VIDEO: Market Snapshot May 2020
Our Market Snapshot provides an overview of key events that influenced financial markets over the course of May 2020.
Global markets rebounded in May as more countries began easing their lockdown restrictions, sparking hopes of an economic recovery. Sentiment was dampened somewhat towards the end of the month as renewed trade tensions between the US and China surfaced, after Beijing approved a proposal for new national-security legislation in Hong Kong. In Europe, markets were buoyed by the news that the EU had agreed to a significant recovery package including a European Recovery Fund that would offer grants to regions and sectors most impacted by the coronavirus pandemic. Locally, the SARB cute the repo rate for the third consecutive time in as many months in an effort to help bolster the economy.
Looking at global equity market returns (all in US$), the MSCI All Country World Index returned 4.4% for the month. Developed markets outperformed emerging markets, with the MSCI World Index delivering 4.9% and the MSCI Emerging Markets Index returning 0.8%. The Bloomberg Barclays Global Aggregate Bond Index (US$) returned 0.4%, while the EPRA/NAREIT Global Property REIT Index (US$) produced 0.3%.
Brent crude closed the month 39.8% higher at around US$38 per barrel after the OPEC reached a tentative deal with Iraq on compliance with quotas for production cuts. Precious metals were mixed as risk-on sentiment improved, with silver returning 13.4%, platinum 7.0%, gold 0.2% and palladium -3.8%.
In the US, equity markets rallied on the back of the gradual reopening of the economy, as more states continued easing lockdown measures. US-China tensions continued to escalate after Beijing proposed a new security law undermining Hong Kong’s autonomy. President Trump threatened several actions against China, however, did not indicate whether Phase 1 of the trade agreement between the two nations would be compromised. China’s latest actions came just weeks after President Trump accused the Chinese government of having manufactured the Coronavirus in a virology lab in Wuhan. Meanwhile, President Trump announced that the US would cut all ties with the WHO, blaming the organisation for a lack of transparency in dealing with China following the outbreak of the pandemic.
In economic news, revised data showed that the US economy shrank 5% y/y in Q1, more than the 4.8% y/y decline initially forecasted, bringing to an end the longest period of expansion in the country's history. The Federal Reserve (Fed) reiterated its commitment to using the tools at its disposal to support the US economy, indicating that it was just ‘days away’ from making the first loans in the Main Street lending facility programme. Minutes from the Fed’s May FOMC meeting painted a gloomy picture of the economy, suggesting that a second wave of the coronavirus outbreak followed by another round of lockdown measures could drag the US economy deeper into recession, prompting a jump in unemployment and downward pressure on inflation. US unemployment hit a record high in April, coming in at 14.7%, slightly off market expectations of 16%, while annual inflation eased to 0.3% in April from 1.5% in March, its lowest rate since October 2015.
The S&P 500 returned 4.8%, the Dow Jones Industrial 30 4.7%, and the technology-heavy Nasdaq 100 6.3% (all in US$).
UK and Europe
In the UK, optimism over a global economic recovery continued to underpin investor sentiment, largely offsetting concerns over the impasse between the UK and the EU over a Brexit trade agreement. Britain's GDP contracted by 1.6% y/y in Q1, its biggest fall since the fourth quarter of 2009 and below market expectations of a 2.1% y/y decline. The Bank of England (BoE) maintained its key bank rate at a record low of 0.1% in line with market consensus, while keeping its bond buying programme at £645 billion. The BoE indicated that the impact of the Coronavirus could see the economy contract by 14% in 2020, with inflation falling to 0.6% and unemployment rising to 8%. For April, inflation slowed to 0.8% y/y from 1.5% y/y in the previous month, while unemployment fell to 3.9% in Q1, below market expectations of 4.4%
Elsewhere, the European Central Bank indicated that the Euro Area economy could shrink as much as 5%-12% in 2020, in spite of the gradual lifting of containment measures and the reopening of economies. Euro Area GDP contracted by 3.2% y/y for Q1, while GDP for the European Union contracted 2.7% y/y over the same period. The European Commission, meanwhile, approved a larger-than-expected €750 billion Recovery Fund Plan to support those countries and sectors hardest hit by the pandemic.
For the month, the UK’s FTSE 100 returned 1.3%, the German DAX 8.3% and France’s CAC 40 posted 5.0% (in US$).
China and Japan
In China, the government passed new national-security legislation for Hong Kong aimed at curtailing protest action within the region. The new law, which infringes on Hong Kong’s autonomy, was met with pushback from the international community, especially from the UK and the US where President Trump responded with threats of economic action against China. Meanwhile, investors were left disappointed after the People's Bank of China (PBoC) kept its benchmark interest rates unchanged and Chinese authorities failed to launch more aggressive monetary and fiscal stimulus programmes to help boost the economy.
In Japan, sentiment was lifted after the government approved the roll out of a US$1.1trn stimulus package to support the local economy. The plan brings Japan’s stimulus package to a total amount of JPY234trn, roughly 40% of Japan's GDP.
Japan’s Nikkei 225 delivered 7.5%, the MSCI China -0.5% and Hong Kong’s Hang Seng -6.3% (in US$).
In South Africa, investor sentiment was lifted following President Ramaphosa’s announcement that the country would move to Level 3 of the lockdown from 1 June, effectively reopening additional sectors of the economy. In a bid to provide some relief for consumers, the South Africa Reserve Bank (SARB) cut the repo rate by 50bps to 3.75%, bringing borrowing costs to its lowest level on record. The move followed a 100bp rate cut in April, making it the third consecutive cut in as many months. The SARB also relaxed regulatory requirements on banks, including additional steps to ensure adequate liquidity in domestic markets. GDP is expected to contract by 7% in 2020, with inflation forecasted to come in below the 4.5% midpoint of the target range.
The FTSE/JSE ALSI returned 0.3% in May. Industrials returned -1.8%, Financials -3.2%, and Resources 5.6%, while Listed property (SAPY index) returned -0.8% 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 -0.4%. SA bonds closed the month higher, with the BEASSA All Bond Index delivering 7.1% in May, while SA inflation-linked bonds returned 1.1% and cash (as measured by the STeFI Composite) delivered 0.5%.
Finally, the rand appreciated against all three major currencies in May, gaining 3.8% against the US dollar, 5.7% against the pound sterling and 2.2% versus the euro.