Having crossed the halfway mark of 2020, the “rear-view mirror” will record the first six months of 2020 as one of the most fascinating and volatile periods for financial markets on record. With global equities having bottomed on the 23rd of March, the rebound witnessed in the 2nd quarter has been one of the sharpest in history.
Here are our views on what the second half of 2020 may have in store:
- There is currently a dislocation between asset prices the real economy;
- Whilst economies are still dealing with the devastating effects of COVID-19, financial markets are looking through this and focusing on unprecedented amounts of stimulus in the global financial system;
- The focus is now on countries reopening their economies after self-imposed recessions - until there is a vaccine this process will be gradual;
- As a result, it is becoming clearer that “U-shaped” recovery is a more likely outcome - a vaccine changes everything;
- A crisis tends to come from an unanticipated “shock” to the financial system - COVID 19 is now a visible risk;
- Investors equally sit with record amounts of cash, looking to buy risk assets like equities;
- As a result, markets may have reached a bottom but future volatility is still likely as visibility remains poor;
- November U.S. Elections and Sino-U.S. tensions are perhaps a larger looming risk for markets right now, and importantly;
- Remaining long-term focused according to your suitable risk profile remains the most sensible approach during this time.
Focusing our attention back to weekly news, the technology-heavy Nasdaq Composite Index reached new record highs, thanks in part to strong gains for “work from home” shares, such as Amazon.com, Apple, Facebook, and Netflix. Total confirmed COVID-19 cases in the U.S. crossed the 3 million mark, with global cases now standing at 12.5 million people. On Friday, Gilead Sciences announced a new study showing that remdesivir, its COVID-19 treatment, might reduce mortality rates in severely ill patients by nearly two-thirds. Earlier studies had demonstrated that remdesivir could only shorten hospital stays.
Major economic reports generally surprised on the upside this week. In the U.S., non-manufacturing Purchasing Managers' Index, a measure of business conditions, posted its biggest monthly gain and moved back into expansion territory. U.S. job openings in May also rose more than expected, while weekly initial and continuing jobless claims fell more than anticipated.
UK Finance Minister, Rishi Sunak pledged an additional GBP 30 billion to support employment, on top of the GBP 133 billion in coronavirus measures he has already unveiled. Meanwhile, Bank of England Governor Andrew Bailey warned banks in a letter last month, to be prepared for negative interest rates in the UK.
Finally, the European Commission slashed its economic forecasts for the EU, suggesting that the euro area would suffer a deeper-than-expected recession because of the COVID-19 crisis. It forecasts a contraction of 8.7% for this year, compared with an earlier forecast of a 7.7% contraction.
For the week, U.S. and Chinese markets were strong with the Dow Jones (+0.96%), S&P 500 (+1.76%), Nasdaq (+4.01%) and the Shanghai Composite Index (+7.31%) all comfortably in positive territory. Japanese and European markets were mixed with the Nikkei (-0.07%), Euro Stoxx 50 (+0.06%) and FTSE 100 Index (-1.01%) underperforming their U.S. and Chinese counterparts.
Market Moves of the Week
South African consumer confidence fell to a 35-year low in the second quarter of 2020, as restrictions kept all but essential workers at home and weighed on output. A quarterly index measuring sentiment fell to -33.0, compared with a level of -9.0 in the previous quarter.
Also worth noting that for the first time ever, South Africa is paying more to borrow in its local currency than Nigeria (with a credit rating that is four steps lower than South Africa, according to Moody’s Ratings Agency). Yields on South African rand bonds have climbed more than a percentage point since the beginning of June after the government boosted bond issuance to “plug” the fiscal deficit, forecast to increase to more than 15% of gross domestic product this year.
The JSE All Share Index (+1.64%) had another strong week, led higher by the resource (+4.68%) and financial (+3.18%) sectors. The industrial (-0.55%) sector was negatively impacted by a stronger rand, ending the week at R16.77 to the U.S. Dollar.
Chart of the Week
This week’s chart takes a look at the cumulative change in U.S. money market fund holdings (both retail and institutional) in the two years before and after the end of U.S. recessions in 2001, 2008-09 and 2020. What is evident is how quickly investors “ran for cover” into the safety of money market funds during the most recent 2020 recession triggered by Covid-19. As investors, we should remember the forward looking mechanism of financial markets, often causing wide dislocations between asset prices and the real economy.
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