Market Insights – June 2, 2020

Each week, a team of experts shares its market views with you.

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Essentials

The number of new jobseekers continued to fall last week in the USA. Weekly jobless claims exceeded six million at the height of the crisis, but that figure has now dropped to two million. As economic activity quickly picks up again, we expect the unemployment rate to return to normal in the coming weeks, which should help to shore up consumer confidence.

Investors have regained their appetite for risk, and Switzerland’s defensive large caps are now struggling as a result. Swiss small caps have for the most part outperformed their larger peers and made up the ground they lost since the beginning of the crisis in March. We expect this trend to continue over the coming weeks.

China’s Caixin manufacturing PMI surprised the market by jumping up to 50.7 from 49.4 in April, beating the consensus of 49.6. Although new export orders rose sharply to 41.7 in May, up from 33.7 in April, they remained well below the 50 mark, suggesting that exports are still weak.

May really wasn't the time to sell!

There’s a well-known saying within the financial community: sell in May and go away. Historically speaking, stock markets tend to perform less well in the six months from May to October than they do in the six months from November to April. Of course, this is an average, long-term trend and it doesn’t happen like that every year. And it wouldn’t have been wise to follow this rule in recent years. And so far, the saying doesn’t look like it will hold true for 2020, an atypical year. Global stock markets put in a very solid performance in May, with the major US and European indexes gaining close to 5%. Some markets fared even better than that. These upturns came in response to the abating COVID-19 pandemic and the gradual lifting of lockdowns in most of the world’s major economies. This was coupled with hopes of a sharp uptick in economic activity in the second half of the year, driven by the massive economic stimulus packages brought in by many governments and central banks. Leading economic indicators show that the recovery is under way almost everywhere. And the sector rotation seen over the past two weeks is another sign that investors’ economic sentiment is changing. Cyclical sectors, which were shunned by investors during the initial stock-market rally, are finally starting to make up the lost ground. The rotation has been good for financial and industrial stocks and small and mid caps. This renewed confidence in the health of the global economy is also reflected in the bond market. The riskiest segments, such as high-yield bonds and emerging-market debt, have made a comeback after a very rough start to the year. However, we’ll be keeping a lookout for any excessive optimism given that the geopolitical situation is still tense and a second wave of infections before the autumn can’t be ruled out. But in the short term, the markets should be able to maintain their momentum. On the forex market, we may also see the euro change course as investors become more optimistic about Europe. We are therefore strengthening our exposure to the single currency in our Swiss-franc portfolios by unwinding some of our forward hedges.

Europe: renewed impetus

In an unprecedented move, the European Commission last week unveiled a EUR 750 billion recovery plan with jointly issued EU debt. The aim is to help the regions and sectors worst hit by the pandemic and get the eurozone out of its deep recession. It will no doubt take some time for the plan to be approved, since there are still a number of obstacles and the money won’t be available straight away. But we have to look at the bigger picture: it would be the biggest fiscal stimulus package in the history of the European Union and would come in addition to the measures already put in place by the European Central Bank. It’s also a strong sign of leaders’ resolve to strengthen the European Union by moving forward in a more coordinated manner.

The stock markets welcomed the news. This new recovery programme could well be a turning point and should reduce the risk premium on eurozone stocks. And these developments come at a time when both expectations about the eurozone and valuations (particularly relative to the US) are low. European stock markets have rallied from their March lows but are still lagging behind markets in other regions, especially the US. We therefore think that European stock markets could now start catching up, driven by the progress made on the political and economic fronts.

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