Weekly Market Update: Stocks climb on promising economic data

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Market Update

Stock markets rebounded last week, posting gains in both local currency and Sterling terms, with news that the Fed will be expanding its corporate bond buying programme sending stocks higher. The move from ETF purchases to individual bond issues by the Fed has been viewed as a significant QE development. The Pound depreciated versus other major currencies as no-deal Brexit uncertainty continued, while at the same time the UK economy is projected to see a steep contraction in output, with COVID-19 hitting demand hard in Q1 2020. European stocks were the best performers of the week, up +4.3% in Sterling terms, while UK and US stock markets returned +3.1% and +3.0% respectively. Globally, the best performing sectors were IT and Healthcare. UK Sovereign bond yields increased, with the UK 10 year gilt yield finishing the week at 0.24%. Gold was up +0.8% in US Dollar terms, while Oil rallied +9.6% on the back of positive economic data suggesting an imminent rebound in activity.

CIO Analysis

A host of data this week encouraged some economists to suggest a V-shaped recovery for the global economy. In the US, June industrial data from New York and Philadelphia, a May blowout US retail sales number (+18%) and stabilised industrial production (+1.4%), a rebound in the NAHB Realtor Index, a rebound in Chinese retail sales and fixed investments, as well as the best German ZEW Business Expectations Index since 2014 were enough for markets, primed with cheap cash, to start hoping for an economic rebound faster than originally expected. However, US unemployment numbers suggested that that pressures on jobs, which might affect consumption going forward, persist. A second reading of the data suggests that economic activity has been anchored at low levels. March was the month of the first downturns,April was the month of the sharpest drawdowns, May the month of deceleration of the downward trend and June was the month of stabilisation after three solid months of economic drawdowns. While the numbers last week were certainly encouraging, at this point they probably represent pent-up demand after the gradual lifting of the lockdowns –some of which are being partially re-imposed. The major question remains to be answered: what will “new normal” institutional and retail demand look like after the summer? Unemployment levels, the course of the virus, the breadth and efficacy of fiscal support, supply chain and travel constraints, the shape and direction of the Chinese rebound and general consumer mood will determine the shape of the recovery (U, V, W, L) or even the possibility of a further downturn. Which is why, while we would very slightly increase our probabilities for a V-shaped recovery after this week’s numbers, our base case scenario at this time remains a U (or W)-shaped tepid recovery. For investors this would mean that valuations are still probably rich, and current asset prices are mainly supported by unprecedented monetary accommodation. It follows that the main risk currently for investor portfolios is not the shape of the recovery, but fear that accommodation may be reduced from levels markets are comfortable with, a scenario especially possible if the economy emits false recovery signals.

David Baker, CIO

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