Markets are expecting most major economies to re-open in 2 to 3 weeks’ time.

Global equities dropped back yesterday with the UK and Europe loosing around 3%. However, overall stocks have risen recently with the US leading this charge. To give you some context to how sizeable this relative US rally has been, the US index is now off 12% from the start of the year compared to Europe which is closer to 25%. This reflects the willingness of the US to produce outsized stimulus, both fiscal and monetary, to combat coronavirus which stands in sharp contrast to the difficulty Europe is facing in producing coordinated responses alongside the raft of political challenges the bloc faces. The structural economic issues within the Eurozone also makes it particularly exposed to any global downturn in growth. Whilst markets are weaker today the general theme is an increased focus on when lockdowns will begin to be lifted in Europe and the US. Markets appreciated comments from Larry Kudlow the Director of the United States National Economic Council. Mr Kudlow suggesting that announcements over a plan to reopen the economy will be announced in a matter of days.

We are now starting to see the impact of coronavirus on corporates earnings with the publication of the US Q1results. As is tradition, banks led the releases with JP Morgan one of the first to show a 69% reduction in net income compared to Q1 of 2019. Banks fell by over 3% in aggregate however Technology continues to perform with that sector up over 4% reflecting expectations that earnings would be more insulated from the downturn.

Markets are now expecting a reopening of most major economies in 2 to 3 weeks’ time. The risk is to the downside here as this is probably the earliest date that can work for the US and UK given the need to develop and deploy a higher rate of testing but also contact tracing technology. We expect markets to be reasonably patient with earnings results that are impacted by the broad economic impact but continue to favour sectors that can show defensiveness.

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