Following three months of declines, risky assets sharply rebounded in April. The rally has been driven primarily by the dramatic policy stimulus in both size and speed.
Coronavirus daily new infection rates started to fall, and many countries will start to lift the lockdown measures in early May. Volatility therefore declined from extreme levels. News of a possible treatment with Gilead’s Remdesivir that likely reduces the severity of the COVID-19 also supported the equity rally in late month.
Macroeconomic data were unsurprisingly horrible. The US economy contracted by 1.8% in the first quarter of the year. Americans filing for jobless claims rose to more than 18 Mios during April. China’s economy has been gradually reopening but first-quarter real GDP declined by 6.8%, while European GDP contracted by 3.8%.
Monetary policy actions continued to limit the impact of the pandemic. The US central bank has committed to purchase government bonds without limit and will also buy investment grade corporate and high yield bonds. The European central bank purchased government bonds of the most at-risk Euroland countries, including Italy and Greece. In addition, the Eurogroup launched an emergency support plan of EUR 540 billion; the European Council also announced a recovery fund.
Fixed income rallied too, supported by the massive amount of monetary accommodation introduced globally. Government bonds were a weak performer in the month of April due to little performance coming from duration or coupon. Investment grade corporate bonds were hit hard during the market volatility, but have managed to bounce back, recovering more than 50% of their losses. Emerging market and high yield bonds also recovered during April but remain underperformers on a year to date basis.
The MSCI World rose by 11% last month. The magnitude of the rally was unprecedented in an environment where there are so many dislocations. The S&P500 outperformed again other major equity markets and emerging markets with a rise of 13%, while Euroland and Swiss equities rebounded by less than 5%. Solid earnings from the FAANGs mostly explained this stunning performance. Emerging markets gained more than 9% amid large reopening of the Chinese economy.
Commodity prices varied violently as crude oil plummeted and precious metals such as gold gained close to 7%. A record level of oil demand destruction equivalent to one‑third of global crude consumption has devastated oil prices, even driving them into negative territory during a day!