Market Overview 2020
The UK economy shrank by a record 20.4% in April as a consequence of the measures taken to control the coronavirus outbreak. This has essentially wiped out 20 years of economic growth in a single month. The UK economy is predicted to be hit hardest in the Western world due to its heavy reliance on services, which have been hit hard by lockdown measures.
The UK has been easing its lockdown over the past month and will fully exit on July 4th, with all shops and businesses allowed to operate again, albeit with continued social distancing measures
The Bank of England though decided to cut the pace of its bond purchases, a clear sign that it feels its response has been working so far and an encouraging sign for the UK economic outlook. Confirmation seemed to come from the PMI data, which showed the largest recovery on record from 30 in May to 47.6 in June, exceeding forecasts of 41.
Researchers in the UK identified the first drug to show lifesaving promise for severely ill Covid-19 patients. The drug, Dexamethasone, is a widely available and cheap steroid, and cut the risk of death by 35% in patients on ventilators and 20% in those receiving oxygen.
The European economy seemed to be staging a comeback with the eurozone PMI climbing to 47.5 from 31.9. Investors hoping for a so-called V-shaped recovery will be encouraged by this early data. European equities and the euro have performed strongly more recently off the back of the agreement to pursue some form of common fiscal policy in response to the coronavirus, with the EU agreeing a rescue package after months of protracted talks. Separately, the EU is continuing its travel ban on US residents and has said that it will not alter this until the US gets its outbreak under control.
One of Germany’s largest companies, Wirecard, has filed for insolvency after fraud was uncovered, with the CEO being arrested. The scandal envelops the firm’s auditor, EY, the regulator, and has caused concern regarding the firm’s third-party customers and the impact on client assets.
The US Federal Reserve began buying direct corporate bonds in July. This monumental step-up in its quantitative easing programme adds to an already extensive stimulus package and provides yet more support for risk assets. Trump has publicly announced his support for further stimulus to households (remember this is an election year) and the Federal Reserve are openly discussing the merits of yield curve control. A resurgence in pending US home sales by the most on record buoyed markets, indicating strong recovery in what is a key sector for the US economy.
A resurgence in the virus has caused concerns around the world and first emerged in the US, with Florida, Texas and now California recording large increases in new cases, adding to signs that the outbreak is actually worsening in some states. The initial response has been to reverse some lockdown easing measures. This may have huge consequences for the broader US economic recovery, particularly if this is to be a more prolonged policy response to the virus. Whilst positive progress has been made in New York, lockdown measures were tougher there.
In China a second wave of the coronavirus in Beijing has caused great concern. This is the first outbreak in a major city and the Chinese government have gone on to say they are unsure if they will be able to contain an outbreak here. Meanwhile the WHO is sending a team to China to study the origins of the outbreak. China on the whole looks well into recovery though, with business picking up again. Positive industrial company profits in June show progress in the Chinese economic recovery; the first such increase since November 2019.
China’s parliament has passed national security legislation for Hong Kong. The British government has previously said the measures violate China’s international obligations and its handover agreement, whilst the US has already imposed some trade restrictions on China in response.
Japan’s economy is posting worrying data as it recovers from the outbreak. Factory output fell 8.4% month-on-month in May to a level not seen since 2009 during a global supply rout in the financial crisis. Unemployment also increased with car production, a key cyclical indicator, decreasing. It will likely take a strong pickup in global demand to boost Japan’s export-heavy economy.
Please note: The opinions expressed in this update are those of A&J Wealth Management Limited only, as at the 2nd July 2020 and are subject to change. The update is for information purposes only.