A selection of articles looking back through the markets last month.
Global Market Review
The other “R” number … Recession
Early in July, investors were buoyed by news of progress in the development of coronavirus vaccines. However, as the month continued, optimism was tempered by a surge in infection rates in countries including the US, Australia, Spain and India. Investor sentiment was further dampened as the strained relationship between China and the US continued to deteriorate.
“The US slipped into recession during the second quarter”
Against a backdrop of renewed uncertainty, nervous investors scrambled for the traditional safety of gold, pushing its price to new all-time highs. According to the World Health Organisation (WHO), over 17.1 million cases of Covid-19 had been diagnosed worldwide by the end of July, with more than 668,000 deaths recorded.
In the UK, parts of northwest England were placed under fresh restrictions following a surge in Covid-19 cases, and the easing of lockdown restrictions on some businesses and activities was postponed. Meanwhile, concerns over an increase in cases in north-eastern Spain spurred the UK government to amend its travel advice, driving down the share prices of UK travel, leisure, and airline companies. The FTSE 100 Index fell by 4.4% during July.
The US slipped into recession during the second quarter, and the economy contracted by 32.9% as activity was curbed by lower consumer spending and a sharp increase in Covid-19 cases. Although the economy is expected to rally in the third quarter, the intensifying surge in infections could undermine its recovery. Consumer confidence weakened in July amid signs that the labour market is under pressure. The Dow Jones Industrial Average Index rose by 2.4% over the month.
Europe also entered recession: the eurozone’s GDP shrank at a record rate of 12.1% in the second quarter, and the economies of Germany, France, Italy, and Spain all notched up double-digit contractions during the period. In particular, Germany’s economy was affected by a sharp decline in import and export activity. The Dax Index experienced a choppy month, but ended July broadly unchanged, while the CAC 40 Index fell by 3.1%. Elsewhere, European leaders finally agreed on an EU recovery fund worth €750 billion.
In Asia, the economies of South Korea and Singapore slid into recession during the second quarter; in comparison, Japan had already entered recession in the first three months of the year. China bucked the trend, however, avoiding recession by posting annualised economic growth of 3.2% during the second quarter.
Asia & Japan Market Review
Recovery remains far off
Bank of Japan (BoJ) Governor Haruhiko Kuroda warned during June that a second wave of COVID-19 infections could cause “considerable” harm to Japan’s economy. He emphasised the importance of ensuring corporate financing whilst remaining vigilant towards the growth expectations – and hence the confidence – of businesses and consumers.
“The Australian economy is going through a very difficult period” (RBA Governor Philip Lowe)
Economic recovery remains far off for Japan at present, according to IHS Markit. Although COVID-19 restrictions have eased, there are no signs of “robust recovery” in the offing, and the risk of a “second wave”, combined with a weak global trade backdrop and ongoing international travel restrictions are likely to hamper economic recovery and growth.
The Nikkei 225 Index rose by 1.9% during June but fell by 5.8% over the first half of the year. Elsewhere, the broader-based Topix Index declined by 0.3% over the month and by 9.4% over the year to date. In comparison, the TSE Second Section Index – which is more exposed to medium-sized Japanese companies – climbed by 7.2% during June and declined by 9.3% over the first six months of the year.
Activity picked up in Australia during June, according to IHS Markit, but the upturn proved insufficient to prevent the country from slipping into recession during the second quarter. Australia had already posted negative growth of -0.3% in the first three months of the year following a wave of devastating bushfires.
Governor of the Reserve Bank of Australia Philip Lowe said: “The Australian economy is going through a very difficult period and is experiencing the biggest economic contraction since the 1930s … it is likely that this fiscal and monetary support will be required for some time”. Meanwhile, RBA Deputy Governor Guy Debelle warned that Australia’s economy is likely to require “considerable” support for some time to come and called on the country’s government to continue its fiscal stimulus beyond September. Cases of COVID-19 spiked in Victoria towards the end of the month, and the ASX All Ordinaries Index rose by 2.2% during June, having fallen by 11.8% over the first six months of the year.
Investor sentiment around the world was rattled as China passed a controversial new national security law that gives it sweeping new powers over Hong Kong. The Hang Seng Index rose by 6.4% during June but declined by 13.3% over the first half of the year.
Emerging Markets Review
China sidesteps recession
While other countries confirmed their slide into recession in July, China’s economy managed to buck the trend, notching up annualised growth of 3.2% in the second quarter after a first-quarter contraction of 6.8%. Over the first half of the year as a whole, the country’s economy shrank by 1.6%. Investors were heartened by better-than-expected trade data: exports rose at an annualised rate of 0.5% in June and imports climbed by 2.7%. China’s industrial production rose at an annualised rate of 4.8% in June, representing its third straight month of growth. The Shanghai Composite Index increased by 10.9% over July.
“Once in a lifetime events” seem to be more frequent than even “once in a decade” (RBI Governor Das)
China’s services sector grew at its fastest rate in over a decade during June and new orders rose at their most rapid pace since 2010, boosting optimism that the economy will continue to rebound from the coronavirus pandemic. According to the Caixin Services PMI for June, business confidence improved to a three-year high; however, the employment backdrop remains weak, raising questions over the outlook for consumer spending. Having fallen by 2.8% in May, retail sales fell at an annualised rate of 1.8% in June, representing their fifth consecutive month of decline.
Brazil’s economic activity rallied during June after steep declines in April and March. The IBC-Br Index rose by 1.31% in May following a drop of more than 9% in April. On an annualised basis, economic activity fell by 14.24%. Although Brazil continued to grapple with the impact of the coronavirus pandemic – with more than 2.5 million cases diagnosed and over 90,000 deaths – the Bovespa Index rose by 8.3% during July.
Governor of Reserve Bank of India (RBI) Shaktikanta Das warned that the outlook for India’s economy is still uncertain: supply chains are not fully restored and demand conditions have yet to normalise. Meanwhile, the long-term impact of the pandemic on India’s economy remains unclear. Governor Das also observed that the global financial crisis, coupled with the Covid-19, have dispelled any belief that shocks to financial systems are rare. He observed: “Shocks to the financial system dubbed as ‘once in a lifetime events’ seem to be more frequent than even ‘once in a decade’”, and highlighted the necessity for financial institutions to have more substantial financial buffers in order to absorb the impact of economic crises. The CNX Nifty Index rose by 7.5%.
Europe Market Review
Europe enters recession
The eurozone’s economy slid into recession, shrinking by a record 12.1% during the second quarter following a first-quarter contraction of 3.6%. Between April and June, France’s and Italy’s economies shrank by 13.8% and 12.4% respectively, while Spain was hard-hit, posting a second-quarter contraction of 18.5% following a first-quarter decline of 5.2%. The World Health Organisation (WHO) reported that over 285,000 cases of Covid-19 had been diagnosed in Spain by the end of July, with more than 28,000 deaths recorded.
Germany’s economy is recovering “step by step”
Germany’s economy also slipped into recession during the second quarter of 2020 as the country suffered a “massive slump” in exports and imports, and also in household spending and investment in machinery and equipment. Germany’s economy contracted by 10.1% during the second quarter, having previously shrunk by 2%. Nevertheless, Germany’s economy is recovering “step by step”, according to the Ifo Institute’s Business Climate Index, which reported that sentiment amongst German companies continued to improve in July. Companies were “notably more satisfied” with their current business situation and are “carefully optimistic” towards coming months. The Dax Index ended July broadly unchanged, while the CAC 40 Index fell by 3.1%.
Although activity in the eurozone improved during June – reaching a four-month high – underlying demand remained weak. A survey by IHS Markit found that output in manufacturing and services remained in decline, while incoming new business continued to fall.
The European Commission (EC) expects the region to experience a “deep” recession this year, warning: “the economic impact of the lockdown is more severe than we initially expected”. The eurozone is forecast to contract by 8.7% in 2020, compared to an earlier prediction of 7.7%, before rebounding to growth of 6.1% in 2021. However, the impact of the pandemic and the strength of recovery is set to vary from one member state to the next, and this variation is likely to be more pronounced than previously anticipated.
The European Central Bank (ECB) reported that its €1.3 trillion economic stimulus measures were “effective … adequate and … working” during the month. ECB President Christine Lagarde expects to use the “entire envelope” of its Pandemic Emergency Purchase Programme (PEPP) “unless there are significant upside surprises”. President Lagarde warned: “uncertainty about the overall scale and speed of the rebound remains high … the balance of risks to the euro area growth outlook remain on the downside”.
UK Bond Market Review
Mounting fears over UK jobs
Gilt yields continued their decline during July, driven down by concerns over the prospect of a “second wave” of coronavirus cases. The yield on the ten-year gilt fell from 0.17% to 0.11% over the month.
“The UK economy is not expected to recover to pre-pandemic levels until around the end of 2022”
Having contracted by 6.9% in March and 20.3% in April, the UK economy expanded by 1.8% in May as lockdown measures began to ease. Manufacturing grew by 8.4% during the month, while construction grew by 8.2%. Between February and May, the economy shrank by 24.5%. The British Chambers of Commerce (BCC) observed that May’s rally was likely to reflect “the partial release of pent-up demand … rather than evidence of a genuine recovery”.
Looking ahead, Bank of England (BoE) policymaker Silvana Tenreyo predicts the UK economy will undergo an “interrupted or incomplete V-shaped trajectory”, hampered by ongoing risk aversion and social distancing, alongside higher unemployment. Elsewhere, appearing in front of the Treasury Select Committee, BoE Chief Economist Andy Haldane said that the UK economy had “clawed back” about half of the 25% fall in activity it experienced in March and April, although the unemployment rate may have reached around 6% by the middle of July.
The UK’s unemployment rate remained unchanged at 3.9% in the three months to June, shored up by the Government’s furlough scheme. However, the number of UK payroll employees fell by 649,000 over the quarter, while job vacancies plunged by more than 58%. The Office for Budget Responsibility (OBR) has forecast that between 10% and 20% of furloughed workers will lose their jobs once the scheme ends, and the UK economy is not expected to recover to pre-pandemic levels until around the end of 2022 – although under the OBR’s worst-case scenario, this could stretch to 2024. Meanwhile, the Organisation for Economic Cooperation & Development (OECD) warned that the UK’s rate of unemployment is likely to reach 11.7% towards the end of this year and could rise as high as 14.8% if the UK experiences a second wave.
Government debt reached record levels between April and June, rising to £1.98 trillion. The Government borrowed £127.9 billion between April and June, more than twice the £55.4 billion borrowed in the whole of the previous financial year. Debt at as a percentage of GDP was 99.6% at the end of June, representing the highest debt-to-GDP ratio since the financial year ending in March 1961.
UK Equity Market Review
Uncertainty hits UK share prices
Share prices in the UK generally fell during July amid mounting concerns over the impact of a possible coronavirus “second wave”. An increase in infection rates in north-west England led the Government to impose new localised restrictions, while a surge in cases in north-east Spain prompted the Foreign & Commonwealth Office to amend its travel advice. The FTSE 100 Index fell by 4.4% during July, while the FTSE 250 Index declined by 1.5%. According to the World Health Organisation (WHO), over 302,000 cases of Covid-19 had been diagnosed in the UK by the end of July, with almost 46,000 deaths recorded.
“UK quoted companies issued 165 profit warnings during the second quarter”
During the month, the Chancellor of the Exchequer announced the Government’s Summer Economic Statement, which focused on supporting the labour market against the impact of the pandemic. Measures included a “Kickstart” scheme to fund traineeships and apprenticeships, and a temporary cut in VAT on food, accommodation, and attractions. According to credit ratings agency Fitch, however, the Chancellor’s announcement “underscores how the pandemic will keep upward pressure in the UK and elsewhere”. As a result, Fitch downgraded its prediction for the UK’s economic growth in 2020 from -7.8% to -9%. The UK economy shrank by 24.5% between February and May, but expanded by 1.8% during May itself, boosted by growth in the manufacturing and construction sectors.
UK quoted companies issued 165 profit warnings during the second quarter, according to EY, representing an annualised increase of 139%. Over the first six months of the year, one-third of companies cut their forecasts, with 84% citing the impact of the pandemic. The FTSE sectors issuing the most warnings in the second quarter were industrial support services with 17 warnings, media with 11 warnings, and ten warnings each from oil, gas & coal, investment banking & brokerage, and software & computer services. Looking ahead, EY believes that the pace of profit warnings should ease this summer; nevertheless, pressure on earnings is set to remain, and insolvencies are on the rise.
There appeared to be little progress in Brexit talks between the UK and EU during July. Michel Barnier, the EU’s chief negotiator, warned that an agreement appeared “unlikely”, citing the UK’s reluctance to “break the deadlock” on competition rules and fisheries. He urged both parties to reach a deal by October to ensure it can enter into force by 1 January.
UK Equity Income Market Review
UK dividends dive in Q2
UK share prices continued to fall during July as investors’ worries about the possibility of another wave of coronavirus infection were exacerbated by localised spikes in Leicester and the north-west of England, alongside surges in the US, Spain, and Australia.
“UK dividends suffered their worst-ever quarterly drop during the second quarter of 2020”
Retail sales rose by 3.4% during June, according to a survey undertaken by the British Retail Consortium (BRC) and KPMG, posting their first monthly increase since lockdown, and their strongest monthly performance since May 2018. Nevertheless, retailer and FTSE 100 constituent JD Sports announced that it will not pay a final dividend, warning that many consumers remain too nervous to visit shopping centres. Elsewhere, having previously cancelled its interim payout, packaging company DS Smith scrapped its full-year dividend, citing “unprecedented uncertainty”.
UK dividends suffered their worst-ever quarterly drop during the second quarter of 2020, according to Link Asset Services’ Dividend Monitor. A total of £16.1 billion was paid out, representing an annualised decline of 57.2% compared with the same period of 2019. 176 companies cancelled their dividends during the second quarter, with a further 30 firms cutting their payouts as companies hastened to shore up their balance sheets. Link commented: “The whole of 2020 will, without doubt, see the biggest hit to dividends in generations”. Under Link’s “best case” scenario, UK dividends are set to fall by 39% this year to £60.5 billion, and it could be 2026 before they return to pre-Covid levels. On a brighter note, Link believes that the crisis could provide companies with “an opportunity to reset their dividends at a “lower, more sustainable level” that, in the longer term, could result in healthier businesses.
The FTSE 100 Index fell by 4.4% during July, while the FTSE 250 Index declined by 1.5%. Since the beginning of the year, the best-performing FTSE industry sectors were leisure goods, technology hardware & equipment, pharmaceuticals and biotechnology, and electronic & electrical equipment. In contrast, the worst-performing sectors included oil & gas, banks, travel and leisure, and aerospace & defence.
The yield on the FTSE 100 Index rose from 4.81% to 5.03% in July, while the FTSE 250 Index’s yield eased from 3.88% to 3.83% over the month. In comparison, the yield on the benchmark UK gilt fell from 0.17% at the end of June to 0.11% at the end of July.
US Market Review
US economy suffers record contraction
The US fell into recession during the second quarter as activity was curbed by a decline in spending and a surge in Covid-19 cases. Having shrunk by 5% in the first three months of 2020, the country’s economy contracted by 32.9% during the second quarter. Imports and exports fell at an annualised rate of around 22.1% and 23.7% respectively over the period, while consumer spending declined by 10.7%.
“The strained relationship between China and US deteriorated further”
Although the US economy is expected to return to growth during the third quarter, the current spike in Covid-19 cases could derail an economic rally. According to the World Health Organisation (WHO), almost 4.4 million cases of Covid-19 had been diagnosed in the US by the end of July, with more than 150,000 deaths recorded. Many states opted to restore restrictions during the month, triggering disagreements between President Trump and individual districts about school reopenings. Elsewhere, the strained relationship between China and US deteriorated further over US opposition to China’s intensifying control over Hong Kong and the closure of China’s Houston consulate.
Despite the ongoing uncertainty, investors welcomed promising results from early Covid-19 vaccine trials. The Dow Jones Industrial Average Index rose by 2.4% over the month, while the S&P 500 Index climbed by 5.5%, and the Nasdaq Index increased by 6.8%. During July, the best-performing S&P industry sectors were consumer discretionary, utilities, and materials; in contrast, energy was the only sector to end the month in negative territory.
Credit ratings agency Fitch warned that the recent sharp increase in Covid-19 cases could weigh on the pace of economic recovery during the third quarter, as delays to reopening and renewed social distancing measures disrupt business activity. Meanwhile, S&P Global Ratings urged the country’s leaders to introduce further stimulus measures to support the economy.
Federal Reserve (Fed) Chair Jerome Powell warned that the current economic slowdown was “the most severe in our lifetimes” and further monetary and fiscal support is likely to prove necessary. Looking ahead, the Fed believes that the economic path is likely to hinge on the development of the virus, and the measures taken to keep it in check.
Consumer confidence deteriorated in July, according to the Conference Board, as the labour market showed signs of pressure. More than 1.4 million people filed new claims for unemployment in each of the last two weeks of the month.