Market Insights – May 4, 2020

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

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Essentials

Gold is consolidating around USD 1,700 per ounce, which is close to its recent highs. Sentiment is running high, which suggests that gold prices may stabilise at these levels in the short term, although they will continue to be supported by government and central bank stimulus measures in the longer term.

Chinese PMIs show that output continued to rise in April. They point to a rebound in the manufacturing sector, although exports are still weak. Among services sectors, retail and IT fared better than hotels and tourism.

The US economy shrank by 4.8% in the first quarter, a larger decline than expected. Consumer spending, the main driver of the economy, was hit particularly hard and fell 7.6%. But the USA is now gradually coming out of lockdown, so we don’t think the situation will deteriorate further in the second quarter – the worst is probably already over in that country. 

Not a good time for renewed hostilities

Wall Street fell sharply on Friday as many other global markets were closed for May Day. The week had started off well, but those gains were all but wiped out. Earlier in the week, the markets had been buoyed by positive developments in terms of the public health situation and the economy. The COVID-19 pandemic is slowing around the globe. This is especially true in Europe and the USA. Daily tallies of new cases, deaths and hospitalisations continue to drop in these two economic regions, like they have already done in China and other Asian countries. This reassuring trend means that most countries in the northern hemisphere can now start thinking about coming out of lockdown in the weeks ahead. This is a good sign and should mean that global economic activity will start returning to normal, even though the pandemic is still taking hold in several emerging-market countries south of the equator. There has also been good news on the research front recently. A US trial has shown that a molecule developed by the firm Gilead can help COVID-19 patients recover faster. Work on a vaccine has also been stepped up, and there are encouraging signs from laboratories that one or more vaccines may be available sooner than expected. However, at the end of last week, these hopes were overshadowed by renewed tensions between the USA and China, prompting fears that we are entering a new phase in the recent trade war between the world’s two main superpowers. The pandemic has derailed the US economy, and the Trump administration seems to think the Chinese government is the perfect scapegoat. At this point, however, we can’t be sure that there will be a dangerous escalation in US-China tensions. These attacks are perhaps just part of the president’s re-election strategy. For the moment, the focus is mainly on the origins of the virus and China’s efforts to stem its spread. The allegations have been vigorously refuted by Beijing. After the trade truce that was so painstakingly negotiated in 2019, it’s worth keeping an eye on these new skirmishes. Any further rise in customs tariffs aimed at hurting China would be a cause for concern and would surely spark retaliatory measures from Beijing. It would also hinder the chances of a speedy recovery for the global economy.

Europe is moving at different speeds

As expected, the eurozone economy has fallen into recession, shrinking 3.8% in the first quarter as the lockdown measures brought economic activity to a standstill. This crisis is very different from the one back in 2008, mainly because this time the European Central Bank and EU Member States quickly took action by injecting unprecedented amounts of money into the economy. The banking system is also in much better shape. It’s reassuring to see that some high-frequency indicators, such as electricity consumption, are showing that the economic slowdown may have bottomed out. For the markets, one of the determining factors will be countries’ capacity to successfully ease the lockdown measures and restart their economies. We don’t think all eurozone countries are on an equal footing in this regard, and regional differences may become even more pronounced. Countries where the lockdown is set to end earlier – like Germany, Austria, the Netherlands and Sweden – will fare much better. We think the German stock market is attractive at the moment. The country is recovering more quickly from the crisis, and the government has been able to use its budget surplus from recent years to bring in a record stimulus package. It’s worth 22% of GDP – more than that of its neighbours. Germany companies are also more exposed to emerging markets, and especially China, where growth is already picking up.

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