Weekly Market Update: Stock markets post mixed returns on virus fears

Weekly Market Update: Stock markets post mixed returns on virus fears

Mon 13 Jul 2020

Please read our full Market Update

Market Update

Stocks posted mixed returns last week, with strong performance in the US as the NASDAQ 100 set new record highs, while UK and Japanese stocks closed down -0.9% and -1.8% in Sterling terms respectively. Emerging Market stocks performed well, gaining +2.4% for the week. Technology, Telecoms and Consumer Discretionary stocks performed well, while Oil lagged as uncertainty regarding the speed of the economic recovery remains and crude oil prices fell below $40 a barrel. The bond market also painted a negative outlook for the economy as yields fell; the UK 10Y Gilt yield was down -3.3bps for the period, while the US 10Y Treasury yield fell -2.5bps. Sterling performed well versus other major currencies on hopes that a no-deal Brexit will be avoided after EU diplomats had confirmed the UK and EU had sketched out a “landing zone” for a Free Trade Agreement. The Pound was up +1.1% versus the US Dollar and +0.6% versus the Euro. In commodities, Gold was up +1.3% in US dollar terms, while Oil prices closed the week down -0.2%.

CIO Analysis

Stocks were mixed last week, due to a confluence of the Fed’s slowing asset purchases since early June and a resurgent COVID-19 narrative. We have often noted how quantitative easing was driving this market instead of traditional equity and bond valuation fundamentals. It stands to reason then, now that the Fed appears to be done with this particular round of asset purchases – that is not to say we’d be surprised if there were more of them – that investors are once again turning their attention to the Coronavirus, only to find that the threat is far from removed. In fact, the world is experiencing a second wave, much sooner than October which is what strategists and policy makers had originally anticipated. We think markets, investors and CEOs have yet to come to terms with the very real possibility that this new, highly infective, unpredictable and lethal respiratory virus might be with us well into the next year before scientific solutions are well established. Unchecked, COVID-19 could present a threat to globalisation, trade, international investments and diplomacy in a significantly more serious way than the political antics of past few years. Not only would this mean a deep “U-shaped” recovery, but it would also probably mean radical changes in consumer behaviour and supply chains, long-term restrictions on travel and thus further pressures on trade worldwide, ultimately leading to a poorer world and a serious re-rating of risk assets. Everyone has little choice but to follow the Federal Reserve right now if they are looking for any return on their portfolio, but clients need to make sure their strategists and asset allocators are on permanent alert for that potential breaking point when fundamental realities may overwhelm the potency of cheap cash for financial markets.

David Baker, CIO


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