The week of 18 May started out optimistically about an experimental drug from the US biotechnology firm, Moderna, which published trial findings that its drug can create an immune system response to fend off COVID-19.
However, excitement faded after a report from a health publication, Stat, highlighted the very early nature of the trial and the extremely limited data being made available. Moderna is one of eight companies conducting human clinical trials for a COVID-19 vaccine.
Optimism also pervaded due to the indications that central banks remain prepared to step in and offer even more support, while there were signs that economic activity has improved in the countries that have eased their lockdowns.
After weeks of discussion, France and Germany agreed to support a €500 billion aid package, which aims to make grants available to the EU member states hardest hit by the pandemic. The package was seen as a much-needed step toward the Eurozone’s economic solidarity, given that the bonds issued to fund the package will be repaid from the EU budget – the lion’s share of which is covered by Germany. It now needs the approval of the ‘Frugal Four’ (Austria, Denmark, the Netherlands and Sweden), who deemed the package to be too generous.
At the end of the week, Hong Kong’s stock market tumbled after the Chinese government said it planned to impose a national security law on the city and, if necessary, draft in the Chinese military to quash protests. The move has prompted concerns over the future of the Asian financial hub. Many argue that it goes against the “one country, two systems” legislation that allows Hong Kong to maintain a largely separate economic and legal framework from China for another 25 years.
Meanwhile, on its mainland, China scrapped its GDP target for 2020 – the first time since records began in 1990. Instead, the Chinese premier Li Keqiang stated that the government would “give priority to stabilising employment and ensuring living standards”, and launched new targets in the form of a 3.5% increase in inflation, an urban unemployment rate of circa 5.5%, and an aim to see personal income grow in line with economic growth.
Federal Reserve (Fed) chair, Jay Powell, has warned that a full US economic recovery may take until the end of 2021 and that it requires the development of a COVID-19 vaccine. Meanwhile, the UK sold negative-yielding government bonds for the first time on Wednesday, with five-year gilts selling on yields of -0.01%. The move led to the Bank of England’s governor, Andrew Bailey, admitting that the central bank was actively reviewing the option to push interest rates into negative territory.
In terms of the economic data, the US weekly initial jobless claims came in at nearly 2.4 million on Thursday, in line with forecasts. This now brings the total number of initial claims in the last nine weeks to 38.6 million. Meanwhile, US home sales dropped 17.8% in April, the sharpest drop in 10 years.
In the Eurozone and US, the consumer price index (CPI) slowed to 0.3%. The UK CPI plunged to just 0.8% year-on-year in April, down from the 1.5% a year figure published in March, marking the first time that headline inflation has been below 1% since 2016. UK retail sales data showed a fall of 18.1% in April – the largest drop since records began – and despite a surge in online sales that reached a new high of 30.7% of total sales.
Over the four days to close of business on Thursday 21 May, when our reports are generated, the MSCI AC World Index was up 3.3% in US dollar terms, and 2.4% in sterling terms.
The best performing markets were the US, Europe and UK, while Japan and Asia ex Japan lagged. The UK’s positive performance comes after a negative month-to-date and the worst performance among peers year-to-date.
All sectors were in positive territory, although consumer staples and healthcare lagged slightly. Healthcare’s performance was at odds with our year-to-date experience, given the healthcare sector is one of the few in positive territory, lagging only behind information technology. In terms of style, value marginally outperformed growth, and small and medium capitalisation stocks outperformed large capitalisation stocks.
In tactical trading, we took the opportunity to participate in a share issue from The Renewables Infrastructure Group. The company will use the capital raised to pay down its revolving credit facility and to fund future construction commitments and further investments. The issue was well received by the market as an opportunity to acquire shares at a significant discount to recent market prices, and at only a small premium to net asset value – the issue was significantly oversubscribed as a result.
With the US and the UK starting next week with a public holiday, it’s a much quieter calendar for markets in the week ahead.
Attention naturally continues to focus on the coronavirus pandemic and associated health metrics, not least as the US approaches a tally of 100,000 deaths.
There will be continued discussions on a European recovery fund throughout the week, and we will also see the release of the latest weekly US jobless claims on Thursday. For other data, given shutdowns only began easing in May, April data is deemed to be too dated to be of much interest to investors.
We will also have a number of central bank speakers this week. European Central Bank president, Christine Lagarde, will be speaking on Wednesday 27 May. Meanwhile, the Fed will be releasing its Beige Book on Wednesday, which provides information on current economic conditions in the different Fed districts. We will hear from Fed chair, Jay Powell, on Friday 29 May.
Last, but not least, tensions between the US and China are once again beginning to ramp up and cast a pall over the investment outlook. While the US threat to sanction individual Chinese officials for human rights violations could be classified as rhetoric, the Senate passed a bill that could force many Chinese companies to delist from the US exchanges, with NASDAQ in focus. While due to last year’s legislation, the State Department must reaffirm Hong Kong’s independence, or the Special Administrative Region could lose its special trade privileges with the US.
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