WEEKLY MARKET UPDATE: Markets fall on second wave fears, gloomy Fed

Mon 15 Jun 2020

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Market Update

The rally in risk assets came to a grinding halt last week on fears of a second wave of infections in the US, with virus rates up in many states, and the Federal Reserve offering up a gloomy economic outlook. Stocks are also down this morning on news that authorities in Beijing are locking-down residential compounds due to 49 new cases in the city. This reduced risk appetite saw a reversal in equity sector performance, with IT and Consumer Staples stocks, in particular, ‘stay at home’ winners such as Amazon and Netflix, outperforming more cyclical sectors such as Energy and Financials. As a result UK equities, which are heavily weighted to energy giants and banks, underperformed global markets, down – 5.8% for the week versus -3.1% for global stocks in Sterling terms. Sovereign bond yields declined as capital sought safer assets, with the UK 10Y Gilt and the US 10Y Treasury closing the week at yields of 0.21% and 0.70% respectively. Gold was up +2.7% in US Dollar terms, with Oil falling -6.3%.

CIO Analysis

2020 is already one of the most volatile years in history. As of this morning, less than half a year of trading has featured 17 days of 4%+ movements. The only year comparable was at the end of the previous cycle, in 2008 (28 days) and before that 1933. Last week saw a return of volatility as stocks dropped significantly on Thursday, and, after a short Friday comeback, were again down this morning. As per usual, the downturn served to highlight lingering investor concerns, such as a sluggish economic recovery, US protests and a rebound of COVID- 19 cases in certain areas of the US. However, bouts of volatility like the one we are experiencing are reminders that, despite the fact that stocks are back to the end of last year’s levels in the US, we are still in a period between cycles, where markets and investors are looking for a direction. During that tumultuous time, volatility may continue, not so much in the sense of deep and fast drawdowns and equally fast recoveries, which can usually be ascribed to algorithmic trading, but rather in the sense of sharp weekly up and downs. That sort of volatility is particularly the enemy for investors in drawdown, as returns on any given day might be significantly different from the next. Holding a cash pot during an affirmed up-cycle might be necessary but often a costly strategy in terms of opportunity costs, especially if volatility is suppressed for years, like in the period of 2012- 2018. However, the same cash pot at a time between cycles is both necessary and efficient when volatility bouts are much more numerous and unpredictable.

David Baker, CIO