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A sense of trepidation is clearly evident across markets as a new quarter beckons. After a sharp rebound in late March, equities are back under significant pressure. The economic calendar tolls bleakly, while news of more dividend cuts, alongside the demise of share buybacks, also casts a pall across broad equity sentiment.

Forget green shoots of spring. Bad news is expected and for all the pain to come from data covering last month, April will beat that by some distance. Estimates of weekly US jobless claims due tomorrow, are in the region of 5.5m, up from a record breaking 3.3m the previous week. 

The primary issue for markets is how long current lockdowns of activity extend and just how deeply the downturn resonates. Arriving at any estimate remains a point of intense conjecture. Now that investors have navigated the usual shuffling of positions around quarter-end, there is a renewed focus on pending economic data and corporate actions.

Government and central bank support have stemmed greater financial turmoil, but what worries plenty of people is how this alone does not limit renewed bouts of market fragility. A rising US dollar and falling oil prices are potent barometers of the pressure rippling across markets. 

This is particularly acute given how the rebound in global equities from last month’s depths appears at odds with the underlying lack of certainty over the economic outlook and the global path taken by Covid-19.

A rebound in May and June appears the current base case, and one that depends on a peak in Covid-19 infections across Europe and North America in the coming weeks. From that starting point, there remains the issue of just how long it takes for economic activity to pick up. Standing in the way of a summer recovery is the yet to be determined toll of unemployed workers and failures among small and medium enterprises.

For all the chatter and hope of a V-shaped rebound, the prospect of a U-type recovery has the edge among forecasters as social distancing measures will linger and detract from service sector activities such as travel, dining, sporting events and other types of recreation.

This hardly soothes investment sentiment and leaves equity markets in a rather tight spot as Peter Oppenheimer and the equity strategy team at Goldman Sachs highlight:

“Most equity markets, following the recent rally, are down only around 25-30 per cent from their highs and these were highs not just in market levels, but also in valuation.”

This leaves equity markets vulnerable given the hefty hit seen looming for earnings. Goldman believe earnings per share face declines in the region of 33 per cent for the US and 45 per cent in Europe, as shown here:

That suggests a push towards the recent lows in the S&P 500 and Stoxx 600, and potentially through their respective floors set last month. A slow restoration of economic activity beyond the start of June, and the likelihood of further financial shocks (after years of reaching for yield) can only weigh on market valuations and even the ranks of optimists waiting for self-isolation to end. 

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Quick Hits — What’s on the markets radar

The push for a common euro bond has met stern resistance from Germany and the Netherlands. That’s hardly a shock, and so France has proposed limits of five or up to 10 years in an effort to offset objections over mutualising debt obligations for the region. Expect little traction and an eventual move towards using the European Investment Bank or the European Stability Mechanism, is the thinking among some observers. 

When the Federal Reserve becomes a buyer of last resort, a market has serious support. The scores on the board for the US investment grade debt market tallied a monthly record of $260.7bn in March, according to Bank of America.

BofA expect another big dose of sales to the amount of $150bn to $200bn this month and add:

“With the partial economic shutdown IG companies will likely continue to issue bonds for liquidity needs while others frontload as the market is wide open.”

Never fight the central bank is the story here, but that hardly helps lower-quality credits. 

The past six weeks has generated plenty of eye-popping charts. The latest contender via the Institute of International Finance, shows the utter rout in emerging market investment flows.

As they note, $83.3bn in outflows from EM securities during March is not just a record, but one “significantly larger than the one seen during the global financial crisis and dwarfs stress events such as the China devaluation scare of 2015 and the taper tantrum in 2014”. Both equities and debt have been hit hard.

At some point, that leaves EM with scope for a bigger rebound than the rest. And Capital Economics believe there is scope for a repeat of what came after the sector’s rout in 2014 to 2016, when EM equities beyond Asia, bounced back stronger. A recovery in oil and other commodities such as industrial metals is a key development for LatAm and Emea economies in the coming months.

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I’d love to hear from you. You can email me on michael.mackenzie@ft.com and follow me on Twitter at @michaellachlan.

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