Global Markets to 7th June 2020
- Global equity markets rally strongly throughout the week, boosted by some surprising data
- Global economic data remains mixed, but the situation in the US is looking better
- European Central Bank president Christine Lagarde announces a further stimulus push, indicating that more needs to be done
- A forceful Beijing sees Johnson and Trump announce further actions regarding Hong Kong
- The UK has until the end of June to request an extension to the Brexit transition period
- Has the stock market been right the whole time? Maybe so, but investors are still cautious
Global Market Summary
Global equity markets rallied strongly over the week, closing out the five-day trading session with impressive gains on Wall Street following Friday’s announcement of better-than-expected jobless numbers in the US. These figures caught everyone by surprise, wrong-footing economists, analysts and market watchers.
The magnitude of the error was astonishing: not one of the 78 economists surveyed by Bloomberg came even close to the actual number. In fact, the consensus expectation was off by an astounding 10 million, and the unemployment rate off by some six percentage points.
The actual figures for May showed that the US economy had essentially gained 2.5 million jobs – significantly better than the 8.3 million that economists had expected to lose, and much better than the 20.7 million jobs lost in April.
Although these are early days and we still have no idea what the new “normal” will look like, barring a second wave of Covid-19, the overall US economy may just have turned a major corner.
Regarding the ongoing debate about what shape the recovery might take, a V-shaped recovery currently seems considerably more likely than an L, U or W-shaped one. Although I have been in the “V” camp since the beginning of April, I would emphasise that thus far, while the US stock market has been enjoying a V-shaped recovery, its economy has not. Not until now, at least.
Indeed, while recent news about improvements in the US figures is extremely positive, the severity of the damage that Covid-19 has inflicted on the global economy should not be underestimated – the biggest shock since the Great Depression.
The reality now is that the S&P 500 Index has just posted its fastest 50-day advance in nine decades, while the tech-heavy NASDAQ 100 Index has hit a record high. This encouraged President Trump to tweet: “Next year will be one of the best ever, and look at the Stock Market NOW!”. Trump’s administration clearly sets great store by the stock market as a barometer of success. It is also thought to have played a major role in the political thinking behind the confrontation between the US and China in trade war discussions.
Similarly, the Federal Reserve Bank now seems to be focusing on jobs information, price stability and the equity market as important directional data for setting out and managing its stimulus measures.
This brings us neatly to this week’s two-day Federal Reserve Bank meeting. Economists will be poring over Fed chair Jerome Powell’s every word, looking for signs that he will be reassuring the market and its investors about the central bank’s willingness to do whatever it takes to continue to support the economy.
The idea that a turnaround in the US jobs numbers and a strong equity market could influence the minds and affect the future plans of policymakers (a risk in itself, given that the market has been rather relying on another stimulus package) might be of some concern, particularly when the second-quarter corporate earnings figures are likely to be dreadful (unless, of course, we are in for another surprise).
Nevertheless, the US market could continue to rally. But as we have seen so far, the rally has been driven by technology and healthcare stocks. We will need to see it widen out and embrace more economically sensitive sectors (such as the financials and industrials).
Furthermore, from a global perspective, the economic data will definitely need to start showing some signs of recovery – recent UK consumer confidence data had fallen to its lowest level in more than a decade at the end of May (even though the government has started to ease the lockdown measures).
In Germany, factory orders had plummeted by 26% on the previous month (when they fell by 15%). But this is significantly less than the 19.7% contraction that analysts had predicted.
Consequently, European Central Bank President Christine Lagarde has announced a larger-than-expected increase to its emergency bond-buying programme: purchases have now been expanded by €600 billion to €1.35 trillion, and the programme has been extended until the end of June 2021.
Although recent evidence would suggest that the downturn in Europe might be bottoming out, improvements have been slight, hence the ECB President’s further action.
In the southern hemisphere, following bushfires in the early part of the year and then Covid-19, Australia is set to experience its first recession in 29 years.
Geopolitically, the world continues to react to events in Hong Kong – and to a more forceful Beijing. Prime Minister Boris Johnson has pledged to overhaul the immigration laws and grant almost 3 million Hong Kong residents a pathway to UK citizenship, while President Trump has announced his decision to end any preferential US treatment that the former British colony may have been enjoying. Both initiatives have met with support and condemnation from the respective governments and administration officials.
Overall, the week’s news triggered a sharp rally in US equities and a sell-off in US government bonds. On the other side of the Atlantic, meanwhile, stocks, government bonds, the euro and sterling all rallied, buoyed by better news from the US and announcements of further stimulus packages from the ECB.
There is, however, a very dark cloud hanging over sterling, given the potential for a disorderly exit from the European Union and the possibility that the Monetary Policy Committee may push interest rates into negative territory should the UK economy weaken further. The UK has until the end of June to request an extension to the Brexit transition period beyond 31 December 2020.
Finally, while the last few weeks have been excellent for risk assets, it should not be forgotten that we still have no cure for Covid-19, and that the disease continues to spread across the world. There is also uncertainty about the prospect of a second wave this autumn and winter. As the months go by, however, the likelihood of a vaccine being developed grows.
This creates an intriguing backdrop for investors as economic indicators start to improve on their earlier depressed levels. Since 23 March 2020, the MSCI World Index has rallied by over 41%, confirming the adage that a crisis should never be wasted, while people have started talking about a V-shaped recovery.
Perhaps the stock market has been right the whole time – it usually is during crises. Nevertheless, investors continue to oscillate between being overly cautious and downright panic stricken. However, if one remains focused on long-term investing while heeding Warren Buffett’s suggestion that one should be “fearful when others are greedy and greedy when others are fearful”, navigating the road ahead is much easier – even if certain parts of it prove very bumpy.
Peter Lowman is the Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.
This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.
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