Global Markets Update Monday, 20 July 2020

Posted on 20 Jul 2020

Global equities rallied, supported by expectations of further stimulus in the US and Europe.

Global Market Update

UK

The FTSE 100 bounced 3.2% over the week.

UK GDP rose 1.8% in May, after the 20.3% plunge recorded in April. The bounce back was weaker than expected.

The UK banned Chinese telecoms company Huawei from selling new 5G equipment in the UK from 2021 onwards. Huawei can continue to provide full-fibre broadband equipment for another two years and its 5G kit stay in the British system until 2027, while its lower-tech 3G and 4G equipment will never have to be removed. The decision provoked a furious response from Beijing.

UK payrolls fell by almost 650,000 people in the second quarter, despite the government’s furlough scheme.

The UK inflation rate rose slightly to 0.6% in June, as prices for clothing and games rose.

UK retail sales jumped 3.4% in June in the sharpest monthly rise since May 2018, with computing, furniture and home improvement all doing well.

Michael Gove announced £705 million of spending for new border infrastructure, jobs and technology in preparation for additional  EU customs checks, and confirmed plans to build lorry inspection sites away from ports.

US

The S&P 500 rose 1.1% over the week.

As new COVID-19 infections continued to jump in the US, with more than 70,000 new cases recorded on toward the end of the week, California joined Texas and Arizona rolling back in its economic reopening.

Some Federal Reserve governors suggested the Fed should do more to boost the US economy. Potential measures included the introduction of yield curve control, a policy tool that seeks to cap interest rates by pledging to buy bonds.

The National Association of Home Builders’ Housing Market Index climbed to a better-than-expected 72 in July, compared to 58 in June, and matching its reading in March. The jump coincided with a decline in mortgage rates, with the 30-year rate falling below 3.0% for the first time on record.

US retail sales surged 7.5% in June as more Americans returned to work and retailers emerged from coronavirus-related shutdowns. May’s data was revised to a rise of 18.2% from an initial estimate of 17.7%.

The number of new jobless benefit claims eased from 1.31 million to 1.30 million for the week ending 4 July. Continuing claims were the lowest since early April.

As the second-quarter earnings season start, earnings for companies in the S&P 500 Index were expected to decline around 45% compared to the previous year. This would be the most significant decline in earnings since the financial crisis in 2008.

Netflix a key beneficiary of the coronavirus pandemic, warned that subscriber growth would slow in the second half of the year.

Wells Fargo cut its dividend by 80% after reporting its first loss since 2008. Citigroup said its net income for the second quarter came in at $1.3bn, down 73% from the year before, citing a “deterioration” in the economic outlook, while JPMorgan Chase warned of “significant uncertainty” ahead and revealed almost $10.5bn of loan loss provisions in the second quarter. However, JPMorgan Chase and Citigroup, along with Goldman

Sachs, Morgan Stanley and Bank of America, all posted their best quarter for trading in a decade, helping to cushion provisions for bad loans.

Europe

The FTSEurofirst 300 gained 1.6% over the week.

The European Central Bank kept its stimulus measures unchanged, but Christine Lagarde warned that “the balance of risks to the euro area growth outlook to remain on the downside”.

The EU’s meeting to agree the proposed €750 billion Recovery Fund became mired in disagreement with the “frugal four” (Austria, Denmark, Sweden and The Netherlands) pushing for a greater percentage of the total being loans rather than grants.

The EU lost its tax battle with Apple after the EU’s General Court quashed demands for Apple to pay back €14.3 billion in taxes to Ireland.

Japan

The Nikkei 225 rallied 1.8% over the week.

Pacific Basin

China’s GDP expanded by a stronger-than-expected 3.2% on the second quarter compared with the same period last year and compared to a 6.8% decline the previous quarter. However, only a week after Chinese stocks recorded their strongest weekly gain in five years, the CSI 300 subsequently fell 5% in its worst one-day fall since February amid concerns that headline growth numbers were boosted by state-support that may not continue.

Chinese industrial production increased 4.4% in the second quarter compared with the same period a year earlier. The Chinese state has supported industrial activity over recent months, in part by increasing the amount local governments can borrow for infrastructure projects. A rise in construction has boosted the country’s steel output when production has shrunk in other big national producers. However, retail sales fell 3.9% in the second quarter, signalling an uneven recovery and continued pressure on consumption.

Singapore’s GDP tumbled 41.2% in the second quarter. The contraction was the steepest on record and follows a 3.3% fall in the first quarter as the city state’s Singapore’s export-driven economy was hit by a drop in external demand as countries around the world locked down.

Bonds

The yield on the 10-year Treasury bond closed the week at 0.63%, while the 10-year German Bund yield ended at -0.45%.

Investors have looked to protect against inflation over the last month, with more than $5bn flowing into funds that invest in US inflation-protected securities over the four weeks ending July 8, according to data from EPFR. That marked a reversal from outflows seen during March and April.

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