Weekly Market Insight

Latest Economic & Market Update 29th April 2020

30th April 2020

Latest Economic & Market Update:Market rally continues despite grim economic data | Oil volatility to continue | Fastest US GDP contraction since 2008

Latest Economic & Market Update
Good Afternoon, it is 30th April 2020 and here is your economic and market update from BlackBee Today we are going to focus on:
  > Market rally continues despite grim economic data.
> Volatility in oil market set to continue.
> Renewable energy companies faring better than their Gas & Coal counterparts.
> EU Economic Sentiment Indicator shows a record drop in confidence.
> Fastest US GDP contraction since 2008.
> Italy downgraded to one notch above “junk” status.
 
Despite the fastest contraction in US GDP since the financial crisis, markets rose yesterday on the back of data released by Gilead Sciences regarding a potential treatment for Covid-19. The recent market rally has now reduced the YTD return for the S&P500 to minus 9%. It is down 12% since the February highs. At its worst point, the S&P was down nearly 34% from its February highs. The study results gave hope to investors as it reported positive results. However, the same company mistakenly released a draft report of a study last month that also indicated positive results. Last week, the WHO announced that they had requested a draft report and while a draft was sent, it was mistakenly uploaded to the company website but quickly removed once the error was noticed. That report was proved to have no evidence of positive results. The rally in the market which saw main US Indices rise as much as 3.5% yesterday shows how investors are eager to react to any bit of good news.
 
The West Texas Intermediate jumped over 22% yesterday as investors bet the reopening of the economy will drive up demand. WTI started the day at $12.34 and closed at $15.06. There is a lot of volatility in the oil market and it is expected to continue. The rise in price is on the belief that demand will increase enough to reduce the strains on storage capacity. However the final day of June’s WTI Future contract is Tuesday 19th May, and currently, inventory levels have increased to an all-time high. This is a short time-period for demand to increase enough to reduce the pressure on storage capacity, indicating that investors who bought up contracts yesterday may be stung. WTI is much more volatile in comparison to crude as storage is on land at Cushing, Oklahoma, whereas crude is a seaborne oil and supertankers can be chartered to hold the oil, making it difficult to run out of storage.
 
Renewable Energy Companies have been performing better than the rest of the energy industry. In comparison, gas and coal companies have been hit hard by the downturn. Consumption of electricity has dropped due to the lockdown as offices and businesses have been forced to close, keeping many people at home. The driving factor behind renewables outperforming their gas and coal counterparts is that majority of electrical systems require operators to purchase clean energy first, putting renewables first in line and making them less vulnerable to a drop in use. Orsted are a prime example of the this, as operating profit for Q1 rose 33% in comparison to the same period last year and the company has stated that they see no indication of Covid-19 having a significant impact this year.
 
The EU Economic Sentiment Indicator measured the largest drop on record in April. The indicator fell by 28.8 points to 65.8 which suggests a severe lack of confidence in the economy. The ESI is a confidence indicator measured through surveys in 5 sectors; Industrial, Services, Consumer, Construction & Retail. It is used to indicate future economic development and is useful as it gives an insight into information known by respondents but not yet reflected in economic data. Views of the economy influence the business cycle and it is clear that there is a strong pessimistic view in the economy at the moment. This fall in the ESI also may be worse than measured as surveys could not be carried out in Italy due to the lockdown.
 
At a -4.8% annualised rate, US GDP contracted at the fastest rate since the financial crisis in 2008. This marks the end of the longest expansion in history. The release was worse than economists forecast as the consensus was that GDP would contract at -4%. A rapid shift in demand was due to lockdown, however the GDP reading for Q2 could prove worse as the lockdown only began mid-March. A shift in the mentality of consumers as they favour building up savings will compound the effect of the lockdown.
 
Italy’s government debt was downgraded to one notch above “junk” status on Wednesday by Fitch. This was based on the rise in borrowing costs and increasing doubt regarding the sustainability of the growing levels of debt. However, the yield on the 10-year bond barely moved as it hit 1.75%, up from 1.728%. This lack of a jump in yield indicates investor confidence that the ECB will do whatever it takes to keep yields low. Although the yield is still well below its highs of 2.2% during this downturn, pressure will grow on the ECB to act if the yield rises again. Standard and Poors decision not to downgrade last week will have also provided some relief to investors.
Best & Worst Performers of Large Cap Stocks on Wednesday

Global Market Update
(as at close of markets 29/04/2020)