Global Markets Update Monday, 25 May 2020

Posted on 26 May 2020

Global equity markets rallied, helped by optimism over a Covid-19 vaccine, indications that central banks were prepared to offer more support and signs that economic activity had improved in countries that had eased lockdowns.

Global Market Update

UK
The FTSE 100 jumped 3.3% over the week.
Bank of England governor Andrew Bailey indicated that negative interest rates were “under active review”.
The UK government borrowed £62bn in April, the highest monthly figure on record, after heavy spending to ease the coronavirus crisis. The increase in borrowing pushed the ratio of debt to national income to 97.7%, the highest level in 57 years.
The flash reading of May’s composite IHS Markit/Cips UK purchasing managers’ index (PMI) rose to 28.9, up from April’s all-time low of 13.8.
Inflation, as measured by the consumer prices index, dropped to 0.8% in April from 1.5% in March. This marks the first time since 2016 that headline inflation has been below 1%. UK core inflation, which excludes food and energy, slipped slightly to 1.4% in April from 1.6% the previous month.
Retail sales slumped a record 18.1% in April, despite a surge in online sales which reached a record high of 30.7% of overall sales.

US
The S&P 500 rallied 2.7% over the week.
Federal Reserve chair Jay Powell warned that a full economic recovery might take until the end of 2021, but reassured markets that the US central bank “wasn’t out of ammunition by a long shot”. 
The US Treasury said it would need to borrow $3tn before the end of June, almost triple what the department borrowed for the entirety of the 2019 fiscal year.
A further 2.4 million Americans sought unemployment benefits last week, taking the number seeking benefits since the start of the US lockdown to 38.6m.
The annual rate of increase in US inflation slowed to 0.3% in April.
US home sales dropped 17.8% in April, the sharpest drop in 10 years.
The flash estimate of May’s IHS Markit manufacturing purchasing managers’ index increased to 39.8 from April’s record low of 36.1. The services index rose to 36.9 in May, compared to an all-time low of 26.7 in the previous month.

Europe 
The FTSEurofirst 300 rose 3.4% over the week.
France and Germany indicated they had reached an accord on a €500bn recovery fund for the EU. The fund, which will see the European Commission borrow money to support the budgets of stricken EU states, now needs to gain the approval of the so-called Frugal Four – Austria, Denmark, the Netherlands and Sweden. 
Speculation rose that the European Central Bank stood ready to increase its €750bn pandemic bond-purchase programme in June following the publication of the minutes of its last meeting on 30 April.
The flash estimate of May’s IHS Markit composite eurozone purchasing managers’ index (PMI) rose to 30.5 in May compared to a record low of 13.6 in April. The manufacturing PMI rose to 39.5 in May, from 33.4 in April, and the PMI for services rose to 28.7, from 12 in April.
Eurozone inflation slowed to an annual rate of 0.3% in April.
In Germany, the IHS Markit flash purchasing managers’ index for services rose to 31.4 in May from 16.2 in April, while the manufacturing PMI rose marginally to 36.8 in May, from 34.5 in April. Germany is showing a faster recovery than the rest of the eurozone, reflecting a quicker lockdown exit and its lower reliance on hard-hit industries, such as tourism. The Bundesbank declared “a recovery is under way”, with its activity index, which measures economic activity based on real-time indicators such as toll road traffic and electricity usage, coming in at a better-than-expected reading of -4.6% in April.
The Zew survey of German current economic sentiment fell from -91.5 to -93.5 in May. However, sentiment about the German economic outlook rose by 22.8 points month-on-month to reach a five-year high of 51 in May.
The flash estimate of the French purchasing managers’ index (PMI) for services rose to 29.4 in May from 10.2 in April, while the manufacturing PMI rose to 40.3 in May, from 31.5 in April.

Japan 
The Nikkei 225 gained 1.8% over the week.
Japan’s economy contracted by 3.4% over the first quarter of the year. Combined with the 7.3% contraction in the final quarter of 2019, this means the economy is now in an official recession.
Core machinery orders dropped 0.4% in April. The data, which is viewed as an indicator of capital spending in the coming months, was better than had been expected. 
 
Pacific Basin
China scrapped its GDP target for 2020. This is the first time this has happened since records began in 1990.

Emerging Markets
Turkey’s central bank cut its benchmark interest rate for a ninth time in a row, cutting rates by 50bps to 8.25%, aiming to stimulate the economy out of a coronavirus slump.
South Africa’s central bank cut rates by 50bps to 3.75%, taking rates to their lowest ever level.

Bonds
The yield on the 10-year US Treasury closed the week at 0.65% while the 10-year German Bund yield ended at -0.49%.
The UK government sold bonds on negative yields for the first time on record, selling five-year gilts on yields of -0.01% amid growing speculation the Bank of England would take rates below zero.

Commodities
Oil prices rose on hopes that a combination of rising demand and falling supply would boost prices. Brent crude rose back above $35 a barrel.

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