknown duration of the coronavirus lockdowns and the potential difficulties that the unemployed will have in finding new jobs. However, on a positive note, he did say that the central bank would provide more stimulus if needed.
Overnight, Chinese PMI data for April came in with readings over 50 (50.8 for manufacturing and 53.2 for non-manufacturing) – 50 is the line separating expansion and contraction, so a reading above 50 signals the Chinese economy is expanding.
Looking ahead to today, we have the weekly US initial jobless claims (hopefully the trend will continue to slow after seeing over 26m Americans lose their jobs in the previous five weekly readings); Eurozone Q1 GDP; and ECB policymakers meet (and after this morning’s French and Spanish Q1 GDP data, which showed economic contraction of 5.8% and 5.2% respectively, the pressure is on for more stimulus).
Investment Management Team