Global Markets Update Monday, 7 September 2020

Posted on 07 Sep 2020

Global equities recorded their strongest August returns since 1986, with the FTSE All World Index surpassing its previous peak in February, propelled by a weaker US dollar and hopes of further fiscal and monetary stimulus. However, the start to September was weaker, with tech stocks suffering a notable reversal.

UK
The FTSE 100 fell 4.8% over the three weeks.
Both the UK and EU reported little, if any, progress in the Brexit negotiations.
UK inflation, as measured by consumer prices, rose 1.0% in July compared to the same month last year, an increase from the 0.6% rate in June.
UK retail sales grew 3.6% in July to reach pre-pandemic levels.
The IHS Markit/CIPS UK services purchasing managers' index surged to a five-year high of 58.8 in August, up from 56.5 in July. The UK manufacturing PMI reading rose to a 30-month high of 55.2 in August, up from 53.3 in July. However, the Bank of England warned that the “summer surge” in economic activity was unlikely to last as wage subsidies and tax deferrals end.
UK government debt exceeded £2tn for the first time and borrowing rose to its highest ever peacetime level.

US
The S&P 500 rose 0.6% over the three-week period. While the index started September by recording fresh highs, having risen more than 50% since its March low, a reversal in tech stocks meant the S&P suffered its first weekly loss in six weeks and the tech-focused Nasdaq suffered its worst weekly performance since March. Japanese giant SoftBank was revealed to have been partly the reason behind this year’s stellar rise in the FANG+ stocks.
Jay Powell indicated the Federal Reserve would allow inflation to run beyond its usual target range of 2.0% before it raises interest rates. The shift caused the US yield curve to steepen as it will mean lower benchmark interest rates for longer and a potential pick-up in long dormant inflation. In addition, minutes from the Fed’s July meeting indicated that policymakers were unwilling to control the yield curve by launching measures that would place a cap on Treasury yields.
The US economy added 1.4m jobs in August, helping the unemployment rate to fall to 8.4% from 10.2% in July. The better-than-expected report raised fears that it may deter Congress from acting quickly to pass another relief package.
The Conference Board’s index of US consumer confidence unexpectedly fell to 84.8 in August, the lowest level since the coronavirus crisis began, from a revised 91.7 in July.
Surveys of manufacturing activity by both the New York Fed and the Philadelphia Fed suggested the recovery in the regional factory sector eased in August.

Europe 
The FTSEurofirst 300 slid 1.7% over the three weeks.
The eurozone had slipped into deflation for the first time in four years. Headline consumer price inflation was -0.2% in August, compared to +0.4% in July. The news increased speculation that the European Central Bank would step up its asset-purchase programme. The ECB is also expected to cut its 2022 inflation forecast to reflect the deflationary impact of a stronger euro on the price of imports.
The flash estimate of the IHS Markit eurozone composite purchasing managers’ index fell to 51.6 in August, down from 54.9 in July. Activity in Germany and France remained above the key 50 level that separates expansion from contraction, while Spain and Italy dropped below it.
Eurozone retail sales fell 1.3% in July from the previous month. This was the first decline in three months. There were signs of a widening north-south divide in the pace of economic recovery, with sales in Germany, France and the Netherlands remaining above last year’s levels, while the Spanish, Portuguese and Greek retail sales continued to decline. 
As the contraction in German GDP over the second quarter was revised to -9.7% from an initial estimate of -10.1%, Germany’s government predicted the economy will recover faster than expected from the coronavirus pandemic, due mainly to the resilience of its labour market.
The Ifo index of German business sentiment rose to 92.6 for August, its highest level since February. 
Spanish banks Bankia and CaixaBank entered exploratory talks on a potential merger to create the country’s largest domestic lender, with total assets of more than €650bn.

Japan 
The Nikkei 225 eased 0.4% over the three-week period.
Shinzo Abe resigned as prime minister, citing health concerns. Mr Abe is Japan’s longest serving prime minister and his departure raises concerns that it may herald the end of his signature monetary and fiscal policy programme, Abenomics. Yoshihide Suga, chief cabinet secretary, is expected to take over as prime minister.
Japan’s economy shrank by a record 7.8% in the second quarter. While the decline in GDP was less severe than that seen in the US and Europe, the country lagged behind neighbouring South Korea and Taiwan where GDP contracted 3.3% and 0.7% respectively.

Pacific Basin
The Australian economy shrank 7.0% in the second quarter. Following the 0.2% contraction in the first three months of the year, the country has now entered its first recession in 28 years.
The People’s Bank of China injected Rmb700bn ($101bn) of liquidity into the financial system through its medium-term lending facility.
China’s official manufacturing purchasing managers’ index eased slightly to 51.0 in August, but the services PMI rose to 55.2 in August, up sharply from 54.2 in July.

Emerging Markets
Argentina successfully restructured almost all of its $65bn debt, ending its ninth default. The deal extended maturities on the debt and lowered interest rate payments from an average of 7% to about 3%.
Brazil entered a recession, with second-quarter GDP shrinking 9.7% on a quarter-on-quarter basis. 
India’s economy contracted by an annualised 23.9% in the second quarter. 
Turkey’s economy contracted 11% between March and June.

Bonds
The yield on the 10-year US Treasury bond closed at 0.69%, unchanged from its level three weeks ago, having risen as high as 0.75% following Jay Powell’s speech to central bankers. The threat of higher inflation was reflected in the widening gap between  yields on five-year and 30-year Treasuries, which rose to almost 125bps, the highest closing level since 2016, as shorter dated bonds rallied.
US corporate bond issuance over the first eight months of 2020 has already beaten previous full-year totals. So far this year, $1.919tn US corporate debt has been issued, surpassing the previous annual record of $1.916tn set in 2017, according to data from Refinitiv.
The yield on the 10-year German Bund ended at -0.48%, down 5bps over the three weeks. Germany sold its first ever green government bond. Proceeds from the sale of the 10-year issue will be earmarked for spending on environmental projects.
Yields on Greek bonds hit record lows with 10-year yields falling below 1.0%, due to their inclusion in the European Central Bank’s Pandemic Emergency Purchase Programme (PEPP). 

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