Monday’s Equity Rally Not Sustained Amid Both Upbeat and Worrisome Developments

May 19, 2020

Pacific Rim stock markets extended Monday’s stock market rally, but share prices subsequently turned lower in Europe and U.S. stock futures. Markets closed up 2.3% in South Korea, 1.8% in Australia, 1.9% in Hong Kong, 1.7% in Singapore, 1.5% in Japan and 0.8% in China. But there are losses of 2.1% in Spain, 1.6% in Italy, 0.8% in France, and 0.5% in the U.K. and Germany.

The price of WTI crude oil climbed another 2.3% overnight. Gold is stable but near a 7-year high.

Ten-year sovereign debt yields have increased two basis points, and the 10-year JGB yield is up one basis point. But the U.S. 10-year futures yield settled back a basis point.

The dollar and yen lost ground. While the dollar appreciated 0.4% versus Japan’s currency, it also has fallen 1.2% against the peso, 0.9% relative to the kiwi, 0.4% vis-a-vis the euro,  Australian dollar and sterling,  0.3% against the loonie and 0.1% versus the Swiss franc.

Investor sentiment toward Germany and the Euroland economy improved considerably more during May than had been anticipated, according to the lastest ZEW Institute’s survey findings. Expectations about Germany rebounded to a 61-month high of 51 from 28.2 in April and -49.5 in May. Expectations about the whole euro area mirrored this pattern, printing at a 57-month high of 46 in May after 25.2 in April and -49.1. Perceptions about current conditions, however, deteriorated unexpectedly with May readings of -93.5 for Germany and -95 for Euroland.

The Covid-19 pandemic continues to spread, with just over 91,000 more cases identified worldwide in the past 24 hours to a grand total thus for of 4,915,587. The U.S. death toll since the start of the epidemic coincidentally stands at 91K and change as well. Yesterday’s report of encouraging early results of a vaccine in development has generated hopeful buzz, and so has a study that appears to indicate that recovered patients are no longer contagious. But then there is also news today that President Trump is considering ending all U.S. funding of the WTO in a month if that groups doesn’t meet his standards. The U.S. president also announced weirdly that he is personally taking the contentious anti-malaria drug Hydroxychloroquine to ward of Covid-19.

Economic data released today attested to the considerable worldwide weakness of economic activity.

Revised Japanese industrial production posted declines in March of 3.7% from February and 5.2% on year. Capacity fell 0.4% between March 2019 and March 2020, while capacity utilization in that span tumbled 7.6%.

There was a record 856,500 jobless claims increase in the U.K. during April, and on-year growth in average weekly earnings there of 2.4% in the first quarter was the lowest since the spring quarter of 2018. The number of unemployed workers rose 211K in March, and a 1.1% quarterly slump in British labor productivity in 1Q was the biggest drop since 1974.

New car registrations in the European Union, a gauge of sales, were 76.3% fewer in April than a year earlier. That was the greatest fall since August 2009 and followed on-year drops of 55.1% in March and 7.4% in February.

Unemployment in Hong Kong increased a whole percentage point in April to a nine and one-half year high of 5.2%.

Factory output in South Africa fell 2.3% in February and resulted in the ninth consecutive year-on-year decline, this time off 2.1%.

Spanish exports and imports in March were respectively 14.3% and 14.4% lower than a year earlier.

Construction output in the euro area plunged 14.1% in March to 15.4% below its year-earlier level. construction dropped 1.8% on quarter and 3.4% on year during the first quarter. The second quarter results are expected to much weaker still.

Bank Indonesia monetary officials failed to cut interest rates further, apparently out of concern of adverse repercussions in the rupiah. The key 7-day reverse repo rate has been at 4.50% since a pair of 25-basis point reductions on the third and 19th of March. The central bank’s deposit facility rate and lending facility rate remain at 3.75% and 5.25%. The decision surprised a majority of analysts, who had anticipated a 25-basis point cut. A released statement from the Board of Governors emphasizes many other measures taken to “mitigate the risks associated with COVID-19, maintaining money market and financial system stability as well as acting in synergy with the Government and other relevant authorities to accelerate the Nntional economic recovery.”

Minutes published today from the last policy review of the Reserve Bank of Australia called the current recession unprecedented in speed and size. Real GDP is projected to decline 6% this year as a whole, and unemployment may remain high through next year. “As the Bank’s policy package had been introduced only recently, members assessed that the best course of action was to maintain the current policy settings and monitor economic and financial outcomes closely.” The official cash rate is just 0.25%, and asset purchases are aiming to hold the 3-year Australian government bond yield around that same level.

World financial market now await testimony later today before the U.S. Senate Banking Committee by Treasury Secretary Mnuchin and Fed Chairman Powell.

On-year increases in New Zealand producer output prices of 2.2% and producer input prices of 1.2% of 1.2% in the first quarter of 2020 were each higher than results in the final quarter of 2019.

But Portuguese producer price deflation deepened to a 128-month low of -5.5% in April.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.


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