Global Markets Update – Monday 3 August 2020

Coronavirus

UK

The FTSE 100 lost 4.7% over the week.

Prime Minister Boris Johnson pressed ‘pause’ on opening up the UK economy as the number of new infections picked up. Additionally, several areas in the north of England were placed under enhanced measures to control local spikes.

Lloyds Banking Group said it had put aside a further £2.4bn to deal with expected customer defaults.
US tech company Nvidia is in talks to buy Arm from SoftBank. The deal would value the UK chipmaker at more than $32bn.

US

The S&P 500 rose 0.7% over the week.

At its July meeting, the Federal Reserve left interest rates near zero and cautioned that “the economy will depend significantly” on the course of the coronavirus pandemic. Fed chair Jay Powell indicated that the pace of the recovery “looks like it has slowed” since Covid-19 cases began to rise again in June.

Republicans in the US Senate have proposed spending an additional $1tn on a coronavirus recovery plan. The plan includes $100bn for schools and issuing stimulus payments of up to $1,200 to most Americans, but it would reduce a $600 boost to unemployment benefits introduced during the pandemic. Democrats have put forward their own $3tn plan.

The US economy shrank by an annual rate of 32.9% between April and June, its sharpest contraction since the Great Depression.

Apple, Amazon and Facebook announced blowout second-quarter results, although Google’s parent Alphabet disappointed. Facebook’s revenue jumped by a far greater-than-expected 11%. Apple’s revenues rose 11%, despite the closure of many of its stores: iPhone handset sales grew 25% last quarter, despite an overall decline of 14% in the broader smartphone market. Amazon’s after-tax profits doubled to $5.2bn, while its revenue surged by 40%. However, Alphabet disclosed the first decline in sales ever reported by the internet group.

Europe

The FTSEurofirst 300 fell 3.1% over the week.

The eurozone economy shrank 12.1% in the second quarter, the biggest drop on record and following a decline of 3.6% in the first quarter. Spain’s economy was worst hit, with its GDP declining 18.5%; France suffered its largest contraction in output since the second world war, with its GDP falling 13.8% in the second quarter; Italy’s GDP fell 12.4%, the steepest contraction in 25 years. Germany’s economy contracted by a worse-than-expected 10.1% in the second quarter, the largest quarterly decline since records began in 1970.

The European Commission’s economic sentiment index climbed to 82.3 in July from 75.8 in the previous month.
The Ifo German business climate survey rose to 90.5 in July, up from 86.2 in June and the highest level since before the coronavirus hit growth at the start of the year.

Credit rating agency Standard & Poor’s raised it outlook on the EU’s credit rating to positive as the establishment of the region’s Recovery Fund enabled joint debt-raising capability. The move increases the chance that the EU could regain its top-notch triple A rating.

Japan

The Nikkei 225 fell 4.6% over the week.

Pacific Basin

China’s official manufacturing purchasing managers’ index rose to 51.1 in July, up from 50.9 in June and the fourth consecutive month that the index has risen.

Emerging Markets

South Africa was granted a $4.3bn loan from the IMF, the single biggest allocation of emergency financing from the fund yet for a pandemic-hit country.

Mexico’s economy contracted 17.3% in the second quarter. This is the fifth consecutive quarter of negative growth for the country.

Bonds

The yield on the 10-year US Treasury bond closed the week at 0.55%, while the 10-year German Bund yield ended at -0.53%.

US 10-year real yields breached -1.0%, a level only touched during the early part of March’s market turmoil and below where they were in 2012, when the Federal Reserve announced an open-ended bond-buying programme to suppress rates and stimulate economic growth.

Global corporate bond issuance slumped to $259bn in July, the smallest monthly issuance in 2020 – less than half the $529bn issued in June. The drop has been particularly pronounced for higher-rated, investment-grade companies in the US, which have sold $76bn of bonds this month, compared with four consecutive months above $200bn from March to June.

US junk bonds posted their best monthly returns since October 2011. The average junk bond yield fell 139 bps over the month to 5.46%, the biggest monthly drop since May 2009. In the investment-grade bond market, the average yield fell below 2.0%.

Currencies

The dollar index, which measures the currency against a basket of peers, slipped to its lowest level since May 2018.

Commodities

Gold rallied to an all-time high of just under $2,000 an ounce. The metal has risen 11% in July, its best month since 2016.