Over the past week, we have once again learned a set of not quite favorable data from the global economy. Chinese economy fell 6.8 % year on year in the first quarter. This was an even greater decline than economists expected. This is the first decline in the Chinese economy since 1976. In the week ending April 10, US jobless claims again exceeded 5 million, and over the past four weeks the number of newly unemployed Americans is over 22 million. All jobs that have been created in the US economy since the global financial crisis of 2008-2009 have been lost since the outbreak of the COVID19 pandemic.
In its updated global economic outlook IMF has estimated that the global economy will decline by 3.5 % this year. Yet in the crisis year 2009, the global economy declined "only" by 0.5 %. According to the International Monetary Fund, the global economy is facing the harshest economic recession this year since the Great Depression in the 1930s.
Capital Economics recalled that global corporate profits declined by 45 % year on year in 2009. Given that the global economy's slump will be significantly stronger this year, global corporate profits are likely to fall by more than half this year compared to 2019. This will have a negative impact on corporate creditworthiness. Credit rating agencies have already begun to reflect on this fact, when they have already begun to reduce rating marks to corporate bond issuers on a massive scale.
Despite these unfavorable news, the mood on the global financial markets could be described as positive last week. Global equity markets grew by 2.2 % according to the broadest MSCI All Country World index. Relatively the most successful shares in the US, according to the S&P 500 index, rose by 3.0%. By contrast, equities in Central Europe, which fell by 0.4% according to the CECEEUR index, performed relatively the worst.
Global bond markets performed quite well, with Bloomberg's widest global bond index gaining 0.6 %. Corporate bonds recorded solid profits of around 1.5 %. They again benefited from purchases of key central banks, the US Fed and the European Central Bank. The Czech government bond index recorded a gain of 0.7 %.
Again, commodities failed totally. The global commodity index S&P GSCI wrote down 5.1 %. Crude oil, despite reported record production cuts of 9.7 million barrels per day reported by the OPEC cartel together with Russia, declined by 10.8 %. The barrel of Brent was traded at the end of last week for 28 dollars, the lowest level since 2002.
I believe that the continuation of the positive sentiment on the global financial markets was mainly supported by two factors. First, unprecedented monetary stimulus from the US Fed and the European Central Bank. It is worth noting that the Fed has bought assets worth well over 2 trillion dollars in the past month! Its balance sheet thus rose to a new all-time high of 6.4 trillion dollars. Relative to US GDP, the balance sheet of the US central bank is 29 %, which is also a historical high. On Thursday, the President of the European Central Bank Christine Lagarde announced that the European Central Bank will increase the volume of asset purchases, if the situation requires so. The second positive factor is that the economies on both sides of the Atlantic are likely to open gradually in the foreseeable future.
So, although the uncertainties associated with the COVID19 pandemic are still huge and economists have yet to agree on how long the global economic recession will last, they are talking about two to six quarters, key central bank steps and flattening curves of newly infected are clearly a very positive impact on global financial markets. I am therefore a cautious optimist for the coming weeks. Our investment portfolios are well prepared for this baseline scenario.
Investment Strategist at Conseq Investment Management, a.s.