Optimism about the gradual reopening of the global economy seemed to be the primary driver of the extended rally in most assets over May.
Optimism about the gradual reopening of the global economy seemed to be the primary driver of the extended rally in most assets over May. The infection rate across the major European economies has fallen significantly, though the infection rate in the US remains high. Countries very gradually opened their economies but managed preventing a second wave of infections so far. The resumption of economic activity will be slow and will inevitably take time to catch up to pre-COVID levels. Further economic stimulus has been announced and welcomed by investors. The European Commission would launch a record €750bn rescue package in the form of grants and loans to European governments.
Economic data has been particularly weak with the US unemployment rate reaching the highest level in post-war history. However, leading indicators show signs of improvement; the economy seems to have found a bottom in April. Any catalyst for a prolonged recovery should come from a potential treatment or a vaccine.
Government bonds were roughly flat for the month as yields on longer duration bonds moved marginally higher. The ECB continue to buy government and corporate debt, while the Federal Reserve begun its ETF/ corporate bond buying program. Accordingly, corporate bond yields continued to decline as credit spreads tightened from relatively high levels. Emerging Market debt also rallied in similar fashion. These moves were supported by a risk-on backdrop in the markets.
Global equities extended their rebound in May with the MSCI World gaining 4% in CHF terms. The S&P 500 sits only 10% below its all-time highs, despite earnings down revisions. The first quarter earnings decline has been -14% for S&P500 companies and -36% for Stoxx Europe 600 members. Analysts are expecting a -40% decline in the second quarter relative to the same quarter last year before a strong rebound in the following quarters. These numbers appear in strong contradiction with the sharp market rebound.
The Euro gained 1% over the USD and the CHF, boosted by the proposal from the European Commission. The dollar remains elevated but fell below its 200-day moving average in May. Gold benefited from a lower USD, closing less than 10% from its all-time highs of $1900.