The UK’s economy shrank a little more than expected in the first quarter – the 2.2 per cent plunge was the joint worst since 1979. Of course, it will be dwarfed by the Q2 drop, with April already printing 20 per cent lower. Meanwhile China’s PMI data showed a slight improvement and Japan’s industrial production plunged over 8 per cent. Does any of this tell us much as investors and traders? In normal times, yes of course, as it might make a difference of a few points on the margins, but in the time of coronavirus there is an awful lot of noise around the data which makes it a lot more challenging, as well as of course all the stimulus, which muffles the notes that the data is trying to sound. Boris Johnson will launch an FDR-like New Deal infrastructure package today to distract us from the harsh reality of rising unemployment and ongoing restrictions on our liberties.
US Treasury yields declined as Federal Reserve chair Jay Powell said the outlook for the economy is ‘extraordinarily uncertain’. In prepared remarks for today’s Congressional hearing alongside Treasury Secretary Steve Mnuchin, Mr Powell said output and employment remain ‘far below their pre-pandemic levels’, adding: ‘The path forward for the economy is extraordinarily uncertain and will depend in large part on our success in containing the virus.’ He also noted that ‘a full recovery is unlikely until people are confident that it is safe to re-engage in a broad range of activities’. San Francisco Federal Reserve President Mary Daly said it’s too early to tell and is just ‘watching the data’. Aren’t we all.
Stocks rallied on Monday despite a wobbly start, as US pending home sales jumped the most on record in May, whilst Boeing surged 14 per cent, heaping dozens of points on the Dow as it restarted test flights on the 737 MAX aircraft yesterday. But as I keep stressing, this is a very rangebound market. The S&P 500 rose 1.5 per cent but is caught between the 38.2 per cent and 50 per cent retracement of the pullback in the second week of June. The Dow added more than 2 per cent but couldn’t even achieve the 38.2 per cent line. Whilst indices are still trading this range, there is a downside bias evident lately and emerging down trend channels as we’ve made a couple of lower highs and lower lows. If this trend strengthens it could gain enough momentum to retest of the June lows. Indeed, during cash equity trading hours the last 5 sessions has produced a lower low and lower high on the S&P 500. Valuations still look too high and based on a far-too-optimistic view of an earnings rebound in 2021 and does not account for permanent productivity and demand destruction. Of course stimulus is making a big difference here, but risk assets are exposed if we see the pandemic get worse from here. World Health Organisation boss Tedros said the worst is yet to come. Cases across states like Arizona, Texas and Florida continue to surge and look to be completely out of control. A short, sharp pullback is a very real possibility.