After a strong first week in June, world markets turned into a sea of red. The week saw a dramatic reversal in sentiment as reopening optimism-the catalyst of the bounce off of the March lows- was followed by pessimism regarding the pace of the recovery.
Stocks suffered their worst weekly decline in almost three months, during a Fed-centric week. After the latest FOMC on Wednesday, Jerome Powell said he wanted to keep interest rates as close to zero as possible and at least up to the end of 2022. Powell also predicted the unemployment rate would end 2020 at 9.3% and warned of permanent job losses. The US central bank is expecting a contraction of 6.5% in 2020, followed by an expansion of 5% in 2021 and 3.5% in 2022.
The Fed also pledged to continue its asset purchase, as its balance sheets continue to swell. QE Infinity is here to stay. The dollar sank to three-month lows against the euro, sterling and Swiss franc after the Fed statement. Concerns about the gloomy economic outlook and virus fears fuelled the sell-off as hopes for a V-shaped recovery faded.
On the data front, U.S. household wealth fell 5.6% in first quarter and weekly jobless claims fell for the 11th consecutive week. U.S. Treasury Secretary Steven Mnuchin said on Thursday that the government was weighing a second round of stimulus payments for Americans. Markets had been pocketing a recovery that does not yet exist, maybe now they start to come to terms with reality.
All major markets in Asia lost ground. In Japan, stocks declined for the week as the country heads for
its worst economic slump since WWII. The Organization for Economic Cooperation and Development (OECD) in its global economic outlook released on Wednesday reduced its growth forecast for Japan. The Paris-based group now believes the Japanese economy will contract 6.0% this year versus the March forecast for 0.2% growth. Meanwhile, Japan's parliament approved a record $300 billion second extra budget - including the reserve fund - in an effort to shore up the economy. OECD added that the effects of the Japanese government's huge fiscal and economic support packages will wear off next year.
Chinese stocks fell amid weaker global sentiment. China's exports and imports fell in May as the economic slowdown abroad started to take its toll, official data showed. Exports fell 3.3% on-year last month, better than the 6.5% slide expected by a Bloomberg poll of analysts. Meanwhile, new bank lending in the manufacturing powerhouse fell more than expected in May. Banks extended 1.48
trillion yuan ($209.47 billion) in new yuan loans, down from 1.70 trillion yuan in April, according to data released by the People’s Bank of China (PBOC) on Wednesday. Analysts have warned of signs that a larger downturn awaits. Highlighting the uncertain outlook, the government said in late May it was not setting an annual growth target, for the first time since 2002.
The Australian market traded mostly on the back foot, ending six straight weeks of gains. Almost all sectors were in negative territory for the week. The banking, energy, retail and travel stocks which benefited most from the recent recovery rally were among the biggest losers on Friday. Analyst said the market's recent rally got a little ahead of itself and was destined for a pullback. Meanwhile, almost three quarters of Australian businesses have accessed COVID-19 support measures.
European equities fell, snapping four weeks of gains. Investors pulled from riskier assets, worried about a gloomy outlook from the Federal Reserve and data showing the UK economy shrank at an unparalleled pace in April. A collapse in German and French trade also weighed. However, the overall risk sentiment and confidence in the Old Continent was more upbeat compared to the US and Asian markets. UK’s economic output tumbled over 20% in April, suffering the largest drop since records began in 1997, official data showed.
Bank of England (BoE) Governor Andrew Bailey said the record drop in GDP was close to the central bank’s expectation for the month. He added that there were some signs of an economic pickup since then but he warned that there was still likely to be long-term economic damage. BoE is expected to announce an expansion of at least £100bn in its bond-buying firepower the following week. In Brexit news, the UK and the European Commission have stepped up talks to reach an agreement.
Eurozone's economy in deep trouble
In Eurozone, industrial output decreased 17.1% on a monthly basis in April, following an 11.9% drop in March, data from Eurostat showed. Germany's industrial month-on-month output slumped 17.9% in April and more than 25% year on year, Destatis said. Meanwhile, exports dropped 24%, following an 11.7% decline in March. The figures were worse than economists had suspected. In France, eurozone’s second-biggest economy after Germany, over 500.000 jobs were lost in the first quarter of this year. The Bank of France estimated that the economy would shrink by 15.3% in the second quarter. In its worst performance since 1945, the French economy shrank 5.3% in the first three months of the year. The central bank also anticipated a 10.3% contraction in 2020, adding that the economy will not recover to pre-crisis levels until mid-2022.
Stocks could not sustain their pace of the previous weeks. The reality that the coronavirus crisis is far from over finally threatened the equity market rally. Investors who had their head buried deep in the sand, reassess their stance realising the recovery will be slow and bumpy.
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What's ahead next week:
Manufacturing sales (April)
Consumer Price Index (May)
Wholesale trade sales (April)
Retail sales (April)
Industrial production, retail sales and new home prices
Trade balance, new car registrations, and consumer price inflation figures, along with German investor confidence. EcoFin Meeting
Trade balance and wholesale price inflation
Bank of Japan monetary policy decision and trade balance
Westpac Consumer Survey and Business NZ PMI
Bank of England monetary policy decision, employment change, retail sales and inflation statistics
Empire State Manufacturing Survey (June)
Retail sales (May)
Industrial production, Capacity utilization (May)
Housing starts, Building permits (May)
Conference Board Leading Index (May)
The content of this review is for informational purposes only and should not be interpreted as specific investment advice.