Market Watch. June 2020 II

Market Watch. June 2020 II

Most Fund Managers expect a double dip recession

The US government yield curve is steepening. Some analysts claim that this indicates a recession. We would however stress the fact that we are in a recession, but the bond market indicates that next year we will see a recovery and therefore the curve is steepening. This is in line with the latest Fed announcement – a US recession with a contraction of around 6.5% in 2020 followed by a GDP expansion of around 5% in 2021

The OECD has revised its global growth forecast down significantly. They predict that the pre crisis GDP output level will only be reached in 2022, Meanwhile Morgan Stanley revised their forecast significantly up, expecting to reach the pre crisis level during H2 2021. Goldman Sachs agrees with MS and has just published positively revised forecasts for 2021.

Meanwhile a majority of fund managers expect a W-shaped (i.e. double dip recession) or a U-shaped recovery. This outlook is mismatching their recent shift from cash into equities. This pain trade was driven by the fear of missing out a further rise in risky assets. Retail investors have bet on a GDP recovery since March and went long for fallen angel stocks.

 

We continue to believe that we will see deepening in the region a V- or U-shape recovery. High frequency data shows that in US the consumer spending is back at 80% of the pre crisis level. The distribution is skewed towards online shops, which are at around 150% of normal sales.

Since our last report, the ECB has announced an additional  EUR 600bn bond purchasing package. The European Union is discussing a EUR 750 bn rescue fund, which should be financed by raising EU debt.

Besides the 5th tax stimulus package, both US parties are discussing an infrastructure program ranging from USD 500bn to USD 1000bn.

The Fed has recycled its statement from March and announced that they will immediately begin to buy single bonds.

Mr. Powell has also hinted that the Fed will not only keep its rates at zero until the end of 2022, but are also discussing the control the yield curve over the whole maturity spectrum. All these measures should increase markets’ predictability and provide some fundamental background for the growth of risky asset prices.

Currencies, Commodities, Equity & Bond Indices

Based on the latest analysis of BofA the risk appetite among fund managers is back, measured by the drop of cash levels in their managed funds. Globally down to 4.7% and in Europe down to 4.2%, both indicators are back to their 10- year means from extreme high levels last month.

That means managers are chasing the rally which they completely missed out since March. At the same time most managers expect a very mute recovery or even a double dip recession.

It is interesting that the bull bear indicator stayed in the extreme bear zone. This is mainly due to the fact that its components, which are controlled by the fund managers, stayed either bearish or very bearish.

On the other hand retail investors have significantly outperformed professionals over the last weeks due to the acquisition of fallen angles and of companies which are either bankrupt (e.g. Hertz) or are not profitable (e.g. Nikola or Tesla). They have also speculated with US airline companies and pushed their prices up to unjustified high levels.

After the sell off US corporate spread look attractive

Liquidity

The Swiss franc lost against the US dollar due to the recent risk off mode, driven by the US Fed and new COVID-19 cases in China and the US. Against the Euro we have seen a roller coaster – a depreciation was followed by a small appreciation due to the risk off mode.

The EUR lost against the dollar and was flat against the Swiss franc. Short-term we might see a further strengthening driven by capital flows from the US to the Eurozone.

The USD has strengthened over the last trading days. This was mainly driven by the sell off in risky assets and the new outbreak of COVID-19 in Beijing and in some US states, like Texas (11% increase in new cases).

Equities

After the Fed press conference, market sold off. Market participants got scared that the outlook for 2020 was revised down and that the Fed rates will stay at zero until at least the end of 2022. Other parts of statement got ignored. According to the Fed, the US economy will bounce back in 2021 and this is rather good news for the US earning outlook, which is still reflected by an outperformance of the Russel 2000 versus the S&P 500.

The sell off was short lived, it only went down to the 200-day average. Once this support level was reached, there was a bounce back.

Technically, we see two gaps in the price chart. It is a question of time until these gaps will be closed.

Fixed Income

The situation in the corporate bond market was similar to the equity market. We have seen a short-lived sell off and a minor correction in bond prices.

The spread widening makes USD corporates even more attractive. In  relative terms we would argue that due to the high equity prices and revised down earnings, corporate bonds do offer better value than equites.

On top we have the global central bank bond buying programs which put an artificial floor under bond prices. It is possible that the Fed soon announces that they will start to control the US yield curve, which would increase market’s predictability.

Alternative Investments

Gold: The gold price continues to trade in a trading range of USD 1’700 to 1’750. During the short sell off in equites gold rose again towards 1’750 before falling while equities recovered. The technical picture looks as if we face soon a breakout of this trading range in unknown direction.

REITs: European residential REITs hold up well while commercial REITs have struggled.

Oil: WTI futures are trading above USD 35 per barrel. The price got supported by the decision of the OPEC+ to prolong the production cut for another months.

Investments covered:

Central China Real Estate 7.65% 2023

Westinghouse Air Brake Technologies 3.2% 2025

UPL Corporation 4.625% 2030

Nexa Resources 6.5% 2028

JD.com

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