The Lowdown │ Global Markets to 26 July 2020

The Lowdown Global Markets to 26 July 2020

Published July 26, 2020


  • Global equity markets have delivered extraordinary returns since the end of March, but storm clouds are gathering.
  • US corporate earnings results and the Federal Reserve Bank’s predictions about the US economy will influence the markets over the coming weeks.
  • Covid-19 cases are on the rise in a number of countries, but governments and leading authorities remain committed to getting the world back to work.
  • Geopolitical tensions between the US and China increase, while a Brexit deal between the EU and the UK remains a long way off.
  • Gold and silver continue to shine as anxieties build over global equity markets, geopolitical risks and autumn jitters.
  • Central banks remain supportive of risk assets with further stimulus packages imminent. Europe and Asia are likely to attract more investor consideration.

Global Market Summary

Global equity markets have enjoyed an extraordinary recovery since 23 March, with the MSCI World Index rallying by over 43% in local currency terms. But as autumn approaches, the markets are likely to begin to focus more on the fundamentals and start reflecting the effects of the last sixteen weeks on the wider economy and corporate profits.
Over the past few months of the global lockdown, the appropriately named US Covid-19 stock index has delivered outstanding returns. These can mainly be attributed to US technology stocks that are made up of companies that develop solutions for remote working and new ways of enjoying leisure time, as well as healthcare companies and many other businesses providing services for the stay-at-home consumer.
Although one could conclude that these have simply been the right stocks to own during these unprecedented circumstances, many of these businesses were also valuable franchises before Covid-19.
From a fundamental perspective, the shares of many of these companies may have recently been somewhat overpriced. In the coming weeks, we are likely to find out two very important pieces of information: firstly, just how hard the economy crashed as the second-quarter gross domestic product numbers are released, and secondly, how corporate earnings have fared during these turbulent times.
We will also get to hear from the Federal Reserve Bank about its predictions for the economy and find out what the Senate Republicans are willing to do to keep the recovery on track as they unveil their proposed stimulus package.
It is therefore likely to be a critical week for the markets, as well as for many of those mega cap technology companies – such as Apple and Amazon – which will be publishing their second-quarter earnings figures. Just as important will be their forward guidance statements, which could give us some insight into how they see the rest of 2020 unfolding.
Most analysts are predicting an extremely bleak second quarter for both the economy and corporate earrings, followed by a bounce back in the third quarter. But the scale of the recovery could be directly impacted by two important factors: firstly, how much more stimulus Congress announces to aid the economy, and secondly, how much more coronavirus continues to impact businesses and economic activity – especially in light of the significant increase in new cases in the US.
Since the beginning of the pandemic and then as the global lockdown got under way, governments, central bank officials, economists and traders have endlessly debated the gloomy outlook for both the economy and corporate earnings. But in actual fact, the markets have reacted positively, possibly focusing more on the longer-term recovery and less on the short-term devastation.
It is expected that earnings for S&P 500 companies will fall by around 40% for the second quarter – based on the already-reported results of companies – with a decline of about 4% for the technology sector.
Incredibly, Wall Street’s NASDAQ Index has rallied to a record all-time high over the summer, while earnings numbers overall have also been relatively good. The basic challenge now is to justify the valuation on the market… and that will require positive corporate earnings support going forward.
The continuing increase in Covid-19 cases and fatalities around the world is obviously cause for concern (both increased dramatically in the US last week). However, they are still lower than they were in April. In the UK, face coverings are now compulsory in all retail outlets and banks, as well as on public transport (they may be removed to consume food and drink while sitting down, provided social distancing rules are adhered to).
There was good news for the UK’s struggling retail sector – sales jumped back almost to pre-pandemic levels in June, which was when non-essential stores reopened in England. But unemployment levels are expected to rise in the coming months once the government’s furlough scheme ends on 31 October 2020.
According to the John Hopkins University, 16 million cases of coronavirus have been reported worldwide, and 645,000 people have died. But although Covid-19 is still the most disruptive factor affecting the markets, the continuing deterioration of the relationship between the US and China will also have serious consequences – beyond the risk of tariffs. Last week, Beijing ordered the closure of the US consulate in Chengdu in retaliation for Washington’s decision to close down the Chinese consulate in Houston. Beijing described the move as “political provocation”, while US Secretary of State Mike Pompeo said the decision was taken due to China “stealing intellectual property”. Mr Pompeo also delivered a provocative speech likely to worsen US-China relations, stating that “if the free world doesn’t change Communist China, Communist China will change us”.
The US Justice Department has accused China of supporting hackers who are supposedly targeting laboratories developing Covid-19 vaccines: officials have charged two Chinese men who were allegedly spying on US companies conducting coronavirus research.
Here in the UK, travellers returning from Spain must now self-isolate for 14 days under the new coronavirus rules following an increase in cases in Catalonia and the north-eastern region. Numbers are also rising in France and Germany. Even South Korea has locked down the border city of Kaesong over fears of a defector who returned to North Korea with the virus.
In Europe, EU leaders have reached an agreement on a momentous coronavirus recovery package that will involve the European Commission borrowing vast sums. After many days of heated negotiations, Euro bloc heads of government agreed on a €750 billion package designed to fund a post-pandemic relief plan for the EU. The recovery fund centres on a €390 billion programme of grants to help the economically weakened member states.
Also this week, EU Brexit negotiator Michel Barnier said that the prospect of reaching a trade and security deal with the UK by the end of this year was “unlikely”, indicating that the UK was demanding “near total exclusion” of European fishing boats from its waters. The UK’s negotiator David Frost appeared to concur, emphasising that “considerable gaps [remained] in the most difficult areas”.
Following the events of last week, the global equity markets ended the five-day trading period lower, marred in uncertainty regarding next week’s corporate earnings reports, rising numbers of Covid cases and geopolitical jitters resulting from US-China tensions.
Gold and silver prices, however, remained robust: the former rose 5%, hitting a peak of nearly US$1906 per troy ounce (close to its record high of US$1921), while silver gained over 16% over the week. Anxiety over the rise in equity markets as autumn approaches (always an uncertain time for risk assets) and global investor speculation have pushed up precious metal prices in recent weeks.
As summer ends and autumn commences, investors will need to “climb the wall of worry”– there are still many issues which need to be addressed, not to mention the outcome of the forthcoming US presidential election. But as central bank policy continues to positively influence risk assets, equity markets are likely to remain investable. That said, Europe and Asia might become more attractive based on valuations, despite Wall Street maintaining its appeal.