The Dow Jones just posted the worst first quarter ever. That’s how bad things are at the moment, but are they ‘peak bad’? Because that would imply a bottom in the stock market.
Data from China today continue to suggest light at the end of the tunnel there, but things look grim elsewhere. The China Caixin Manufacturing PMI for March was 50.1 vs 45 expected. It means small-to-medium manufacturing businesses in China are on the mend, and expanding.
Japan looks like once place the virus could do untold damage. The Nikkei just closed down 4% today after dire numbers from the widely watched Tankan survey of industry and as the country’s health minister warned the pandemic was getting more ‘severe’ in his country. Gains in the yen, which investors have turned to as a haven are an added headache for Japan’s export-orientated economy.
More broadly- the current state of play appears to be that stock markets have priced in a very bad economic scenario in Q2 but nothing more. Goldman Sachs (NYSE:GS) yesterday forecasted -34% GDP growth for the United States in Q2.
There is a hope that with the help of government stimulus, Q3 will mark the beginning of a recovery. If there is going to be a ‘V’ or ‘U’ shaped economic recovery this year, then stock markets should be close to a bottom. However if infection curves don’t flatten, lockdowns will need to last longer and the timing of the recovery becomes a lot less clear and stock markets will need to price in something much worse than only a Q2 shock.
In FX markets, the performance of the pound stands out. Part of the gains stem from a belief in markets that the UK will be forced to ask for a Brexit transition period extension. Remote working and civil servants being redeployed to help in the battle against the coronavirus have reportedly caused EU/UK negotiations to stall. But yesterday the official spokesman for the Prime Minister said the end of year deadline was ‘enshrined in law’. The longer it goes without any announcement on the transition period, the bigger the downside risk in Sterling.
FYI here are the quarterly returns for major asset classes, it’s quite stunning.
Quarterly performance of indices
S&P -20%
Dow -23%
DAX -25%
FTSE 100 -25%
FTSE MIB -27%
CSI 200 -10%
Quarterly performance of currencies (vs USD)
Australian dollar -12.68%
Canadian dollar -7.62%
Pound -6.31%
Swiss franc +0.57%
Yen +0.99%
Quarterly performance of commodities
Gold +4%
Oil -66%