Massive Stimlus Provides Tailwinds as Global Markets Rally for a Third Week
Weekly Update – June 05, 2020
U.S. equities posted a third straight week of strong gains as volatility eased; global markets also rallied. Beside a surprisingly strong U.S. jobs report, the biggest tailwind was massive fiscal and monetary stimulus, which stayed in focus this week as the European Central Bank (ECB) exceeded expectations. Investors also focused on upticks in monthly economic data and respondent comments about a pickup in demand.
The traction behind these tailwinds was evidenced by the outperformance of value and cyclical assets, bearish yield-curve steepening and a softer U.S. dollar. The two- to ten-year U.S. Treasury yield spread widened to 69 basis points from 49 bp last week; the ten-year yield closed at 0.91%, up from 0.65%. “Risk-on” sentiment pushed oil futures up and gold futures down; the Bloomberg Commodity index rose for the week.
U.S. nonfarm payrolls rose by 2.5 million in May and the unemployment rate declined to 13.3%, well ahead of expectations for 19% and a significant decline from 14.7% in April. Employment rose sharply in leisure and hospitality, construction, education and health services and retail trade.
May ISM nonmanufacturing came in at 45.4 versus April’s 41.8. The report noted increases in new orders and business activity.
The ISM Manufacturing index signaled modest improvement, rising to 43.1 in May from 41.5 in April. New orders, production and employment all rose significantly. The final May Markit manufacturing purchasing managers’ index (PMI) read 39.8, surpassing April’s 36.1 reading. New orders, employment and output expectations improved slightly.
China’s Caixin/Markit Manufacturing PMI unexpectedly crossed into expansion in May, rising to 50.7 from 49.4 in April. China’s official manufacturing PMI came in at 50.6 for May compared to 50.8 in April. Markit German manufacturing PMI rose to 36.6 in May from April’s 34.5 print.
The ECB boosted its Pandemic Emergency Purchase Program by €600 billion, higher than the €500 billion consensus, and lengthened the program from year-end 2020 until June 2021. As expected, the ECB left its key deposit rate unchanged at -0.5%. Its asset purchase program will continue at a monthly pace of €20 billion for as long as necessary, together with a €120 billion temporary envelope until year-end.