Performance, April 2020
Statistics of hospitalised and deceased persons as a market indicator
- The statistics reflect personal stories, which of course are worst for those affected and their relatives. At the same time, however, the statistics have undoubtedly been the best indicator of the development in the financial markets since the first figures were made available - this also applied to April. As the curves around the world flattened - i.e. the rate of new incidents of infection and deaths slowed - the global financial markets saw improvement. The economic and health-related facts still reflect a tough situation, but the improved visibility offered some tailwinds to the financial markets. By way of example, the global equity markets had fallen by about 30% year-to-date when things were at their worst on 23 March, but since then the global equity markets have recovered somewhat, and at the end of April, the decline had been reduced 10% year-to-date.
Tough economic facts and gigantic rescue packages
- The economic indicators are horrendous - not least the sentiment indicators, reflecting the state of the companies and their outlook. During the Corona crisis, several of these leading indicators have reached levels below those seen during the financial crisis in 2008. This reflects how sudden the slowdown was - rather than reflecting the basic state of health of the companies - knowing full well that things may quickly change when everything has come to a standstill. The reactions on the part of governments and central banks have also been unprecedented. For instance, rescue packages amount to 13% of GDP in the US - corresponding to incredible USD 3,000 bn. Many other countries have launched similar initiatives as regards magnitude relative to GDP - with Japan, Italy, GDP and France in the lead. However, this also means that the extent of public debt has exploded globally and amounts now to more than 120% of GDP.
Historic crisis in the oil market
- The corona crisis has totally overshadowed the conflict between two of the largest oil-producing nations - Saudi Arabia and Russia - that was going on when the pandemic took off. The sudden and historically drastic economic slowdown in the wake of the lockdown of several countries resulted in a demand shock in the market. Because not all oil extraction can be put on hold at short notice - and because for a period production for inventory had taken place in anticipation of better prices - oil inventories were already high when the virus began to spread. Indeed, inventories were so high that oil producers began to face a storage problem, and in April they had to pay money to get rid of oil for delivery in May - the so-called oil futures expiring in May were briefly priced at USD -37 a barrel.
Optimism in the equity market despite effect on financial statements
- So far, the global equity markets bottomed out on 23 March, and the optimism continued throughout April. The growing belief in improvement was so pronounced that returns in the global equity markets neared 11%. After these increases, the losses in the global equity markets this year have been reduced to about 10%. When things looked bleakest, the loss was above 30%. Optimism was intact even though the effect from the corona virus was evident in the Q1 financial statements published by companies. However, investors took comfort from the improving figures reflecting the number of hospitalised and deceased - figures that brought confidence that the global economy may soon open up again. Also, investors saw tailwinds from the gigantic rescue packages expected to restart the economies.
Calmer interest rate markets
- April turned out to be a significantly calmer month in the bond markets compared to March. In terms of 10-year government bond yields, we saw a fall by 0.12 percentage point. However, the majority of the fall was seen on the last day of the month, when the ECB lowered its interest rates. Also, once again the ECB assured the market that they are willing to go to great lengths to support the markets. Mortgage bonds also had a positive month. 30-year issues have increased by about 2 points, and now the issue takes place in 1% bonds. However, the issue activity was fairly limited, and extraordinary redemptions of higher yielding bonds were also at a modest level.
Stabilisation and slight optimism in emerging markets in April
After the very negative month of March with historic price declines, emerging markets recovered slightly in April. Oil stabilised, yet at a low level, and US bonds traded sideways. This in combination with the improved corona figures globally resulted in positive returns in the emerging bond markets. The credit spread on bonds in USD narrowed from 6.24 percentage points to 6.07 percentage points after peaking at 7.20 percentage points on 23 March. In the local markets, yields fell generally. Offhand, inflation does not pose any challenge, and also corrections in March were just too drastic. Only Argentina, Turkey and Brazil delivered negative returns. However, a series of bankruptcies are still threatening. Argentina is in the process of restructuring, while Lebanon and Ecuador are in the so-called 30-day grace period, i.e. they have to pay interest due within 30 days. Up to 25 of the poorest countries have globally been granted remission of debt, and also the IMF has granted liquidity and longer credits to several countries. The better off countries may carry out issues in the bond market, while this is somewhat more difficult for countries with lower ratings in the current markets.
Credit markets in April
- April 2020 turned out to be an excellent month as regards returns in the credit markets. In the US the Fed stated that in future it will buy investment grade bonds through purchases of ETFs. However, the programme was not launched in April. It is expected to take place in May. So far, the Fed has acted very aggressively to avoid a new credit crisis, which could indeed be feared. Over the month, the market for new issues was busy, which was a healthy sign.