While financial markets remained volatile, June saw risk assets climbing a wall of worry as financial markets further recovered from the appalling first quarter drawdown. Off a low base, economic activity picked up as restrictions were eased and the growth rate of COVID-19 cases slowed.
Investors continued to take comfort from the remarkable levels of stimulus governments and central banks are providing across the world, although towards the end of the month there were worrying signs that the pandemic was accelerating again, most notably in the US Sun Belt states.
On the political front, tensions between China and most other countries (which were already frayed by COVID-19), increased as China imposed draconian anti-sedition laws on Hong Kong Special Administrative Region that many believe effectively ends the “one country / two systems” arrangement put in place when the UK handed Hong Kong to China in 1997. In response, the UK invited up to three million Hong Kong holders of UK overseas passports to come to Britain, while the US suspended Hong Kong’s special trading status and imposed sanctions.
With the race for the presidency now in its final few months, Trump’s poor handling of both the pandemic and racial protests has seen his approval ratings slump, and Democrat nominee Biden to take a meaningful lead in the polls. How Trump reacts to this shift remains to be seen. While a Biden victory would probably help ease global political tensions, he would also seek to reverse some of Trump’s tax cuts and deregulation, which would be less investor friendly.
Corporate news flow was relatively quiet ahead of the July second quarter reporting season. In Germany, the Wirecard fraud was the biggest in the country’s history, causing significant losses for shareholders. Elsewhere, an increasing number of large companies announced restructuring plans involving significant redundancies as fiscal support programs and furlough schemes near their target end dates. Many companies also continued to raise capital and reduce dividends in order to maintain sufficient liquidity.
Equities continued their recovery, with most major markets and sectors delivering gains. Over the month, the MSCI AC World Index rose +2.7% in sterling terms. At the country and regional level, Asia ex Japan (+7.8%) and Emerging Markets (+6.8%) led, while the US (+1.7%) and the UK (+0.9%) underperformed. At the sector level, information technology (+7.0%) and consumer discretionary (+4.8%) were the best performers, with healthcare (-1.2%) and utilities (-1.6%) the weakest. From a style perspective, investors continued to back growth (+4.6%) more strongly than value (+0.8%). The performance of smaller company stocks (+2.7%) broadly matched their larger company peers (+2.7%).
Fixed income also saw positive returns with sovereign bond yields generally drifting lower. Central bank support continued to encourage some investors to return to higher yielding assets, with riskier types of bonds seeing the strongest returns. Over June, the JP Morgan Global Government Bond Index delivered a return of +0.2%, while shrinking spreads saw the ICE Merrill Lynch Global Corporate Investment Grade and High Yield Bond Indices gain +1.8% and +1.7% respectively (all hedged to sterling).
Most commodities gained as the Bloomberg Commodities Index rose +1.8% on the month. The largest advances were in crude oil (+8.1%) and industrial metals (+6.3%) as hopes of economic recovery helped claw back some of the significant losses seen earlier in the year. Nonetheless, commodities sent mixed messages as more cautious investors took comfort in buying gold (+2.3%), either as a hedge or safe haven.
Foreign exchange markets were relatively quiet, with the Yen, Euro, Sterling and the US Dollar all fairly stable against each other. Currencies that weakened included some of the traditional safe haven currencies, such as the Swiss Franc, while an improvement in demand and pricing for commodities helped boost the Canadian and Australian Dollars.
(Notes: All monthly data is quoted in sterling terms unless otherwise stated).
|INDEX||LAST MONTH’S VALUE||THIS MONTH’S VALUE|
|DJ Ind Average||25383.11||25812.88|
|£ Base Rate||0.10||0.10|
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