VIDEO: Market Snapshot June 2020
Our Market Snapshot provides an overview of key events that influenced financial markets over the course of June 2020.
Global equity markets continued their resurgence in June as investors shrugged off concerns over a potential second wave of coronavirus infections and forecasts of a contraction in global growth. According to the World Bank, global GDP is expected to contract by 5.2% in 2020, making it potentially the deepest global recession since the Second World War and the broadest collapse in per capita income since 1870. Sentiment, however, remained upbeat as more countries began relaxing their lockdown restrictions and implementing additional fiscal and monetary stimulus policies, particularly in the US and Europe. In South Africa, additional sectors of the economy began to reopen, while positive data out of the US and China also helped buoy the local market.
Looking at global equity market returns (all in US$), the MSCI All Country World Index returned 3.2% for the month. Emerging markets outperformed developed markets, with the MSCI Emerging Markets Index returning 7.4% and the MSCI World Index delivering 2.7%. The Bloomberg Barclays Global Aggregate Bond Index (US$) returned 0.9%, while the EPRA/NAREIT Global Property REIT Index (US$) produced 2.7%.
Brent crude closed the month 16.5% higher at around US$41 per barrel, on the back of supply cuts by major oil producers. Precious metals were broadly mixed, with silver returning 2.8%, platinum -2.4%, gold 3.0% and palladium -0.6%.
In the US, markets reacted favourably to the news that the US/China trade deal was still on track, and that more states would begin loosening their lockdown measures, which saw an additional 3.2 million people return to the workplace in June. Retail sales increased 17.7% in May, the largest margin ever, after declining 14.7% in April.
The Federal Reserve (Fed), meanwhile, left the target range for its federal funds rate unchanged at 0-0.25% as expected, however noted that the US economic recovery from the coronavirus pandemic will be challenging and take time. Final figures showed that the economy contracted by 5% q/q in Q1 2020, in line with previous estimates, marking the biggest drop in GDP since the Global Financial Crisis and bringing to an end the longest period of expansion in the country's history. GDP is expected to contract 6.5% in 2020, but see 5% growth in 2021.
The Fed also announced several stimulus measures in a bid to help boost the economy, including expanding its Main Street Lending Programme to include small and medium-sized businesses; updating its corporate credit facility to include the purchasing individual corporate bonds; and setting new limitations on big bank dividend payments and bar share repurchases.
The S&P 500 returned 2.0%, the Dow Jones Industrial 30 1.8%, and the technology-heavy Nasdaq 100 6.4% (all in US$).
UK and Europe
In the UK, GDP contracted by 2.2% q/q in Q1 2020, marginally lower than preliminary estimates of a 2.0% q/q decline, making it the largest drop in growth in 40 years. The Bank of England maintained its key bank rate at a record low of 0.1% in line with market forecasts, while increasing the target stock of purchased UK government bonds by an additional GBP100 billion, to take the total stock of asset purchases to GBP745 billion. Brexit negotiations remained at an impasse, after both parties failed to agree on several contentious issues, including fishing, EU judicial power and the concept of a “level playing field”. Other news weighing on investor sentiment included the prospect of the US imposing new tariffs on $3.1 billion of exports from the UK, France, Spain and Germany, following the World Trade Organisation’s ruling that the European countries had granted illegal subsidies to airplane manufacturer Airbus.
Elsewhere in Europe, the Eurozone economy shrank by 3.6% q/q in Q1 2020, marginally off preliminary estimates of a 3.8% q/q decline, making it the steepest contraction on record. This was largely on the back of sharp drops in GDP from the region’s largest members, with Germany posting its biggest contraction since 2009, joining France and Italy as all three economies entered a recession. The European Central Bank, meanwhile, launched a new backstop facility to provide precautionary euro repo lines to central banks outside the euro area, and expanded its pandemic emergency purchase programme by EUR600 billion to a total of EUR1.35 trillion.
For the month, the UK’s FTSE 100 returned 1.6%, the German DAX 7.3% and France’s CAC 40 posted 6.5% (in US$).
China and Japan
In China, the People’s Bank of China (PBoC) held its benchmark interest rate steady at 3.85% for the second straight month, and pledged stronger fiscal and monetary policies to help offset the impact of the coronavirus on the economy. Earlier in the month the PBoC launched a CNY200 billion one-year medium-term lending facility operation to help maintain sufficient liquidity within the banking system. At the same time, China’s move to impose new restrictions on Hong Kong’s democratic freedoms through new security legislation was met with widespread condemnation, both local and international, dampening investor sentiment. Despite this, the legislation was passed and China moved quickly to start arresting anti-government protesters.
Japan, meanwhile entered its first recession since 2015, after final numbers showed GDP contracting 0.6% q/q in Q1 2020, marginally beating preliminary estimates of a 0.9% q/q contraction. The Bank of Japan kept its key short-term interest rate at -0.1% and maintained its long-term borrowing costs around 0%, however increased the size of its lending facility programme from USD700 billion to USD1 trillion.
Japan’s Nikkei 225 delivered 1.9%, the MSCI China 9.0% and Hong Kong’s Hang Seng 7.4% (in US$).
South African GDP surprised on the upside, shrinking just 2% q/q in Q1 2020 and beating market expectations of a 3.8% q/q decline. This, however, marked the third consecutive quarter of negative GDP and the steepest contraction since Q1 2019. Market sentiment was muted following Finance Minister Tito Mboweni’s Supplementary Budget Speech, which warned of an imminent debt crisis and persistent weak economic growth if tough fiscal and broader economic reforms were not implemented. Mboweni revised the country’s budget deficit forecast to 14.6% of GDP in 2020/21, while the economy is expected to contract by 7.2% in 2020, before recovering by 2.6% in 2021.
In more positive news, June saw the relaxation of certain lockdown restrictions as new sectors of the economy were unlocked. Markets reacted positively to better-than-expected PMI data coming out of China, stronger retail sales in the US, and the implementation of more aggressive fiscal stimulus programmes aimed at boosting economies in Europe and the US.
The FTSE/JSE ALSI returned 7.7% in June. Industrials returned 8.3%, Financials 4.2%, and Resources 8.8%, while Listed property (SAPY index) returned 13.4% 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 6.7%. SA bonds were negative for the month, with the BEASSA All Bond Index delivering -1.2%, while SA inflation-linked bonds returned -0.9% and cash (as measured by the STeFI Composite) delivered 0.4%.
Finally, the rand appreciated against all three major currencies in June, gaining 1.6% against the US dollar, 1.5% against the pound sterling and 0.6% versus the euro.