The week of 6 July saw markets end in positive territory, despite the less than optimistic news flow, as stock market increases were outpaced by the rising number of new coronavirus pandemic cases.
The news is particularly of concern in the US, where the three most populous states in the Sun Belt – i.e. California, Florida and Texas – recorded their largest ever single-day increases in reported COVID-19 deaths1, indicating that the latest outbreaks could lead to another surge in the country’s overall fatalities.
The virus also continues to weigh on economic data releases, with a further 1.31 million US citizens going through the initial jobless claims process2, although this number is slightly lower than the 1.41 million announced on 2 July. Unsurprisingly, Texas registered the biggest jump in claims as it contends with its COVID-19 resurgence.
Meanwhile, a senior Federal Reserve (Fed) official warned that the US economy was in danger of stalling3. This view was based on high frequency data, which showed a “levelling off” of economic activity, both in terms of business openings and labour mobility.
Trade tensions increased on Friday 10 July as the US announced it will seek to impose tariffs of 25% on US$1.3 billion worth of French goods4 if Paris presses ahead with its digital service tax, which the White House argues unfairly discriminates against US technology companies.
In Europe, data published pointed to improving economic activity5. For example, May’s retail sales rose by a record 17.8%, albeit off a very low base.
German Chancellor Angela Merkel met with Dutch Prime Minister Mark Rutte, in his role as unofficial leader of the frugal four, in the hope of getting his support for the EU recovery fund6. Merkel also urged her fellow EU leaders to be willing to compromise in order to secure a swift deal ahead of the EU summit on Friday 17 July.
Meanwhile, the UK’s Chancellor, Rishi Sunak, announced a £30 billion fiscal package7, putting forward a number of measures such as tax breaks, restaurant discounts and new job programmes, designed to help bolster UK employment.
Looking at the equity markets, for the five days through to markets’ close on Thursday 9 July, global equities – as highlighted in the performance of the MSCI All World Countries Index – were roughly flat (+0.04%) in Sterling terms, and up +1.24% in US Dollar terms, with the difference due to currency movements.
Sector-wise, information technology (+2.02%) continues to power ahead, as does the communications services (+2.00%) sector. The market believes these types of stocks will continue to be ‘winners’ during the COVID-19 crisis or, at least, the safest sectors in which to invest. Energy (-5.42%) was the weakest sector, with the oil industry under particular pressure.
Style-wise, growth (+1.83%) continued to perform versus value (-1.87%), due to the number of technology and communication services stocks in the growth category, versus value which includes energy and financial services names.
Large capitalisation stocks (+0.21%) outperformed their smaller peers (-1.50%).
On the fixed income front, given the fears of a sweeping second wave, yields on government bonds fell further. At the time of writing, the UK 10-year gilt was yielding 0.15%, the US 10-year treasury 0.64%, the German 10-year -0.47%, the Swiss 10-year at -0.52%, and the Japanese 10-year at 0%.
Emerging Markets (+4.39%) and Asia ex Japan (+4.86%) were strong performers, although still have ground to make up versus most of the developed markets on a year-to-date basis. The UK was weak again (-3.10%) and continues to underperform most developed markets (-19.15% year-to-date), although this is supportive of our stance on diversification based on global market capitalisations. For our fixed income investments, falling yields has meant our bias towards shorter duration continued to marginally work against us, as has also been the case for the year so far.
Among the alternative investments, Hipgnosis Song Fund saw strong demand for its £236 million share sale, in which Nedbank Private Wealth participated, with approximately 0.5% added to portfolios across the risk ratings. This investment remains a good performer since the initial investment, as its management team has delivered on the revenue growth in line with the explosion in music streaming.
Turning to property, investors continue to mark down global and UK REIT funds, and our investment in BMO Commercial Property Trust also struggled. We have yet to hear any concrete news on a resumption of a dividend payment, despite 80% of Q2 rents being collected, while the balance was largely deferred rather than reprieved. A similar level of rental payments in Q3 should help push up demand and net asset values.
The US weekly jobless claims continues to be a closely watched number, and we will also see June’s consumer price index (CPI), retail sales and industrial production numbers published for the US. The Fed will release its ‘Beige Book’ on Wednesday 15 July. Officially known as The Summary of Commentary on Current Economic Conditions, it is published eight times a year and compiles qualitative research from each of the Fed’s 12 regional reserve banks. It is viewed as a guide to granular economy activity, particularly in times of economic distress when data quickly becomes outdated.
In the UK, we will see gross domestic product (GDP) numbers for May, CPI for June and unemployment data for the three months ending 31 May.
China releases its Q2 GDP numbers on Thursday 16 July.
Meanwhile, on the political front, a key highlight will be the EU summit on Friday 17 July as leaders gather to discuss its recovery fund. Meetings are also in the diary for the European Central Bank and Bank of Japan this week, although no major decisions are expected.
Finally, a session of the extended Organization of the Petroleum Exporting Countries (OPEC+) is expected to recommend easing its self-imposed supply cuts8, although these are unlikely to help the oil price in the short term or the industry as a whole. The depth of the industry’s issues can be seen in recent job announcements. For example, BP is looking to shed around 10,000 jobs i.e. approximately a quarter of its workforce.
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Clients of Nedbank Private Wealth can get in touch with their private bankers to understand how their portfolios are responding to market events, or call +44 (0)1624 645000 and speak to our client services team.
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Sources: Nedbank Private Wealth and (1) Covid Tracking Project; (2) US Department of Labor; (3) Atlanta Fed; (4) US Trade Representative; (5) Eurostat; (6) Bloomberg; (7) UK Government; and (8) Reuters.
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