Global Markets Update Monday, 10 August 2020

Posted on 11 Aug 2020

Tensions between the US and China rose again after President Trump unveiled executive orders targeting popular social media apps TikTok and WeChat. The US administration also re-imposed a 10% tariff on imports of some Canadian aluminium, which responded with tit-for-tat measures of its own.
 
Global market Update
 
UK
The FTSE 100 rallied 2.2% over the week.
The Bank of England’s monetary policy committee poured cold water on the prospect of introducing negative interest rates in the near future, citing the possible impact on the banking sector, and noted that it had “other instruments available” to support the UK economy. The Bank also predicted the economic slump caused by Covid-19 will be less severe than expected but warned the recovery will also take longer. The BoE’s central forecast shows GDP falling by 20% in the second quarter of 2020, compared with 28% in May, with GDP shrinking by 9.5% in 2020, compared with May’s projection for 14%. 
The IHS Markit/Cips UK composite purchasing managers’ index (PMI) rose to 57.0 in July, the highest reading since June 2015. The manufacturing PMI increased to 53.3 from 50.1 in June, while services activity improved significantly, rising from 47.1 to 56.5 in July. The construction PMI rose to 58.1 in July, from a reading of 55.3 the previous month. This was the highest level in almost five years. During the week, the UK government announced proposals for “once in a generation” planning reforms that will ease restrictions on building new homes across England.
BAE Systems, Land Securities and Smurfit Kappa announced they were restoring their dividends, but Glencore scrapped its dividend while BP cut its in half.
HSBC profits plummeted 96% as it was hit by both COVID-19 and escalating US/China tensions.
 
US
The S&P 500 rose 2.1% over the week, coming within touching distance of its all-time high.
Talks on agreeing a new coronavirus relief package broke down before the Senate’s summer recess (Democrats had pushed for a $3.5 trillion package while Republicans proposed one worth $1 trillion).  President Trump subsequently signed an executive order that will provide up to $400 per week in supplemental unemployment benefits. This is less than the $600 people had been receiving until 31 July, when the benefit expired.
Non-farm payrolls rose by 1.8 million in July. While this was down from a record 4.8 million in June, the data was better than had been expected. The unemployment rate fell to 10.2%, continuing to improve from the high of 14.7% seen in April.
Donald Trump ordered firms to stop doing business with TikTok within 45 days and also issued an executive order that gave US companies 45 days to halt transactions with WeChat. Following the moves, Microsoft said it was prepared to takeover all of TikTok’s global business.
 
Europe 
The FTSEurofirst 300 gained 1.7% over the week.
Eurozone retail sales jumped 5.7% over the month of June. Compared with the same period of the previous year, eurozone retail sales were up 1.3%.
The IHS Markit purchasing managers’ index for Spain’s services sector increased from 50.2 in June to 51.9 in July while, in Italy, it jumped from 46.4 to 51.6. France recorded a services PMI of 57.3 in July while Germany logged 55.6.
The IHS Markit purchasing managers’ index for Spanish manufacturing rose to 53.5 in July, from 49.0 a month earlier. Italy’s manufacturing sector also recorded an improvement in July, with its PMI rising to 51.9, from 47.5 in June — its first expansion in almost two years. Germany’s July manufacturing PMI was also revised upwards from 50.0 to 51.0 — its first positive reading since the end of 2018.
German factory orders jumped by 27.9% over the month of June, although they were 11.3% lower than the levels recorded in February 2020, before restrictions were put in place to stop the spread of coronavirus.
 
Japan 
The Nikkei 225 rose 2.9% over the week.
The Jibun manufacturing purchasing managers’ index rose to 45.2 in July. While the index remained below the 50 mark that separates expansion from contraction, it was the strongest reading since February.
 
Pacific Basin
The Caixin purchasing managers’ index of Chinese manufacturing activity rose to 52.8 in July, its highest level in more than nine years.
China’s exports rose 7.2% on a year-on-year basis in July, sharply higher than the 0.5% increase seen in June. Both exports to the US and other south-east Asian nations increased. 
Chinese technology stocks declined after Donald Trump unveiled executive orders targeting popular social media apps TikTok and WeChat, which are owned by Tencent and ByteDance respectively.
 
Emerging Markets
Argentina reached an accord with its biggest creditors on terms for a restructuring of $65bn in foreign bonds.
Ecuador also reached a definitive agreement with its bondholders to restructure its $17.4bn of sovereign debt.
Lebanon, another country that has defaulted this year, suffered a catastrophic explosion in the port area of Beirut, further adding to the country’s woes.
 
Bonds
The yield on the 10-year US Treasury bond closed the week at 0.56%, while the 10-year German Bund yield closed at -0.51%.
Chinese bonds have seen robust foreign inflows this year as investors are attracted to their relatively high yields compared to other markets.
 
Currencies
The British pound rose to a five-month high against the US dollar after the Bank of England appeared cool on the prospect of introducing negative interest rates. 
The Turkish lira fell to a new low, despite efforts by the central bank to reassure investors that the country’s economy is recovering from the coronavirus pandemic. Tukey’s central bank has spent billions trying unsuccessfully to prop up the currency. Short-term money markets are starting to dysfunction, with skyrocketing overnight rates failing to stem the currency’s decline.
 
Commodities
Gold rose to a new record high of $2,063 an ounce, meaning it has risen by more than a third so far this year. Silver is also rallying, rising 34% in just the month of July.