Risk appetite returned to world markets. Equity indices were mostly up driven by the optimism from the economic reopenings and the large fiscal and monetary stimulus packages. Headlines regarding potential answers to the pandemic out of the healthcare sector also offered support. But stocks gave up a portion of their gains as caution returned with US-China friction coming to the fore again.
It was a strong week of gains for US stocks as enthusiasm over the economy reopening and some encouraging economic reports supported sentiment. Comments from US Federal Reserve Chair Jerome Powell who told an interviewer that the central bank had not exhausted its options to counteract the slowdown reinforced the brighter mood. IHS Markit's manufacturing and services output in May showed improvement while existing home sales in April were surprising handily on the upside. Mortgage applications jumped in May off a five-year low but weekly Initial jobless claims for last week remained painfully elevated at roughly 2.4 million.
News of progress on coronavirus vaccine development also lifted optimism for the economic recovery. However, in our opinion, a vaccine and a new round of massive monetary and fiscal policy responses cannot fix the world economy. The world economy will rebound when people produce and consume again, of course when they are free to do so.
Tensions between the US and China continued to rise, dampening gains slightly.
Asian markets closed higher for the week but took a beating on Friday after deterioration in U.S.-China relations. The US Senate overwhelmingly passed a bill that could block some Chinese
companies from listing on US stock exchanges. Meanwhile, China urged domestic firms to list in London to hedge against Wall St’s growing hostility, The South China Morning Post reported citing sources. Investors pulled from Hong Kong stocks on Friday as China announced plans to impose a new security legislation on the Special Administrative Region with the Hang Seng Index sinking 5.6%. Mainland A-shares also dropped on the last trading day of the week. Critics say the proposed legislation would effectively end one country, two systems status.
In Japan, stocks posted gains for the week as the Bank of Japan left its monetary policy stance unchanged and pledged further support. The central bank bolstered its support for business financing to about $700 billion, launching its version of Federal Reserve's ‘Main Street’ lending scheme.
The country's economic conditions will likely stay tough in the current quarter, Finance Minister Taro Aso said on Tuesday. Ministry of Finance (MOF) data on Thursday showed Japan's exports fell 21.9 percent in April year-on-year, the fastest decline since the 2009 global financial crisis, as pandemic wipes out global demand car exports there plunging 65.8 percent.
In Australia, the ASX managed to bank a fourth straight week of gains but closed lower on Friday Earlier in the week, minutes from the country’s central bank’s last meeting revealed that Australia is
facing an “unprecedented” economic contraction due to the coronavirus pandemic.
In New Zealand, RBNZ Deputy Governor Geoff Bascand told Reuters in an interview that the central bank “will evaluate negative rates alongside other options."
Equities made gains in every major developed market in the continent as countries began to emerge from lockdowns. France and Germany proposed Monday a one-off €500 billion rescue fund designed to support economies across the EU to rebound from the coronavirus crisis.
The announcement followed weeks of debate between EU leaders over which financial mechanisms should be used. France, Italy and Spain had favored grants but Austria, the Netherlands, Denmark, and Sweden said they would only accept a rescue fund that gave out loans.
French Economy and Finance Minister Bruno Le Maire stressed on Tuesday that the fund is not expected to become available before 2021. Germany’s DAX index was especially strong after the monthly survey published by ZEW showed that economic sentiment in Europe's largest economy surged to 51 points in May significantly surpassing the expectations.
Adding to optimism, purchasing managers’ indices for the region encouragingly showed improved activity in most countries in May and Eurozone consumer confidence was also up slightly this month.
After growing speculations,Bank of England (BoE) Governor Andrew Bailey told lawmakers on Wednesday that BoE is neither ruling in nor ruling out negative interest rates, as it tries to fight the worst downturn in centuries.
It's worth remembering that only a couple of weeks ago, Bailey said, in effect, that the BoE had never lowered interest rates to below zero and wasn’t going to start now. His Wednesday comments came shortly after the UK issued its first bond with a negative yield. The auction means Britain joined the club of negative-yielding debt issuers. Meanwhile, April jobless claims jumped to highest since 1996, data showed.
Despite positive headlines which are driving the markets, uncertainties are creating an environment of caution. Investors seem to enjoy the recent rally but the economy and the stock market are seemingly on different pages at the moment. As economic forecasts continue to deteriorate, will they manage to hold their nerve amid the chaos?
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What’s ahead next week:
Gross Domestic Product (March)
Industrial Product, Raw Materials Price Indices (April)
Industrial profits (April)
Economic confidence and consumer price inflation (May) along with German business and consumer confidence reports (May) and retail sales (April)
Retail sales and industrial production (April)
2020 GDP estimate
Retail sales (May)
Conference Board Consumer Confidence Index (May)
New home sales (April)
Gross Domestic Product (First Quarter)
Durable goods orders (April)
Pending home sales (April)
Personal Income and Spending (April)
Univ. of Michigan Consumer Sentiment Index (May)
The content of this review is for informational purposes only and should not be interpreted as specific investment advice.