Performance, May 2020
Gradual reopening and rescue packages were welcomed
- In May, the financial markets benefited from the gradual reopening in several countries, as the politicians assessed that the coronavirus numbers allowed this. Not least combined with a number of precautions, but also the acknowledgement that a long-lasting lockdown may have incalculable economic consequences. The gradual reopening has therefore been garnished with giant rescue packages. In addition to the national initiatives, the EU is discussing a giant rescue package - Emmanuel Macron and Angela Merkel are talking about a EUR 500 bn package. But there was a fly in the ointment from Germany’s constitutional court, which ruled that the European Central Bank’s mass bond-buying partly violates the German constitution.
Economic data - it looks bad, but there are signs of recovery
- More than 30 million Americans lost their jobs in the last weeks. Economists estimate that up to ten million of these risk not getting a job any time soon even when the coronavirus pandemic is under control. This means that a decade’s worth of job gains were wiped out in only a month. The Federal Reserve is keeping a sharp watch on the unemployment situation, and further stimuli may be on the way - on top of the massive capital injections which the US economy has already received. However, there is light at the end of the tunnel. The forward-looking industrial barometers showed signs of recovery at the latest statement. Both in the US and in Europe. There is still a long way to go, but the trend is the same as in China where the outbreak was already in December and where the sentiment indicators are back at a neutral level, yet not fully back at the level from before the outbreak of the coronavirus.
Drug considered to be effective against coronavirus
- Global investors have stared hard at the coronavirus numbers, but they have also been hoping that there were drugs against the coronavirus in the pipeline. Preferably a vaccine, which is close to utopian for the short term, but alternatively drugs which may result in a more moderate average course of the disease for patients. And much to the markets’ liking, the latter appears to be the case in the form of Gilead’s product, Remdesivir, which was originally developed for the treatment of hepatitis. The news about trials which have reduced the mortality rate of Covid-19 patients by up to 80% has been given a nod of approval by both doctors and investors.
Equity market optimism continued in May
- Optimism in the global equity markets continued in May when equities gained more than 4%. However, a dollar decline of more than 1.5% weighed on the return for Danish investors, since the global equity markets gained 2.66% in DKK terms. Optimism related to economic indicators, drugs against Covid-19 and a positive development in the coronavirus numbers were among the sources behind the continued optimism. The gains were highest in the cyclical sectors, while the interest-rate sensitive sectors Financial Services and Real Estate were the only two which closed the month in negative territory. Most equity markets increased, but Donald Trump’s renewed attacks on China and Hong Kong weakened the return in Asia, while the coronavirus was still taking its toll in South America and this was reflected in the equity markets in the region.
Flat development on interest rate markets
- May was yet another calm month on the interest rate markets with an almost unchanged level. A giant EU rescue package was proposed in May, but the details have yet to be negotiated. The package will mean that even more bonds will be issued in the coming period. Germany’s constitutional court has raised questions about the legality of the ECB's bond purchases, which would potentially be a bomb under the monetary policy. But both events had a very limited market effect. Bond returns were typically positive in May, as mortgage bonds outperformed the corresponding government bonds. Foreign investors continue to have great appetite for Danish bonds, and the supply of long-term bonds was rather modest in May.
Large price increases in May
- Increases in commodity prices, improvement of the Covid-19 situation and thereby reopening in several countries have - together with liquidity and loans from the IMF - supported the asset class and contributed to a return of 6.34% in external bond debt and 3.51% in bonds issued in local debt. The market was driven by risk-on in May, and several new issues were welcomed in the market. In addition to the conservative countries, we are also beginning to see issuances from the lower-rated credits. Surging oil and commodity prices buoyed the currencies of Colombia, Mexico, Russia and South Africa. Argentina is still negotiating with its investors about a restructuring offer after its ninth default. Ecuador and Lebanon have reached a deal with its creditors to delay interest payments on its bond loans, and most recently Angola has contacted its investors to talk about a restructuring. Despite the challenges in some countries, the asset class is performing well at the moment. Before the coronavirus crisis, the average credit spread traded at the level of 300 bps. This topped at 720 bps and is now trading at 500 bps, which is still a historically high credit spread.
Credit markets in May
- May was a continuation of the development in April when the positive expectations of the effect of the ECB and the Fed’s purchases of corporate bonds and other monetary policy measures offset the negative macro-economic consequences of the coronavirus crisis. The global high-yield spreads therefore narrowed by more than 100 bps over the month. EUR IG narrowed by 22 bps over the month. The primary markets were also very active, especially towards the end of the month when most companies had reported their Q1 results.