Market Overview August 2020

UK

Data from the Office of National Statistics showed gross domestic product fell 19.1% in the three months to May – a record decline. The UK economy has since picked up and returned to growth, but not by enough to counter the previous contractions.

In early July chancellor Rishi Sunak announced an additional £30bn stimulus package aimed at getting the economy through the worst of the recession. Fears were mounting that, as the furlough scheme begins being phased out and employers have to start paying National Insurance again, there would be a wave of job losses. The measures include directly paying for people’s meals out to stimulate the hospitality sector, cutting VAT from 20% to 5%, and eliminating stamp duty altogether on homes up to a value of £500k.

Brexit negotiations are continuing with both sides seemingly willing to get a deal done but neither prepared to back down on their key negotiating demands.

Eurozone

EU leaders have been meeting to further discuss the €750bn coronavirus rescue package, with more frugal states still arguing for a reduction in the size of the programme, and Germany’s Angela Merkel becoming increasingly frustrated at the delay. In what French President Emmanuel Macron has called the most important moment for Europe since the creation of the euro, it seems they have now, finally, managed to agree amongst themselves. The package splits between low interest loans, worth with around €360bn, and grants of €390. This is a major win for the European Union and sees the first such common fiscal policy for the bloc.

Confirmation of this deal has sent Eurozone assets soaring against global counterparts and in particular the US, with both the Stoxx index of largest shares and the euro outperforming over the past month. This is a marked change from the previous decade as European assets have consistently underperformed their US counterparts. If the EU continues to move towards common fiscal policy, this will most likely continue to be positive for eurozone assets.

US

The coronavirus outbreak in Florida was recently described as ‘out of control’ by senior politicians. Whilst infection numbers have since appeared to stabilise somewhat, the US is still struggling to contain what is the worst outbreak in the world. It appears the American lockdown strategy of last in first out has failed to adequately deal with the contagion.

GDP figures out of the US made for some grim reading, showing the economy to have contracted by an annualised rate of 32.9% in Q2, the worst quarter since the second world war. This came alongside data showing another 1.43 million Americans filed for unemployment benefits, the second consecutive week of rises after a four-month decline. Economists expect these numbers to improve sharply in Q3 and beyond as lockdown measures are retracted and the economy gets back up and running, though this must be tempered with the reality that, until a vaccine/cure is found, economic activity will likely remain below pre-virus levels.

US Big Tech earnings however seemed to shrug the bad news off and continues to demonstrate resilience to the downturn in economic activity. The FAANG index of tech companies is up nearly 30% year-to-date as investors bet these companies will benefit from the cultural shift towards online living.

Asia

The US has now confirmed that it has ended Hong Kong’s special status and will now treat it like mainland China. There will also be sanctions on officials responsible for the clampdown in the city – yet further deterioration in the relationship between China and the West. The UK has indefinitely suspended its extradition treaty with Hong Kong. Japan meanwhile is setting up special terms to accept investment funds that run into trouble due to the civil unrest, as it looks to lure business away from Hong Kong.

Tensions between the UK and China have taken a turn further as the UK government decided that Chinese tech firm Huawei no longer be allowed to provide 5G infrastructure and will be banned from any future involvement, whilst ordering that all existing 5G infrastructure provided by the firm be removed from the UK by 2027. Security concerns were cited, although it is likely pressure from the US played a large part in the decision, with US Secretary of State Mike Pompeo praising the decision in a recent visit to the UK.

Please note: The opinions expressed in this update are those of A&J Wealth Management Limited only, as at the 3rd August 2020 and are subject to change. The update is for information purposes only.

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