WeekWatch 04/05/2020
“Baseball,” said Leo ‘The Lip’ Durocher, one of the greatest managers in the history of the game, “is like church. Many attend, but few understand.”
These days, however, few even attend. Taiwan’s government, which has done an exceptional job of suppressing the spread of the virus, reopened its high-profile baseball league back on 11 April. As yet, the only fans present have been cardboard cut-outs placed around the stadium seats to provide the impression of an audience. Is this how lockdown ends?
Last week, as the global number of cases passed 3.5 million, quite a few countries announced a softening of lockdown measures, and stocks rose in response. In the US, numerous states allowed business across several sectors to reopen shops, offices and factories. On Friday, the state of Texas allowed retail outlets, malls, restaurants, museums, libraries and cinemas to open at 25% capacity.
In Europe, meanwhile, several governments laid out lockdown-softening plans. Italy will open shops and tourist and cultural venues on 18 May, restaurants on 1 June, and schools after the summer holiday. May will also be an important month for lockdown loosening in France, Spain and Germany; the UK has yet to announce loosening measures.
The combination of these announcements, and of support measures pledged by governments and central banks, was enough to buoy the S&P 500 for most of last week – ending its best calendar month since 1987. However, it ended the trading week marginally down as corporate results weighed on Friday trading, with S&P 500 constituent companies facing their worst earnings season in a decade; it was a similar tale on the FTSE 100. China’s CSI 300 and Europe’s EURO STOXX 50 both ended marginally up.
In fact, the FTSE 100 briefly broke through 6,000 points for the first time since early March. Its fall back came on announcements from major constituent companies that they were cancelling or cutting their dividend, among them Royal Dutch Shell, the largest company on the index.
Travel and tourism, two of the engines of energy sector growth, are not expected to recover any time soon. Indeed, those countries highly reliant on travel and tourism are particularly vulnerable even as the global economy gradually recovers, according to analysis last week by Capital Economics.
It sees three other groups of countries as particularly at risk of a “very protracted recovery”: those that fail to get the virus under control (it attaches warnings, on this score, to countries in sub-Saharan Africa, Latin America and the Indian subcontinent); those where the fiscal cost of current measures will overly strain debt-to-GDP ratios (southern Europe, Japan and, to a degree, the US); and those where a deeper downturn could be precipitated by a banking crisis (it cites Turkey’s banking sector as poorly capitalised). In short, it may be a global crisis, but the consequences are liable to vary widely between countries.
“Governments in developed markets have generally been quick to offer both direct assistance, such as wage subsidies, and big loan guarantee programmes, but the experience in emerging markets has been more mixed,” said Capital Economics. “This links to our previous point about debt sustainability; countries with weak public finances, such as Brazil, will generally be more reticent to stand behind their private sectors. Mexico and India have been slow to provide support, too.”
Support has, of course, come not only from governments through the crisis, but also through central banks – often in extraordinary form. Last week, the European Central Bank expanded its stimulus programmes, offering helicopter money for banks in the form of up to €3 trillion at negative rates. It also emphasised its willingness to use all its tools to avert a prolonged downturn, but skirted over the sensitive topic of how far it will offer a backstop for Italian debt.
The Federal Reserve, meanwhile, has been ditching its own rule book on who it lends to and what risk it takes on. Last week, it expanded its $600 billion lending scheme to incorporate larger businesses – those with up to $5 billion in turnover.
“The latest move will help a little bit,” said Pete Drewienkiewicz, Chief Investment Officer for Global Assets at Redington. “But it doesn’t do much [because] the programme is still being implemented by banks, who don’t really lend to small and medium-sized enterprises much anymore, and because it’s capped at six times leverage, which is a blunt measure that takes no account of business structure or profitability.”
Indeed, despite the stock rallies, indicators last week showed the scale of the economic damage suffered in recent months, with eurozone GDP down 3.8% and US GDP by 4.8%. That’s the biggest US quarterly fall since 2008, and the chief culprit was consumer spending. It may not get better quite yet, either; a White House senior advisor said last week that second quarter US GDP is likely to be between -20% and 30%.
It was a similar tale at a corporate level, with income investors feeling the pain of a record number of companies announcing dividend cuts (see video). Among the world’s largest companies, Apple was a notable disappointment on the results side, but still chose to raise its dividend significantly. Even Amazon, whose business model could even benefit from a lockdown economy, had mixed news to deliver to shareholders – sales surged but so did virus-related costs. Amazon’s CEO prefaced his announcement to shareholders with the words: “You may want to take a seat.” Its share price duly took a bow.
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