Moving on (can we forget 2020)
- Markets continue to recover on hopes of 2021 economic rebound.
- More countries loosening Covid-19 lockdown measures.
- Lockdown measures reflected in shocking Q2 economic and job data.
- BoE raises funds on negative yield.
- UK Treasury warns that Covid-19 could cost the UK over £300bn.
- EU launches €750bn stimulus plan although some countries may continue to dissent.
- ECB warns that Europe is trending towards worst-case scenario in terms of recession.
- Japan confirms delivery of additional fiscal stimulus of $1.1trillion.
- China abandons its economic growth.
- China passes new security law for Hong Kong.
- US warns it may remove Hong Kong’s special trading status.
- Widespread rioting in US. Whilst not having an immediate market impact, it may play on US Presidential election campaigning.
Major global equity markets rose. Commodities generally strengthened, with oil notably strong, up some 65%, driven by increased risk appetite and an improving demand outlook as the global economy starts to unwind coronavirus restrictions.
It remains early days, but with lockdowns being progressively lifted, and so far, no signs of a significant pick up in coronavirus infection rates, sentiment has generally been optimistic. This has effectively seen investors looking through this year’s sizable falls in GDP and high unemployment rates, looking to a recovery in earnings in 2021 and beyond.
The month saw further stimulus announcements from both central banks and governments. Of particular note was the proposal by the EU of a recovery fund, with Germany finally acknowledging the need for transfers of funds within the union, by agreeing to a grant element to the countries most affected by the virus. Should this be agreed it would mark a significant political milestone in Europe.
In the UK, the good weather and the actions of the Prime Minister’s adviser have likely lessened people’s caution to going out, however the key will be whether they are willing and able to spend. The Government furlough scheme has undoubtedly prevented a major increase in unemployment, but until social distancing measures are significantly eased, large parts of the consumer economy will remain highly constrained. Gilt yields turned negative for the first time ever on the back of Bank of England quantitative easing and speculation that they would need to do more given the deteriorating near-term outlook and falling inflation.
Relations between China and the US worsened, as each attacked the other on how they have handled coronavirus and who should be blamed for it. The tabling of a law by China to bring Hong Kong under greater control ratchetted tensions further, and both sides threatened reprisals. This deterioration comes at a very unhelpful time with global trade already significantly weakened by coronavirus. With the Presidential election only months away, it is likely to be a key area and as such, it seems unlikely that things will improve in the near-term, yet one hopes common sense will prevail to protect the recently agreed trade deal.
We welcome the continued improvement in sentiment, however we remain cognisant that we are still in the midst of a global pandemic which has caused one of the worst recessions in history. In spite of cases in Europe decreasing, cases of coronavirus are rising faster than ever worldwide. Certain areas of the market have seen a very strong run since the March lows, suggesting the possibility of some consolidation. The extent of policy support is unprecedented and continues to support stock markets, but markets will also need to see continued progress in exiting lockdowns.
With much of the developed world’s economy consumer based, the pace of economic recovery will be highly dependent on consumer confidence and attitude to spending.
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