In spite of renewed fears of coronavirus clusters in Beijing, data last week suggested the more consumer-oriented sides of the Chinese economy were tracking improvements in industry, with a year-on-year increase in auto sales in May. UK retail sales were also encouraging, but the biggest surprise came from the US where May’s 18% rise in retail sales month on month was double analysts’ expectations. Popular metrics like pedestrian, air and auto traffic, credit card spending and restaurant reservations likewise indicate the US consumer is alive and kicking. We still believe it is too early to sound the all clear and will continue to track corporate defaults and unemployment trends, among others. But a robust post-pandemic recovery could well bring relief to cyclical and value stocks.
We continue to become relatively upbeat on euro area assets. The European Central Bank’s (ECB) latest offer of multi-year loans at negative rates generated EUR1.3 trn in applications from banks and will help credit flowing in the European economy. Given that banks can book a profit of about 50bps on the loans they take on, one can say that the European banking system is also alive and kicking, courtesy of the ECB. European Council meetings last week provided a chance to gauge the strength of opposition to the European Commission’s recovery fund proposals—but we are still confident that we will see progress on this front when heads of government meet in person in July.
Central bank support is also helping high-quality corporate bonds. The ECB last week increased bond purchases under its existing asset purchase programme, while the Fed announced details on its programme to purchase corporate securities. The programme’s unveiling over two months ago and other stimulus have led to a big increase in corporate issuance, with Fed support for select ‘fallen angels’ (debt recently downgraded to high yield) offering potential. The GBP100 bn boost to the Bank of England’s bond buying was further good news for the credit market last week. There was no discussion of negative rates, but we believe they are a strong possibility if a ‘bare bones’ trade agreement with the EU weighs on the UK’s post-pandemic recovery. The chance of rate cuts and further quantitative easing mean that we are negative on sterling, but more upbeat on UK gilts.
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