Weekly Report

18.05.2020
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US-China tensions and virus flare-ups take their toll on global equity markets.

Economic data continues to illustrate the extent of the damage caused by the action to halt the coronavirus pandemic.

Markets

  • Global equity markets painted a mixed picture at the start of the week over news reports of some flare-ups of coronavirus cases in South Korea, China and Germany. This highlighted the immense challenge faced by authorities seeking to loosen social restrictions and restart their economies, unnerving investors over how sustainable the reopening of economies is at present.
  • European stocks began the week by retreating, with travel and leisure companies leading the way following the UK government’s announcement that it is considering imposing a 14-day quarantine period on air arrivals in the UK. This was quickly followed by Spain, which announced that it would follow suit.
  • In the US, stocks struggled to gain any traction and there was a marked sell-off as investors tried to fathom the likely pace of the economy reopening. Each of the three primary US indices retreated with even stocks poised to benefit from the economy reopening – retail, real estate, banks and airlines - pulling back.
  • The gloomy mood was not helped by a warning from the US Federal Reserve over the ‘lasting damage’ being inflicted by the pandemic on the world’s largest economy. The Fed chair, Jay Powell, warned that the US risks an ‘extended period of low productivity growth and stagnant incomes’. He also suggested that additional fiscal support may be ‘worth it’ to shield the US economy.
  • By mid-week, global stock markets were well and truly in retreat, with Wall Street heading for its third consecutive session of falls following news that a further 3m Americans had filed for unemployment benefits in the previous week, taking the total to 36m in eight weeks.
  • The week ended with global stock markets having posted broad spread losses as optimism linked to the easing of lockdowns was tempered by flare-ups in virus infections, and an escalation in the war of words between the US and China.
  • Unsurprisingly, the worry displayed in the global equity markets resulted in safe-haven assets registering a positive week. Sovereign bonds and gold were in demand as tensions rose following President Trump’s order that the US government’s main pension fund should not invest in Chinese stocks, in retaliation for Beijing’s handling of coronavirus. US Treasuries’ yields were squeezed further with the benchmark 10-year sliding at one point to 0.61%, and gold prices rose by more than 1% to $1,732 an ounce, nearly a seven-year high.
  • Oil prices rose on the week as Middle East countries began to apply cuts to production levels and following signs that demand was recovering as economies begin to reopen, with Brent crude, the international benchmark, climbing to $32.16pb.

Economics

  • The London Business School issued a survey report which showed that UK household spending fell by as much as 40% in April, suggesting a deeper downturn than had been predicted in the previous week by the BoE.
  • Meanwhile, Rishi Sunak, the UK’s chancellor, announced that he is to extend the government’s flagship job retention scheme until the end of October, prolonging a programme that has supported more than 7m jobs at a cost that could be as much as £80bn.
  • The FT calculated, based on the Office for Budget Responsibility’s recent analysis, that should the UK economy stay weak until the autumn, the total additional borrowing to finance the Covid-19 support measures and offset lost tax revenues could exceed £350bn.
  • According to the ONS, the UK economy shrank at the fastest monthly pace on record in March as the coronavirus lockdown triggered a slump in activity and demand. GDP fell 5.8% compared with February, and in the first quarter declined by 2% compared with the previous quarter. Output in the services sector which accounts for 80% of the economy fell 1.9% in Q1, with the sharpest falls seen in travel, accommodation and air transport as the lockdowns took effect.
  • However, the UK fared better than the eurozone, which contracted 3.8% in Q1, largely reflecting the later start to the UK lockdown. In the US, output fell 1.2%.
  • German GDP shrank by 2.2% in the first quarter compared to the final three months of 2019. The numbers are expected to get worse before they get better with the German Statistical Office forecasting a 10% plunge in GDP for the second quarter, dependent on the success of lifting lockdown measures.
  • Despite the steep downturn, Europe’s largest economy has fared better than France and Italy, which posted first-quarter contractions of 5.8% and 4.7% respectively.
  • The value of sterling sank by 0.8% against the dollar to $1.2120, its lowest level since March, after the UK’s chief Brexit negotiator said that ‘very little progress’ had been made in the latest round of UK-EU negotiations.
  • In the US, core consumer prices, an underlying measure of inflation, fell in April by the most on record as lockdowns weighed on demand for everything from fuel to clothing and airline fares. Core CPI, which excludes volatile items such as food and petrol, fell 0.4% in April from the previous month, the largest monthly decline on record since 1957, the labour department confirmed yesterday. Core price pressures are up 1.4% on a year ago.

The Week Ahead

MondayJapan GDP
TuesdayUK Average weekly earnings; UK unemployment rate
WednesdayEurozone consumer confidence; UK CPI
ThursdayJapan composite PMI; UK composite PMI; US manufacturing PMI; US services PMI
FridayEurozone manufacturing PMI; Eurozone services PMI; Japan CPI

Index Data

Stock Markets May 15 May 08 % Change
FTSE 100 5800 5936 -2.29%
FTSE All Share 3189 3271 -2.51%
S&P 500 2833 2922 -3.02%
Nasdaq Composite 8885 9112 -2.49%
Dow Jones Industrial 23459 24246 -3.24%
FTSE Eurofirst 300 1283 1332 -3.68%
Xetra Dax 10482 10904 -3.87%
Nikkei 20037 20179 -0.70%
MSCI Asia ex Jap $ 597 602 -0.92%
MSCI EM $ 901 897 0.44%
MSCI World $ 2000 2026 -1.29%
Bond Yields May 15 May 08 Bps Change
UK Gov 10 yr 0.22 0.24 -2
US Gov 10 yr 0.64 0.68 -4
German Gov 10 yr -0.54 -0.54 0
Japan Gov 10 yr -0.01 -0.01 0
Commodities May 15 May 08 % Change
Brent Crude ($/bbl) 32.34 30.25 6.91%
Gold ($/oz) 1731.60 1704.05 1.62%
Copper ($/lb) 2.33 2.41 -3.32%
Currencies May 15 May 08 % Change
$ per £ 1.213 1.245 -2.57%
€ per £ 1.121 1.145 -2.10%
¥ per $ 107.305 106.430 0.82%

Source: FE Analytics, Financial Times, JP Morgan Asset Management

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