Risk assets experienced a week of panic selling on fears of a second wave of COVID-19.
Economic data continued to highlight that the world is far from where it was prior to the pandemic.
- Sentiment turned negative last week with global equities suffering their worst weekly decline since March, as investors appeared to realize recent gains.
- Recent hopes of a quicker global economic recovery were offset by a downbeat update from the US Federal Reserve and concerns of a spike in the number of new coronavirus infections worldwide, a day after the WHO warned that the pandemic was “far from over”.
- Hopes of a ‘v-shaped’ recovery faded, prompting cyclical stocks to retrace much of their recent gains versus growth stocks.
- Financial stocks came under pressure as analysts evaluated the likely impact on profitability of the continuation of low interest rates, while in Europe bank stocks after lenders were asked by a financial watchdog to delay dividend payments until at least next year.
- Travel stocks, which are highly sensitive to renewed health concerns, led the market declines on both sides of the Atlantic.
- Oil prices fell over concerns about oversupply against a backdrop of falling demand for fuel, and following the Fed’s pessimistic outlook for the US suggesting that interest rates would remain near zero throughout 2022.
- • Government bonds and other haven assets such as Gold rallied as investors sought safer parts of the market. The switch in sentiment to ‘risk-off’ also halted the recent sell-off in the US dollar.
- It was a busy week in terms of economic updates, all of which continued to paint a very gloomy picture.
- The OECD forecast that the global economy will contract 6% in 2020, and if a second wave of the virus is avoided. The Paris-based group said rich countries face a disappointing recovery from the historic downturn, which would leave deeper scars than any peacetime recession in the past 100 years.
- Fed chair, Jay Powell, delivered a downbeat message in the latest update from the US central bank, which reinforced its dire assessment of the country’s economic prospects for the coming years. In its first economic projections since December, Fed officials estimate that by 2022, the US will still be facing 5.5% unemployment, far higher than pre-coronavirus levels, with core inflation at 1.7%, still below its target of 2%.
- Crucially, the forecasts show that almost all top Fed officials expect interest rates to be kept close to zero through to the end of 2022 – offering not the slightest hint of early tightening.
- France’s central bank estimated that output this year would contract by 10%, adding to gloomy forecasts by other big regional economies.
- Germany’s trade surplus narrowed sharply in April as exports dropped more than imports. Exports slumped 31.1% due to lower sales to the EU and third-party countries, such as the UK. Imports fell 21.6%.
- Eurozone industrial output slumped 17.1% m/m in April, following an upwardly revised 11.9% fall in March, but did come in slightly better than the 20% drop anticipated by economists.
- The UK economy shrank at the fastest monthly rate on record in April as the coronavirus lockdown hit demand and activity in all sectors. UK GDP shrank by 20.4%, the largest drop since figures began in 1968, with the sharpest fall in transport equipment such as car production, which fell by 28.3%. Pharmaceutical production was the only manufacturing sub-sector to register an expansion, with 15.4% growth.
- Brexit talks between London and Brussels gained some momentum but look to end with only a minimal agreement ahead of the fast-approaching end-December deadline.
- Data from Japan revealed that orders for machinery in May fell the most in more than a decade.
- Finally, in China, producer prices declined by 3.7% y/y in May, following a 3.1% drop in April, and surpassed consensus for a 3.3% fall. The annual inflation rate fell to 2.4% in May, down from 3.3% in April, and came in below market consensus of 2.7%.
The Week Ahead
|Monday||China industrial production; China retail sales|
|Tuesday||US retail sales; UK unemployment; Japan BoJ policy rate|
|Wednesday||Europe CPI; UK CPI |
|Thursday||Bank of England base rate|
|Friday||UK retail sales; Japan CPI|
|FTSE All Share
|Dow Jones Industrial
|FTSE Eurofirst 300
|MSCI Asia ex Jap $
|MSCI EM $
|MSCI World $
|UK Gov 10 yr
|US Gov 10 yr
|German Gov 10 yr
|Japan Gov 10 yr
|Brent Crude ($/bbl)
|$ per £
|€ per £
|¥ per $
Source: FE Analytics, Financial Times, JP Morgan Asset Management
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