18:00 Blue chip index faces up to worst quarter since '87
March comes in like a lion and goes out like a lamb. One can often twist an old saying to fit one’s narrative but in some ways that is indeed what we’ve seen in equity markets over the last month, although it depends on how you define roaring and bleating I suppose.
Despite a horrid quarter and a shocker of a month, there is something of relative calm descending on markets at the month-end. Call it exhaustion, but it is welcome respite from what has been about the worst bout of panic selling we have seen.
While the '08 and dotcom drawdowns were larger, it’s the speed at which we saw equities sold off earlier this month which was truly remarkable. Volatility is declining in a way that will give hope, albeit we would tend to think that whilst the bottom has on balance likely been found for equity markets, it could well be felt a few more times. Daily ranges are tightening but resistance is holding.
US equities turned higher after a soft start while European equities finished the day up, bringing an end to a bruising three months. The FTSE 100 closed up nearly 2 per cent at 5671, failing to breach the near-term resistance at 5700. Shell led the charge with a 4 per cent rally that contributed 30pts to the index as it gave a tacit signal it’s not about to pull the dividend. Nevertheless the FTSE 100 still managed to post its worst quarter since 1987. The blue chip index has given up about 2,000 points, or 25 per cent, in three months. For March the FTSE declined 14 per cent, but it was a lot worse at one stage. The recovery off 4900 saw the near-term low put in and this is now our key support level. Elsewhere the Stoxx 600 was down 23 per cent for its worst quarter since 2002.
Top performers (ie those that held gains) were Polymetal, Pennon Group, Fresnillo, Reckitt Benckiser, National Grid and United Utilities. Our worst performers were unsurprisingly led by travel operators, with the bottom (all worse than -50 per cent) made up of Carnival, IAG, Melrose Industries, Easyjet, Meggitt, ITV, Centrica, Rolls-Royce, WPP, Informa and M&G. Of the big boys, Shell was 40/43 per cent lower, with BP -31 per cent, HSBC -22 per cent. Unilever and AstraZeneca were down 6-7 per cent apiece.
US markets were mildly positive as of send time but lacking any real momentum to the upside and again on track for the worst quarter in a long time. E-mini futures have come up against solid resistance at 2640, the 38.2 per cent retracement level and now face a key test here. For now, the pattern is very double-top like and suggests a pullback to the 2462 lows on the 23.6 per cent level. The MACD on the daily chart is still positive.
The Vix has come well off the highs earlier in the month. VIXX here has an ascending triangle, a typical continuation pattern, and today is showing signs of a potential breakout to the downside.
US economic data is yet to seriously reflect the scale of the crisis. The Chicago PMI read 47.8 vs 40 expected. To put that in context, the January print was 42.9, albeit that could have been due to the pressure on Boeing at the time. Consumer confidence registered 120 vs 110 expected, down from 130 previously. I think we can safely assume these readings will get worse from here. Q2 forecasts for the US economy from major forecasters range from -9% to –40%. Goldman Sachs drew a fair bit of attention as it downgraded growth forecasts to –34%, taking to among the most pessimistic. For sure the worst of the economic damage is yet to befall the world’s largest economy. Let’s hope April is not the cruellest month.
Indeed, even if we see a mega contraction in the economy there are a couple of points to be made vis-a-vis ‘the markets’. First, we know it’s temporary – maybe not quick, but transient nonetheless. We know there is a mega bailout and this is we think that equities could well outperform – Wall St should do better than Main St because the way it’s being set up favours the large caps over the SMEs and sole traders. Hat tip to Adam Button at Forexlive (which you can find on the platform under ‘Financial Commentary’ btw) who posts about this today. The point being that large caps can borrow at ultra-low rates already, while SMEs are still waiting and struggling. With a US equity market driven by a handful of big names, stock markets won’t reflect the damage being wrought in the real economy.
Crude oil is not feeling any uplift from those China PMI numbers any more. With WTI moving back to look at $20. I think at this rate we see $10 before $30.
09:00 European shares rally at end of brutal quarter
Financial markets and investors have been left bruised and battered by one of the most brutal quarters on record for equities, but the last few sessions have indicated some tentative green shoots.
Italy is finally seeing progress in its fight against the coronavirus. Stefano Patuanelli, a member of the Italian senate, says people should prepare for the end of lockdown. Getting back to normal could be as hard as isolating in the first place, but recovery is not far off. There is light at the end of the tunnel you feel.
Asian shares were broadly higher as Chinese factory data improved as investors were encouraged by green shoots. The official manufacturing PMI rose to 52, ahead of the 45 forecast and well up from the coronavirus-impacted 35.7 in February, which was a record low. Two things about this number – it shows a bounce, which is encouraging, but it doesn’t show a massive bounce into the 60s, and can we really trust the number? Economic recovery will be uneven, and stock markets are unlikely to bounce back to where they were, yet the panic seems to be over. Japan’s retail sales bounce seems to be down to a spot of panic buying – something we could see in the next UK retail sales print – Kantar says grocery sales jumped 20 per cent in the four months to 22 Mar.
Australia was weaker, with a late fall sending the ASX 200 down 2 per cent on the day to cap its worst quarter since 1987.
European markets are broadly higher again but are still heading for the worst quarter since 1987. Despite the FTSE rising 2 per cent today and having put on 700-odd points from the lows, the blue chips are still set to finish the quarter down by a quarter. Similarly, the YTD performance of all the major European indices looks around –25 per cent, give or take.
The US is doing a bit better. The Dow finished yesterday up 3 per cent for its fourth green day in five. It’s down 12.2 per cent for March its worst monthly performance since Oct 2008, when it declined by 14 per cent. For the quarter it’s 21.76 per cent lower, only beaten by the 25 per cent decline registered in the final quarter of 1987.
The S&P 500 was up 3.5 per cent yesterday and down 11 per cent for the month. This would also be its worst since Oct 2008, when it fell almost 17 per cent. Quarterly the broad market is holding up better others – the S&P 500 is down 18.7 per cent, again its worst since 2008. Tech is faring even better – investors are finding safety in quality names and in about the only area of growth except for grocery. The Nasdaq is only down 13 per cent this quarter.
Quarter- end rebalancing could be a big factor in the bounce we have seen and it could get tougher again in April but the low is in for now. We could be in for a website-shaped recovery: WWW.
Dividend no go for the lenders
UK banks are preparing to be told that they cannot pay any dividends. The Prudential Regulation Authority looks set to follow the ECB in demanding banks hold off on any shareholder returns for the time being in order to boost capital levels. These are unprecedented times, they’ll come for the bonuses next. But there is an important point here – shareholders are now at the back of the queue. Short-term I don’t particularly think dividends are going to be a major factor in trading action - investors will not be quibbling over whether they get a 2 per cent or a 6 per cent dividend yield on stocks, they should be looking at whether these companies are going to be in a decent shape after the fallout. Capital discipline will be welcomed, whether it’s enforced or not. Barclays, Lloyds and RBS all rose in early trade.
Shell forecasts post-tax impairment charges in the range of $400-800 million for the first quarter. In an update today the company says margins are down and the impact of the coronavirus and OPEC price war was primarily felt in March with little effect on Jan-Feb. Management reiterated that for every $10 move in the price of a barrel of oil it’s worth $6bn in free cash flow. However, this sensitivity is not as pronounced in when we see prices move as aggressively as they have – you can cut operating and capital expenditure accordingly. Shares rose 5 per cent in early trading in London.
WPP and AA have joined the long list of companies suspending their dividends. Imperial Brands has seen no material impact on performance to date and current trading remains in-line with expectations.
Neil Wilson is chief markets analyst at Markets.com
