The week of 22 June saw markets turn negative and volatile, as the hope of fresh economic stimulus being provided was neutralised by the news of rising coronavirus case numbers, particularly in the US. As such, an aversion to risk predominated among investors.
On 24 June, the US suffered its biggest daily increase in new virus cases, prompting authorities and businesses in some states, such as Arizona, North Carolina and Texas, to reverse the easing of lockdown measures.
Meanwhile, the US weekly initial jobless claims came in at 1.48 million last week, continuing the declining trend in numbers, and down from 1.54 million the week before. Although the jobless claims have slowed in each of the past 12 weeks, the number of unemployed workers remains around the 20 million mark, which is approximately 13.5% of the US workforce.
The International Monetary Fund released its latest economic forecasts on Wednesday 24 June, stating that it expects the global economy to shrink 4.9% in 2020. It also forecast that global debt will balloon to a record 101% of GDP, above even the post-World War II peak for global debt, as countries attempt to combat the pandemic.
We also had a number of purchasing managers’ indexes (PMIs) published, with the Eurozone composite numbers rising to 47.5 in June, and the US number rising to 46.8. Although both show an improvement versus May, the readings are below the magic 50 mark and, therefore, still in contraction territory.
Optimism about the European economic outlook was also dampened by the Trump administration’s announcement on Tuesday 23 June that it was considering additional duties on products imported from Europe, in an escalation of trade tensions between the two sides.
The European Central Bank’s President, Christine Lagarde, advised that while the worst might be over for the global economy, it would still take a time for the “phenomenal” jump in precautionary savings to trickle down to higher investment and spending. She also expects the recovery to be “incomplete” given trade is unlikely to return to pre-crisis levels anytime soon and productivity may be weaker.
Meanwhile, on the Brexit front, the EU’s chief Brexit negotiator came out with the news that Brussels is willing to compromise with Britain with regard to the future alignment of business regulations. At present, it appears that the compromise would allow the UK to maintain the right to deviate from common standards, but that Brussels will be allowed to impose retaliatory tariffs if that happens.
In the four days to Thursday 25 June, the MSCI All Countries World Index was down -0.6% in US dollar terms and -1.0% in sterling terms. Asia ex Japan and Emerging Markets were the best performing markets, while the UK and Japan were the worst. This data, however, excludes Friday, which was a very weak day for markets – for example, US fell a further -2.5% – due to the concerns over a second wave of COVID-19 cases in the US, as well as an accelerating growth of cases worldwide.
Sector-wise, there wasn’t a great deal to note last week. Energy (-2.96%) and real estate (-2.87%) were weak again, due to worries of a return of some regional restrictions, while IT (+0.85%) and communication services (-0.56%) were solid. In the month-to-date, cyclicals have had a slight edge over more defensive stocks.
Style-wise, growth (+0.06%) continues to outperform value stocks (-1.93%), and large capitalisation stocks (-0.80%) saw better returns than their small peers (-1.49%).
Overall, our equity funds were broadly in line with the peer group, although our overweight to healthcare has detracted from performance as the market tries to price in the impact that Biden and the Democrats would have on the sector if they win November’s US elections.
For bonds, the aversion to risk was shown by the slight reduction in the yields of ‘quality’ sovereign issuances and a widening of credit spreads, which does not help our portfolios given our bias to shorter duration.
Property remains weak ahead of the upcoming quarterly rent collections, which the market will be carefully looking at. Our other alternative investment trusts had mixed performance in the absence of any new news.
It is worth flagging that the gap in stock market performance between the UK and the rest of developed markets is now around 10% year-to-date, which is quite significant, but which supports our global approach to managing money. Our overweight in emerging markets has also been helpful given the markets’ strong outperformance in June.
The main publication this week is likely to be the US jobs report for June, which will be out on Thursday 2 July. We will also see the release of the final June PMIs from around the world.
On the central bank front, no major meetings are taking place, but we will be able to read the June meeting minutes of the Federal Reserve’s monetary committee and hear from its chair, Jay Powell. The Bank of England’s governor, Andrew Bailey, will also be speaking on Thursday 2 July.
In Europe, there is a key meeting between Chancellor Merkel and President Macron, with the EU budget and recovery fund both on the agenda. Finally, Brexit negotiations between the UK and the EU continue this week – the first set of intensified talks that will take place every week for the next five weeks.
Last, but not least, we wanted to flag that we still believe there is too much complacency among investors in general, and especially since the number of global and US COVID-19 cases is accelerating. The question, however, is whether markets will continue to shrug off much of the bad news.
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