VIDEO: Market Snapshot July 2020
Our Market Snapshot provides an overview of key events that influenced financial markets over the course of July 2020.
The month of July saw an extension of the global financial markets recovery, with investor optimism growing over the development of a vaccine for COVID-19 despite the worsening of infections in large economies like the US, Japan and Brazil, among others. Stock markets also appeared to take heart from further stimulus measures announced by governments and some good news from the Chinese economy, as did global bond markets. However, with some countries forced to renew some shutdown measures due to the resurgence of “second waves” of the pandemic, the outlook for economic growth remained uncertain. A weaker US dollar also helped drive asset prices for the quarter. In South Africa, the worsening of the virus weighed on market sentiment, although a strong Resources sector underpinned equity returns.
Looking at global equity market returns (all in US$), the MSCI All Country World Index returned 5.3% for the month. Emerging markets outperformed developed markets, with the MSCI Emerging Markets Index returning 9.0% and the MSCI World Index delivering 4.8%. The Bloomberg Barclays Global Aggregate Bond Index (US$) returned 3.2%, while the EPRA/NAREIT Global Property REIT Index (US$) produced 3.4%.
The spot price of Brent crude oil closed July 5.2% higher from the previous month at around US$43 per barrel. Precious metals prices continued their rising trend, with gold gaining 11.5%, platinum up 11.9% and palladium rising 10.1%, while industrial metals also rose: copper was up 6.8% and aluminium gained 5.2%.
In the US, the economy slumped into a recession after Q2 2020 GDP shrank by a record-breaking 32.9% q/q annualised, slightly better than expectations of -34.1%. Although unemployment improved somewhat, investors worried about the expiration of the special US$600 weekly benefit for the jobless at the end of the month, with no extension or replacement agreed. They also worried about the impact of renewed animosity between the Trump administration and China over trade and the curbing of Chinese companies’ global expansion.
As widely expected, the Federal Reserve left its federal funds rate target unchanged at 0-0.25% and expanded its Main Street Lending Programme to the end of the year.
No further fiscal stimulus was forthcoming, as Congress and the Whitehouse remained deadlocked over yet another financial relief package. CPI rose 0.6% y/y in June as more businesses reopened across the country, off a low base of 0.1% y/y in May, while consumer spending grew 5.6% after a record 8.5% jump in May.
The S&P 500 returned 5.6%, the Dow Jones Industrial 30 2.5%, and the technology-heavy Nasdaq 100 7.4% (all in US$).
UK and Europe
In the UK, Brexit uncertainty continued to weigh on investor sentiment as both sides failed to reach a consensus on certain key issues, such as fair competition and fishing rights. Prime Minister Boris Johnson, meanwhile, announced the country would slow down the reopening of its economy due to a spike in coronavirus infections, with parts of Northern England re-imposing certain lockdown restrictions. On a more positive note, economic data showed that British retail sales jumped to a record high of 13.9% in June, while Manufacturing PMI increased to 53.6 in July from 50.1 in June, and Services PMI increased to 56.5 in July, well above the 47.1 contraction posted in June.
Elsewhere in Europe, preliminary estimates showed that the Eurozone economy shrank by 12.1% q/q annualised in Q2 2020, making it the steepest contraction on record as the region entered into a recession. All major economies posted sharp declines in GDP for the period, with Spain recoding -18.5%, Italy -12.4%, France -13.8% and Germany -10.1% (all q/q annualised). The European Central Bank left its monetary policy unchanged during its July meeting, keeping its main refinancing rate unchanged at 0% while the deposit rate remained at a record low -0.5%. However, the central bank pledged to buy up to €1.35trn in debt through to June 2021 under its Pandemic Emergency Purchase Programme.
For the month, the UK’s FTSE 100 returned 1.8%, the German DAX 5.3% and France’s CAC 40 2.5% (in US$).
China and Japan
In China, tensions with the US continued to escalate after China ordered the closure of the US consulate in Chengdu, in response to its diplomats being ousted from the Chinese consulate in Houston. This was further compounded by the US curbing the global expansion of certain Chinese companies. Investors, however, remained upbeat on the back of better-than-expected economic data, with the Chinese economy growing by 11.5% q/q annualised for Q2 2020, China’s strongest quarterly expansion on record. The People's Bank of China, meanwhile, kept its benchmark interest rates unchanged for the third straight month, amid signs of an economic recovery. Hong Kong sentiment continued to deteriorate as the Chinese government quickly moved to arrest prominent pro-democracy protestors in the wake of the new national security laws imposed by Beijing.
The Bank of Japan kept its key short-term interest rate at -0.1% and maintained the target for its 10-year government bond yield at around 0%. The central bank noted at its July meeting that the country’s economy is likely to improve gradually from the second half of this year, with GDP for 2020 expected to contract by between 4.5% to 5.7%, compared -4.7% previously.
Japan’s Nikkei 225 delivered -0.6%, the MSCI China 9.5% and Hong Kong’s Hang Seng 1.5% (in US$).
On the local front, President Ramaphosa re-imposed certain lockdown restrictions, including the ban on alcohol sales and the reintroduction of a night curfew, as hospitals in the country continued to battle with the rising rate of new coronavirus cases.
The South Africa Reserve Bank (SARB) cut the repo rate by 25bps to a new all-time low of 3.50%, signalling the possible end of its easing cycle. The SARB also relaxed regulatory requirements on banks with the aim of freeing up more capital for financial institutions to lend to cash-strapped consumers and businesses. Since the beginning of 2020, the repo rate has been cut by a total of 300bps.
Sentiment, however, was dented after ratings agency S&P stated that South Africa’s economy would most likely shrink more than initially projected amid the lack of growth and concerns over the country’s fiscal trajectory. According to the SARB, GDP is expected to shrink by 7.3% in 2020, compared to a previous estimate of a 7% contraction, before increasing by 3.7% in 2021 and 2.8% in 2022.
The FTSE/JSE ALSI returned 2.6% in July. Resources stocks were by far the strongest performers, up 9.0%, while Financials were only marginally positive with a 0.4% return. Industrials returned -1.3%, while Listed Property (SAPY index) resumed its downward trend, delivering -3.2% for the month. The FTSE/JSE Capped SWIX All Share Index, which we use as the equity benchmark for most of our client mandates, returned 3.0%. SA bonds delivered 0.6% (as measured by the FTSE/JSE All Bond Index), while SA inflation-linked bonds returned 1.1% and cash (as measured by the STeFI Composite) delivered 0.4%.
Finally, the rand appreciated against a broadly weaker US dollar, gaining 2.0% during the month. However, it lost 4.1% against the pound sterling and 3.1% versus the euro.