Global Markets to 29th May 2020
- For the second consecutive month, the majority of global equity markets rally strongly.
- Lockdown measures are eased, although fatalities continue to rise and anxieties persist over the possibility of a second wave.
- Additional support measures are announced by the European Union in the shape of a €750 billion package.
- China imposes new security legislation for Hong Kong. President Trump retaliates, resulting in a hostile backdrop for Washington and Beijing.
- The UK sells its first negative-yielding bond. Could negative interest rates be around the corner?
- Global equity markets have seen a spectacular run –driven by hope, rather than fundamentals.
Global Market Summary
For the second month in a row, the majority of global equity markets have rallied strongly, sustained by the view held by many commentators that the worst of the global economy’s collapse may be over. Lockdown measures are gradually being lifted and restrictions eased all over the world, as countries emerge from isolation.
Further support from the world’s leading central banks – the European Union being the most recent with its proposed €750 billion package – is generating cautious optimism, alongside signs that economic activity could slowly be resuming.
It is likely that we are in the early stages of an economic recovery. But the Covid-19 pandemic is by no means over; indeed, remote working and social distancing are still firmly in place, and there is a great deal of uncertainty surrounding what might happen if they were to be phased out. Would we see a second spike in infection rates?
Recent data published by the John Hopkins Coronavirus Resource Centre confirms that fatalities have passed the 360,000 mark, with the US being the worst affected, followed by the UK, Italy and France.
Another month has ended and pharmaceutical and biotechnology companies across the world continue to work relentlessly on developing a vaccine, massively supported by governments, leading authorities and philanthropic bodies.
Many US states are beginning to reopen, but there is significant variation across them: some are forging ahead much faster than others. The precipitated actions that some of them are taking are a reflection of the immense pressures weighing on the nation’s governors to nurture a crippled economy. But epidemiologists warn of a potential second wave. Indeed, some states have already seen a rise in infections in the days immediately following these reopenings.
In the UK, Prime Minister Boris Johnson has announced that non-essential retailers will be authorised to reopen on 15 June 2020 as part of the government’s staged plan to ease the lockdown and try and get the country’s economy moving again. However, this is contingent on progress being made in tackling Covid-19.
Outdoor markets and car showrooms will also be able to reopen from 1 June 2020, but any further relaxation in lockdown measures must be rigorously implemented, together with any new guidelines laid down by the government.
Other relaxations include allowing groups of up to six people from different households to meet outdoors or in a garden. Social distancing rules must still be adhered to for those who do not live in the same household. It remains prohibited, however, to meet friends and family members indoors.
As trade and businesses gradually start resuming activity in the UK, we are likely to see substantial price cuts in discretionary spending items as a way of encouraging consumers back onto the high street and into restaurants. But with so many caveats governing how this will actually work – and so much uncertainty about the changes that this will create in people’s daily lives – any resumption is likely to be extremely measured, especially with so many people still furloughed and unaware of whether they will actually get to keep their jobs.
Similarly, in the US, another month of dwindling high-street consumer spending has hit demand levels. However, the country does benefit from numerous factors: it is home to many of the world’s leading digital and medical companies, significant numbers of their employees are able to work remotely and spend money online, and it boasts an extensive scientific analysis programme focused on finding a Covid-19 vaccine.
But irrespective of the dreadful economic backdrop created by coronavirus, the massive stimulus packages unveiled by governments and central banks will continue until the global economy begins to recover and unemployment rates fall.
Investing money in the age of coronavirus has involved more damage assessment than trying to forecast recovery patterns or future returns. Buying on rumour and selling on fact has resulted in the stock markets following the most extraordinary crisis and recovery patterns since February.
Since the end of last week, the S&P 500 Index has regained 70% of its total losses since the post-February crash. Over the past few months, we have seen the fastest ever 35% collapse from its record high, followed by one of the strongest and most relentless rebound rallies in decades. In fact, the NADSAQ 100 Index is now only 1.8% below its high in February and 9.0% up for the year to date.
The stratospheric rise in the US stock market is even beginning to turn the bears more bullish. Despite the dire economic outlook, this could lead to a further rise on Wall Street. Admittedly, the initial rally was rather narrow, led predominately by technology stocks. But some of the cyclical and small cap stocks have begun to rally over the past week or so.
It is also the case that Wall Street has benefitted over recent weeks from significant incentives. Firstly, it has been buoyed by the Federal Reserve Bank’s gigantic stimulus package. Secondly, it has been given a boost by the possibility that one or more of its leading pharma and biotech companies might produce a vaccine much earlier than the World Health Organisation and leading health experts are predicting.
The gains seen in recent weeks have not been limited to Wall Street. Indeed, the London, European and Japanese indices have all rallied aggressively since the markets bottomed out on 23 March 2020.
China’s decision last week to impose new security legislation for the territories of Hong Kong has sparked controversy, with US President Donald Trump immediately announcing that he will end preferential treatment for Hong Kong in trade and travel. The President went on to announce his decision to terminate the US’s relationship with the World Health Organisation over Covid-19, accusing it of mismanaging the spread of the virus following its emergence in China.
This is likely to further tarnish the relationship between Washington and Beijing at a delicate time when both superpowers are still in the process of negotiating a renewed trade deal. China has essentially told the West to “stop interfering” in Hong Kong, and the increased tensions between the two administrations have pushed the price of gold to a near seven-year high.
As we enter June, the markets remain optimistic, working on the assumption that the economic recovery will gain momentum over the coming 12 months – regardless of short-term dangers, such as a second wave of the virus or the dislocation between the corporate earnings outlook for most companies in 2020 and their share prices.
The Federal Reserve Bank has made its intentions clear: there is no limit to what it might do in order to avoid a further stock market crisis. Other leading central banks have made similar declarations and proposals.
Even the UK sold its first ever negative-yielding government bond last week amid growing fears of a deep recession. This means that Britain has now joined Germany, Japan and several other European nations in selling government debt with a negative yield. Will this action now pave the way for Bank of England Governor Andrew Bailey to announce that interest rates are to go negative?
The spectacular run in the global equity markets over the past couple of months has been driven by hope, rather than fundamentals. But perhaps the “TINA” slogan (“There is no alternative”) does indeed hold true. What is certain, however, is that the Great Financial Crisis (GFC) and the Covid-19 pandemic have transformed both the global economy and our daily lives. Perhaps the launch of the SpaceX rocket this weekend will herald a new chapter in our fast-changing world, alongside disruptive technologies in the form of smart drugs and vaccines.
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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