COVID-19 – An update From Ermin Fosse

Market Review August 2020

July proved a mixed month for stock markets, with both UK and European markets unable to advance. In contrast, US shares continued their upward trend with momentum from a small number of very large US technology companies.

Market Review August 2020
Ermin Fosse

Ermin Fosse

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I’m forever blowing bubbles

  • Global Covid-19 cases continues to grow
  • WHO warns increasing infections among young people could be driving spike in Europe
  • Positive early stage vaccine development trials from Astra Zeneca and other pharma majors
  • Mounting concerns over the US economy sends Dollar down 6% against Sterling - biggest monthly fall in a decade
  • China officially passes new national security law for Hong Kong
  • US designates Chinese technology giant Huawei as a national security threat
  • UK starts to emerge from lockdown but Covid-19 clusters lead to regional lockdowns
  • UK Chancellor announces number of targeted measures to support economy worth £30bn
  • Brexit trade negotiations extended until October
  • EU leaders agree €750bn stimulus package
  • China’s economy grew by 3.2% in Q2
  • OPEC+ agree to increase oil production from August
  • Dollar weakness and US/China tensions propel gold to $2,000

The message from central banks remained highly supportive and government bond yields continued to trade at or near record lows, with the UK benchmark 10-year yield briefly going below 0.1%. US Treasury bonds saw notable falls in yield, further eroding the yield advantage against other government bonds, likely one of the main drivers of the global weakness of the US Dollar, which fell some 5.5% against Sterling. The biggest monthly fall against Sterling in over a decade.

As holiday season began in earnest, the UK government added further coronavirus U-turns to its growing tally, changing guidance on holiday destinations with little notice. Unsurprisingly, this was very unwelcome for international travel companies, but the growing tendency of ‘staycations’ has proved a boost to the UK economy. This, in combination with the support measures announced by the chancellor, including the ‘eat out to help out’ scheme, were welcomed by the hospitality sector.

Coronavirus cases continue to rise, but it is notable in the west that the death rates remain much lower than those seen in March and April. Clearly there are lots of variables, not least a better understanding of treatment and greater rates of infection amongst the young, but this suggests that large scale lockdowns look very unlikely to be repeated. Nevertheless, the key to a return to some form of normality still looks likely to rest with the development of a vaccine.

Having seen strong rebounds in economic activity in May and June, the trend may well be easing as the impact of support and pent up demand fade. In the UK as elsewhere, the key will be how companies respond as flagship schemes such as the furlough scheme unwind and the resulting impact on confidence. In the US, the next fiscal support programme has yet to be agreed, with both sides of the house seemingly dug in on some very contentious issues.

US-China relations continued to deteriorate, with the US ordering the closure of the Chinese consulate in Houston on intellectual property grounds. China swiftly countering with a US consulate closure in China. The upcoming US Presidential election and the need for President Trump to draw attention away from domestic issues suggests that relations are likely to remain tense.

Company results have typically reassured, admittedly beating very low expectations and benefitting from pent up demand, but there are also early signs of encouragement on dividend policy as some companies resume payouts. This should make stock markets such as the UK more attractive to overseas investors and cause valuations to re-rate in the context of more highly valued overseas markets.

August is typically a month that can be quite volatile given the impact of holidays and lower market volumes. With coronavirus news simmering away and developments around US/China relations and US stock market levels, it has the potential to follow a similar pattern.

As we cross into the second half of 2020, markets are looking for further signs of an economic rebound in the third quarter. This will be required for market sentiment to remain upbeat, as we also consider the prospects into 2021 and beyond.

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