Summary: A mixed day in Asia as the quarter ends. China PMIs beat, but what does the rebound signal below the hood.
Another mixed day in Asia to end the worst quarter for global equities since 2008, ASX200 -2.02%, KOSPI +1.43%, Hang Seng +0.63%, Shanghai +0.44%, Nikkei -0.71% at the time of writing. Despite mixed trade, risk sentiment continuing to fare better than the panic deleveraging of two weeks prior. Short covering, month/quarter end rebalancing and stimulus measures are continuing to lift equities off lows. However, we still maintain it would be premature to sound the all clear. The VIX remains elevated and ultimately, we do not yet know the scale of the problem or length of lockdowns and the task of estimating the depth and duration of the hit to economic growth and earnings is subject to those unknowns. The case for re-testing lows can easily be made, particularly whilst containment measures are ongoing, and contagion is not yet under control in many countries.
A testament to the volatile quarter ending today, the day’s trade was somewhat erratic with US futures fluctuating between gains and losses, dragging Asian indices off from opening highs after China PMIs beat expectations. As has been the new norm, the trading range on the ASX 200 remains above average and Aussie stocks saw a significant 400-point reversal as US futures pared early gains, leaving the quarterly decline for the index at 24.05%. A laggard within the APAC region, both in local currency terms and USD terms.
Sentiment was buoyed this morning as China’s official manufacturing purchasing managers’ index rebounded from a record low 35.7 points in February to 52.0 points in March. At face value conditions have improved since last month as activity has resumed from lockdown. However, before reading too much into the rebound, it is important to remember that the PMI index is a diffusion index. Therefore, the rebound is a reflection of an expansion in activity relative to February, and March activity expanded vs. February, which was a lockdown month. Not indicative of a V-shaped recovery or a full resumption in economic activity. Both new export orders and raw materials inventories remained in contractionary territory. This was later corroborated by China’s National Bureau of Statistics warning that the rebound does not indicate a return to normal.
China’s manufacturing sector continues to face headwinds as the global demand shock presents a second wave of external demand collapse for the sector. European and US demand will have fallen off a cliff edge as lockdowns to contain the spread of COVID-19 have ensued. On that basis both monetary and fiscal policy will remain supportive despite the rebound in the data.
Australian weekly consumer confidence hit the lowest level on record, since the index began in 1973. Again the reading may be taken with a pinch of salt as the survey was conducted prior to the announcement of the Australian government’s wage subsidy plan yesterday. The next weeks read will be more important in gauging the hit to sentiment and read through to consumer behaviour.
Looking ahead, highlights include, German Unemployment, EZ CPI, Canadian GDP, US Consumer Confidence.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
