Global Markets Update Monday, 6 July 2020

Posted on 06 Jul 2020

After record second-quarter returns, global stocks started July on a strong footing as better-than-expected US jobs data helped investors look beyond a sharp rise in new COVID-19 infections in the US and Latin America.

Global Market Update

UK
The FTSE 100 closed the week with flat returns, having enjoyed the best quarter since September 2010 between April and June. However, a lack of IT companies and heavy weighting to oil & gas, along with Brexit-related concerns, meant UK shares lagged many other markets.
UK GDP growth was revised down to a 2.2% contraction in the first quarter, from an original estimate of a 2.0% fall. This represents the sharpest contraction in more than 40 years.
The Bank of England’s chief economist said the UK economy was undergoing a V-shaped recovery “so far” but said he was worried over the risk of a rapid rise in inflation.
The flash reading of June’s IHS Markit/Cips UK purchasing managers’ index (PMI) for services sector activity rose to 47.0 compared to 29.0 in May. The manufacturing PMI jumped to 50.1 in June from 40.7 in May. Both indices came in well above expectations. UK lockdown measures were further lifted on 3 July, with many hospitality businesses and hairdressers re-opening across England – although Leicester reverted to lockdown, with all non-essential businesses forced to close again due to a localised COVID-19 outbreak.
Royal Dutch Shell said it would cut up to $22 billion from the value of its assets as it warned that the pandemic would deal a lasting blow to demand for energy products.
Job losses surged as the furlough scheme started to wind down. Retailers John Lewis, Harrods and Arcadia Group announced job cuts, as did hospitality businesses. Airbus also said it was cutting 1,700 jobs in the UK as part of a 15,000 reduction in global headcount.

US
The S&P 500 jumped 4.0% over the holiday foreshortened week, having recorded their biggest quarterly gains since 1998 over the second quarter.
Central US states reversed re-opening plans as the numbers of new daily coronavirus cases hit records in Florida, Texas, Arizona and California. Apple closed some of its stores in affected states, while New York, New Jersey and Connecticut imposed a two-week quarantine on visitors from states with elevated infection rates.
Minutes of the latest FOMC meeting showed policymakers moved closer to providing detailed guidance on the future path of interest rates and asset purchases. Fed officials also discussed whether to control the yield curve, a policy last used during the second world war.
The Federal Reserve said it would cap US banks’ share repurchases and dividend payments until at least October, saying it required firms to keep money on hand to guard against the risks.as it warned that they could be hit by losses of up to $700bn in a severe downturn due to the COVID-19 pandemic. However, the week also saw the easing of post-2008 crisis rules that will make it easier for banks to invest in venture capital funds and free-up capital set aside for derivatives.
Non-farm payrolls rose by 4.8 million in June, helping the US unemployment rate to drop to 11.1%, from 13.3% in May.
The ISM manufacturing purchasing managers’ index jumped to 52.6 in June from 43.1 in May - the strongest reading since April of 2019. 

Europe 
The FTSEurofirst 300 rose 1.8% over the week, after delivering the strongest gains in 5 years in the second quarter. 
The flash estimate of the IHS Markit eurozone composite purchasing managers’ index (PMI) rose to 47.5 in June, up from 31.9 in May. Manufacturing activity rose to 46.9 in June, up from 39.4 in May, while the index for services climbed to 47.3 compared to 30.5 in May. 
The eurozone’s two largest economies reported better than expected improvements in sentiment. Germany’s composite PMI rose to 45.8 in June: while the index remained in contraction territory, it was the highest level since the coronavirus pandemic began. France’s composite PMI indicated a return to growth in activity at 51.3.
German retail sales surged 13.9% in May - up 3.8% year on year, as the lifting of lockdowns released pent-up demand. However, the country suffered an outbreak of COVID-19 infections at an abattoir which led to the re-imposition of local lockdowns.
German payments company Wirecard collapsed into receivership. At its peak, the company had been valued at €24 billion.

Japan 
The Nikkei 225 slid 0.9% over the week.

Pacific Basin
Chinese shares, as measured by the CSI 300, hit a five-year high after the Caixin/Markit services purchasing managers’ index surged to a 10-year high of 58.4 in June. This is up from 55 in May and compared to a trough of 26.5 in February. Manufacturing activity, as measured by Caixin/Markit rose to a stronger-than-expected 51.2 in June, from 50.7 in May - the highest reading since December 2019. The official manufacturing purchasing managers’ index unexpectedly rose to 50.9 in June compared to 50.6 in the previous month. This was the fourth straight month of increase in factory activity and the strongest since March.
Profits at large-scale Chinese industrial companies rose 6% year on year in May, after shrinking 4.3% in April, marking the first return to growth this year.
The city of Melbourne re-imposed lockdown measures due to a spike in new COVID-19 infections, yet Australian stocks posted their best quarterly returns since September 2009. New Zealand's benchmark index recorded its best quarter ever.

Emerging Markets
South Africa’s economy shrank 2.0% in the first quarter of 2020. The country’s finance minister warned that the nation is on the verge of a sovereign debt crisis if it does not control its debts. The South African economy is likely to contract more than 7% per cent this year, while its budget deficit projection for 2020/21 has more than doubled to about 15% of GDP.
Index provider MSCI warned that Turkey may be demoted to the status of “frontier” market, after a series of measures by local authorities made it harder for foreign investors to buy and sell assets.
Brazilian stocks delivered their best performance since 2003, while Mexican stocks were set for their best quarter since 2011.
Indian equities witnessed their best quarter since 2009, driven by strong overseas demand. 

Bonds
The yield on the 10-year US Treasury bond closed the week at 0.67%, while the 10-year German Bund yield ended at -0.44%.
Junk bond fund flows turned negative for the first time in 13 weeks, with investors withdrawing $3.4bn for the week ending July 1, according to data from EPFR Global.

Commodities
Gold surpassed $1,800 an ounce for the first time in more than seven years.

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