Weekly Market Insight

Daily Covid-19 Market Update 27th April 2020

27th April 2020

Monday’s Covid-19 Update: Divergence of markets and the real economy | Italy avoids downgrading | US & EU’s economic reopenings

Good Afternoon, it’s April 27th and welcome to today’s Covid-19 daily market update.

Today we are going to focus on:
> The divergence of the market from the real economy
> Italy avoids downgrading by S&P
> US & EU’s economic reopenings
> EU disagreement on how injection of funds should be structured
> And more.
 
Latest Covid-19 Market Update
(as at close of markets 24/04/2020 unless otherwise stated)
Divergence between the real economy and the market is significant. Despite the grim outlook in economic data released so far, half of the losses have been erased as the S&P500 is up 23% from its lows in February. Technically this signals a new bull market, but this rally is heavily influenced by Central Bank action and cannot be considered a true picture of the economy. Rallies are also common in bear markets.

Tech is leading the way but travel & leisure stocks are also up 24% from their lows, reducing their decline for this year to 37%. Currently, the market is considered expensive based on earnings. The S&P500 forward PE ratio is over 21, the highest level since Dec 2001, suggesting that investors are at greater risk from poor forecasts if they buy now.

Italy’s borrowing costs have been pushed higher in recent weeks. On Friday, Italy avoided a downgrade from Standard and Poors which saw the yield on the 10yr bond drop to 1.85% (the yield has reached over 2.2% in recent weeks). If Italy was downgraded to “junk” status, the ECB would continue to buy its debt but many bond funds would have to sell their positions because they can only hold “Investment Grade” rated bonds. Debt to GDP ratio is forecast to be 157% by the end of the year. The amount of debt may not be an issue, but the cost of the debt will be a deciding factor and if it is judged too high, Italy could see a downgrade later in the year forcing the ECB to support it further due to an inevitable outflow of funds.
 
States in the US are beginning to reopen as job losses have reached over 26m. In comparison to the 2008 Financial crisis which saw a loss of 8.7m jobs, this crisis is losing the same amount every two weeks. European countries are also considering reopening the economy in phased stages. Reopening of the economies is good news for businesses however it is a very delicate procedure, as no country wants to risk a second wave of infections.

Economic data on durable goods for the US showed a 14% fall, the biggest since 2014. This is still considered good news, as when aircraft and defense spending are removed from the data, there is only a mild fall in spending suggesting resilience in the durable goods market.
 
Hopes of an Italian Coronabond are now gone due to the EU’s new direction for the EU Recovery Fund. Although direction is evident, the finer details are still being discussed. Harder hit countries like Italy, who already have mounting debt, want funds to be received in the form of grants, however the more stable and resilient economies are seeking the funding to be in the form of loans, with accountability playing a huge part in this argument. Economic reform for the troubled countries post-crisis is also a hotly debated topic, highlighting the dissatisfaction and segregation between countries in the EU.

The Bank of Japan have followed suit with other major Central Banks across the world by announcing the removal of restrictions that only allowed them to buy government debt. They will now ramp up purchases in corporate bonds to support the market. The US, Eurozone and Japan represent over half of the worlds’ output. Each of these Central Banks have removed restrictions and promised to go to unlimited lengths to protect their economies.