With coronavirus deaths in Arizona, California and Florida hovering near record highs on Thursday1, there were increasing worries that cases were starting to spread to other regions, including the Midwest.
The economic impact of the virus was also clear as the US confirmed that its economy’s gross domestic product (GDP) contracted in the second quarter2 by an annualised rate of 32.9% – the most in post-World War II history. US initial jobless claims rose for a second week to 1.43 million3.
Amid this, it was hoped the US government would agree a fresh stimulus package to help the economy bounce back, and plug a hole left by the expiring unemployment benefit package4. However, reports show Democrats and Republicans are struggling to find common ground. The US$1 trillion package proposed by the Trump administration is seen as insufficient by the Democrats, while the US$3 trillion package put forward by the Democrats is viewed as expensive and poorly targeted by Republicans.
Trump floated the idea of postponing the US election last week4, as he suggested postal voting would be subject to fraud. However, a change in the election date is unlikely given it would have to be passed by the Democrat-controlled House of Representatives.
The Federal Reserve (Fed) meeting resulted in no significant changes, with interest rates held constant5. The bank did, however, announce an extension to its emergency lending facilities to the end of the year and pledged to do more to support the recovery if necessary. In his press conference, the Fed chairman, Jerome Powell, flagged that the pace of the US recovery had slowed after COVID-19 cases began to spike again in June and stated that the path for the US economy depends significantly on the course of the virus.
Europe is also battling to contain a surge in cases after Spain saw the start of a second wave, while there are signs of increasing numbers of cases in France and Germany1. The Eurozone also experienced a significant decline6 in second quarter GDP, down 12.1% from the first quarter of this year.
In the UK, Boris Johnson also put the hand brake on the removal of further restrictions within England after seeing case numbers creep up4.
And finally, China has put the Xinjiang Uyghur Autonomous Region under lockdown to control a surge of cases there4.
Global equities were up in US Dollar terms (+0.74%), but down (-1.38%) in Sterling terms, the difference being largely because the US Dollar was under pressure throughout the week on worries about the US’s failure to control the virus and lift its stalling economy.
Asia (+0.08%) and Emerging Markets (-0.09%) were the least weak, while Japan (-3.37%) and Europe ex UK (-3.00%) fell further. The US returned -1.01% and the UK -2.35%.
Style-wise, growth was still favoured (-0.43%) over value (-2.41%), which came about due to the sector outperformance of IT (+0.58%), communication services (-1.19%) and consumer staples (-0.98%). Energy (-4.87%) and financial services (-3.34%) underperformed the most.
One of the biggest trends in July was the fall of the US Dollar. Traditionally seen as a safe haven, the US COVID-19 case numbers, doubts about leadership and the potential for further economic damage, have encouraged investors to shy away from the US Dollar. The weakness of the US Dollar is good news, however, for Emerging Markets globally, which has been helpful to our portfolios given our overweight positions.
On the fixed income side, government bond yields fell again on worries about stalling growth and a second wave of COVID-19. A 10-year UK government bond (aka a gilt) gives you a return of 0.1% if held to maturity, while a US 10-year treasury bill offers 0.5%, and a German 10-year bund -0.6%. While the fall in government bond yields was unhelpful, the change in credit spreads was constructive enough for the bond portion of our portfolios to finish up in absolute terms.
Looking across the alternative investment funds, performance was mixed, although it ended slightly positively given the strong performance of the two lending funds, GCP Asset Backed Income and KKV Secured Loan Funds (as SQN is now known). Greencoat Renewables was also up last week after posting strong results. The fund owns windfarms in the Republic of Ireland too, and cash generation has been strong and production is in line with budget. The Irish incentive system providing a 15+ year price guarantee has been very valuable of late, given power prices have generally been supressed by the economic slump.
In terms of economic data, one of the main highlights this week will be the US jobs report for July, which will give insight into how the current coronavirus spike throughout the US has affected its economy. Investors will also look out for the weekly initial US jobless claims number.
Earnings season continues this week with a total of 133 S&P 500 companies reporting.
The other main data highlight will be the final July purchasing managers’ index (PMI) releases from around the world, and should confirm the flash PMI readings that showed the recovery has more momentum in Europe than in the US.
On the central bank front, there will be a monetary policy meeting at the Bank of England and Governor Andrew Bailey’s subsequent press conference on Thursday 6 August.
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Clients of Nedbank Private Wealth can get in touch with their private banker directly to understand how their portfolios are responding to market events, or call +44 (0)1624 645000 to speak to our client services team.
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All data is for the four days ending 30 July. Sources: Nedbank Private Wealth and (1) John Hopkins University; (2) US Department of Commerce; (3) US Department of Labor; (4) Bloomberg; and (5) Eurostat.
Investments can go down, as well as up, to the extent that you might get back less than the total you originally invested. Exchange rates also impact the value of your investments. Past performance is no guide to future returns. Any individual investment or security mentioned may be included in clients’ portfolios. They are referred to for information only and are not intended as a recommendation, not least as they may not be suitable. You should always seek professional advice before making any investment decisions.
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