tentative slowing signs of coronavirus department...11.08% 12.68% 15.45% 4.00% 9.32% 4.04% 8.78%...
TRANSCRIPT
Tentative slowing signs of coronavirus
spread worldwide helped the equity
markets to rebound in April. However,
incoming economic data have been
consistently disappointing, reported
corporate earnings didn’t give much positive
surprise, and that market breadths are
narrowing.
Thus, we believe the recent market pickup
may only be short-lived and the overall
direction is still tilted towards the
downside.
As economic activities gradually resume, we
foresee that the post-COVID world will need
at least a few months’ time to regain the
lost capacity particularly in the
manufacturing sector.
Furthermore, the unprecedented heavy
slump in oil price proved that global demand
is very weak, but on the bright side, cheap
oil can help to keep production cost low.
Also need to bear in mind, whether the
re-escalating tension between U.S. and
China will start another round of trade war
will be another decisive factor for the
rebound of the global economy.
As people always say, opportunities come
from chaos.
We are undoubtedly under a very uncertain
environment. We need to monitor the
market closely and manage the portfolio in
a very active way in order to capture the
opportunities, or protect against significant
market downturn.
GLOBAL STOCKS
COMMODITIES & CURRENCIES
10.80%
11.08%
12.68%
15.45%
4.00%
9.32%
4.04%
8.78%
6.75%
9.00%
10.90%
10.25%
3.99%
14.42%
16.09%
3.91%
15.61%
4.21%
8.90%
13.23%
5.76%
4.41%
10.99%
MSCI World
Dow Jones
S&P
Nasdaq
France
Germany
UK
Australia
Japan
MSCI EM
Russia
Brazil
China
India
Vietnam
Indonesia
Thailand
Malaysia
MSCI Asia ex Japan
Taiwan
Singapore
Hong Kong
South Korea
6.93%
-8.01%
7.47%
4.48%
-6.80%
Gold Crude Oil Platinum Copper Wheat
-0.03%-0.69%
0.32%
1.40%
6.21%
0.87%0.41%
1.78%
-5.10%
-0.05%
0.27%
USD EUR JPY GBP AUD CAD KRW TWD BRL INR CNY
As the global coronavirus spread looks
improving, countries are taking steps toward
reopening the economy partially and gradually.
Yet, infection numbers are slowing but the
slowing rate is deteriorating. Therefore, to
avoid triggering massive outbreak when they
loosen social distancing measures, governments
are very cautious about their plans.
For instance, U.K. locked down from mid-March
which forced businesses to close and consumers
to stay at home. Now it’d ease limits to length
of time allowed for certain outdoor activities as
well as allowing citizens to drive to parks and
beaches.
Prime Minister Johnson targets to reopen
primary schools as early as the first of June and
the hospitality industry by 1st July. At the same
time, he encourages to commute on foot, or to
drive or cycle.
In the U.S., many states already outlined
phased plans. For example, Virginia is set to
allow some businesses to open except areas just
outside Washington. President Trump also
confidently spoke a lot on how the country can
control the virus and urge all to reopen soon.
On the other hand, Trump also needs someone
to blame for American deaths (accumulating up
to 85,883 as of 15/5/2020 09:33 GMT+8) by the
virus, especially when he is running for the
re-election campaign later this year.
That’s why he repeatedly addressed China as
the infectious source. Here, we expect trade
tensions to be heated.
Apart from trade, virus control effectiveness
also sounds a note of caution lately as new
confirmed cases of Covid-19 (all asymptomatic
infections) were reported the first time in
Wuhan in more than a month while the
authorities are restarting business and work.
Meanwhile in Russia, since 3rd May, the country
recorded >10,000 confirmed cases every day for
11 days straight! Note that the country had
been quite “safe” from the virus before April.
Given that it had all looked calm in Russia a few
weeks before. What makes us worry is that any
“safe” places now might would become
“another Russia”.
Meanwhile, the sever surplus of crude oil and
China marked its first ever shrinkage at -6.8% in
Q1’2020 since record began in 1992.
The above both speak the fact that global
economic recession is set to last for at least the
first half of this year.
Gasoline demand once collapsed to barely 5m
barrels per day in the week ending 3rd April
(compared to an average of 9m since 1990).
Such chronic surplus smacked the market hard
in late April. Before the month, who would have
thought that oil price can actually “hit the
ground”, even fell into negative zone?
Despite having climbed back to $20 (WTI price)
by the end of April, it’s still too low to make a
profit. For reference, production costs range
$10~20 in Saudi Arabia, around $30 in Russia,
and $40~$50 for U.S. shale oil.
Above all, the market is set to be highly volatile
and again, tilted to the downside considering
the weak economic outlook ahead.
Multiple economic data are worth watching to
ascertain what’s going to come, e.g. durable
goods orders (a lagging indicator of typical
economic cycle), jobless claims, etc.
Consumer price inflation rates YoY %
Consumer inflation added 0.3% while the core rate rose 1.4%, both significantly
lower than March as prices for apparel, motor vehicle insurance, airline fares,
and lodging all fell sharply. Yet, food inflation jumped to 3.5% from 1.9%.
IHS Markit U.S. Manufacturing PMI index
The index was revised lower to 36.1 in April, compared to March’s final at 48.5,
the lowest since early 2009 as output, new orders, and exports all fell at record
rates due to virus control measures.
Permanent job losses SA; Continuing jobless claims (week ended 15/3 ~ 25/4)
Two million U.S. job losses in April were permanent, most were temporary layoffs.
Jobless claims hit a record high of 22.647 million in the week ended 25th April
(recent prior weeks: 1.8m → 3.1m → 7.4m → 11.9m → 15.8m → 18.0m).
April was a month of recovery but as May began, the market is already losing
momentum as we had expected. Year-to-writing-day: S&P 500 and Dows are
still losing 11% and 17% while NASDAQ already takes 0.3% gain, market cap is
now >55% of S&P 500.
The outperformance of tech stocks with narrow market breadths (all three
index 200-day breadths lie around 25 to 30) point to the fact that the market
upside is just contributed by a very small portion of market participants. Mainly,
a few tech giants of which the balance sheets are fully-loaded such as “FANG”
are the major contributors.
This means, the market is indeed fundamentally weak. Also, Dows is making a
suspicious head-shoulder peak terrain. Look at the graph below, the two-month
trend of Dows price index marked a “peaking” signal, which is worth watching.
We expect high level of volatilities as speculations mount and believe that the
overall direction is tilted to downside.
IHS Markit Manufacturing PMI index for Euro area
In the Euro area aggregate, the index for April was revised lower to 33.4, from
March’s final 44.5. This makes the steepest contraction since the comparable
series began in June 1997.
European Commission economic sentiment indicator
The index plunged from 94.2 in March to 67 in April, the lowest level since
March 2009, most sharply among services provider (-2.3→-35.0), retailers
(-8.6→-28.3), manufacturers (-11.2→-30.4), constructors and consumers.
European Commission expectations; GDP Growth rate YoY %
EC expects the area’s GDP to shrink 7.7% this year and rebound 6.3% in 2021.
Q1’20 GDP fell 3.3% for Eurozone and 1.6% for Britain, both the steepest
contraction in the decade.
Having seen the chronic spread of coronavirus disease in Russia, we are far
from confident to say anything about whether European countries are
becoming more “safe” despite its gradual recovery.
Yes, the number of new COVID19-confirmed cases reported each day has been
lowering. Regrettably, the growing rate neither speed up nor slow down.
To be honest, we are hardly confident whether the economy can recover under
such uncertainties. Also, we still need to bear in mind the worst-case scenario
possible: what if governments start to reopen the economy, people starting to
let their guards down then a new wave of virus outbreak hit the region again?
European markets in April in a nutshell, MSCI Europe ex U.K. grew by 5.63%
which shows much softer growth when compared with MSCI World 10.80%.
One reason for the lagging performance is that European stocks are not cheap
at all, currently trading at historical high valuation levels. Look at the graph
above, we expect the soft upside to continue.
Year-on-year inflation (consumer prices, food prices, producer prices
Annual consumer inflation rate fell to 3.3% in April whereas food inflation
stood at 14.8%, both marked the lowest since last September. Producer
inflation fell three months straight to -3.1% in April.
Caixin General Manufacturing PMI index
PMI stood at 49.4 which lagged the market consensus of 50.3 as domestic and
international demand continued to be soft. New orders fell three months
straight with new export orders declining the most since December 2008.
Export Amount on Daily Average YoY %
Daily exports fell 30% in the first ten days of May, with shipments to the U.S.
and E.U. falling more than those to China.
April was a month of rebounds where MSCI Emerging Markets and Asia ex Japan
index rose 9.0% and 8.9% respectively. During the month, among the BRIC
countries, India rebounded the most by 14.4% while Russia and Brazil stock
markets both recovered around 10%, helping to narrow down their severe
year-to-date returns to -27% and -31%, from their previous heavy declines.
For now, Shanghai Composite index stumbles as it approaches key resistance
levels where both the 100-day and 200-day moving averages converge.
In China, the PBoC, has reduced multiple policy rates in the past four months,
recently vowed to deploy “more powerful” policies. Key government meetings
that start soon may approve even more debt sales and some other stimulus
policies.
In releasing liquidity, the central bank scheduled reduction of the required
reserve ratio effective 15th May, this will add a mild 200 billion yuan in liquidity.
In Japan, the stock market added 6.8% while MSCI Asia ex Japan index gained
8.9%.
Yen moved little. In its meeting on ending 27th April, the Bank of Japan kept its
short-term interest rate target unchanged at -0.1% but unleashed the biggest
ever expansionary pack. It pledged to buy an unlimited amount of bonds to
keep borrowing costs low (initially limited to JPY 80 trillion annually). In terms
of forecast, the Bank estimated a shrinkage of 3% to 5% in the really economy of
fiscal year 2020/21, way worse than its January’s estimate at 0.9% of growth.
As factories shut down, global trade suffered intensely, such trauma is likely
to shift global supply chain to be in search of more diverse and secure sourcing
of inputs despite China’s price competitiveness. Also, the post-COVID world
tends to be more cautious treating foreign nations, we expect to see
protectionism in terms of trade and diplomatic intensify.
Even for China, the infectious source of COVID-19, has taken protective moves.
Whether or not it’s for disease-control, the ultimate result still tightens trade rules.
Lately, the country suspended meat imports from 4 Australian abattoirs, fueling
concerns to damage Australia’s most important trading relationship (2018: 37% of
its total trade was with China; trade balance: AUD 58B (China) 67B (All countries)).
Further to South Korea exports figures mentioned above. As the global trade
barometer, the country’s top trade official Sung Yun-mo added that, “it’s just the
beginning … will hammer Korean exports more than the financial crisis did”
Sung warns that the impact could come deeper and longer-lasting and that the
trade pain could shift the supply chain. EM/ Asian nations that “succeeded” in
controlling the virus spread can renew investors’ confidence and gain an attractive
point. Korea could be in favor due to its higher security in exports which shall help
improve its harm from Japan trade disputes. With exports decline and expected
growing protectionism, trade sector will have more difficulty to recover.