(ATF) Financial markets remain defensive as the earnings season kicks off and a growing number of companies are issuing profit warnings. Economic data continues to shock markets with the world’s largest economy reporting a series of record lows overnight.
Data showed on Wednesday that US retail sales had plunged 8.7% in March – the biggest drop since 1992. This data is significant because consumer spending accounts for two thirds of the US GDP. Total industrial production in US fell 5.4% in March, a report from the US Federal Reserve showed.
“The decreases for total industrial production and for manufacturing were their largest since January 1946 and February 1946, respectively,” it said.
The Federal Reserve also published its beige book – a summary of commentary on current economic conditions, reporting on business around the country, which is issued eight times each year. “All districts reported highly uncertain outlooks among business contacts, with most expecting conditions to worsen in the next several months,” it said.
The dire economic conditions were also reflected in corporate earnings with Goldman Sachs and Citigroup reporting lower earnings and warnings of future loan losses.
Looking for clues
“As earnings season begins, markets are desperately looking for any clues about the depth of economic/earnings destruction of Covid-19. Whilst we suspect widespread disappointment, it will be hard to compare the decline against any reasonable estimates, as analysts’ forecasts are extremely uncertain,” Marija Veitmane, multi-asset class strategist at State Street Global Markets, said.
“In fact, the dispersion of analysts’ forecasts is the highest on record. Furthermore, CEOs are unlikely to provide any concrete guidance as we are yet to learn when economies around the world will be re-opened. Investors’ time is much better spent looking at infection/active virus cases for any signs of a possible re-opening of the economy.”
In stocks, Japan’s Nikkei 225 is down 1.2%, Australia’s S&P ASX 200 is 1.48% lower, China’s CSI300 has edged down 0.2% and Hong Kong’s Hang Seng index is off 0.73%. Regionally the MSCI Asia Pacific index has slid 1.6%.
Oil prices continue to be volatile with Brent futures up 2.8% and WTI is 3% higher, following their slide on Wednesday. But measures announced by OPEC+ and the G20 countries would not rebalance the market immediately, the International Energy Agency said. The IEA was created in 1974 to help coordinate a collective response to major disruptions in the supply of oil.
“We forecast a drop in demand in April of as much as 29 million barrels a day year-on-year, followed by another significant year-on-year fall of 26 mb/d in May. In June, the gradual recovery likely begins to gain traction, although demand will still be 15 mb/d lower than a year ago. There is no feasible agreement that could cut supply by enough to offset such near-term demand losses. However, the past week’s achievements are a solid start and have the potential to start to reverse the build-up in stocks as we move into the second half of the year.”
Credit markets also turned risk averse, although primary issues continue to trickle. Sovereign credit default swaps (CDS) are wider with the Asia IG index 2bps wider at 120/123. China’s five-year CDS has moved out by a basis point at 42/45 bps, Indonesia is 5 bps wider at 200/210 bps and Vietnam is 5bps wider at 255/305 bps. China Travel Service has issued price guidance for a 5-year, 10-year two-trancher after Malaysia’s Petronas priced a 3-tranche deal that attracted over $35 billion in orders.
