Weekly Market Update: Increasing COVID-19 case count caps equity market rally

Weekly Market Update: Increasing COVID-19 case count caps equity market rally

Mon 24 Aug 2020

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Market Update

Global equities traded higher last week, up +0.5% in Sterling terms. US equities climbed +0.9% with housebuilders, buoyed by promising housing data, leading the way. Other developed markets did not fare as well. UK and European stocks were down -1.3% and -1.1% respectively, driven by both the negative sentiment around COVID-19 as case counts continue to rise and weaker than expected economic data, such as the Flash Services PMI figures out from the Eurozone, which showed that employment and demand remain under significant pressure. Returns from different sectors continue to show divergence, consistent with the so called “K” shaped recovery analysts expect as “old economy” sectors such as Energy and Financials fail to regain their 2019 position, while “new economy” sectors, comprising digitally enabled businesses, set record highs. Sovereign bond yields fell over the week in response to sour pieces of economic data and rising COVID-19 case numbers, with the yield on the UK 10Y Gilt falling 3.7 basis points to close at 0.206%. The US 10Y Treasury yield closed the week at 0.628%, 8.1 basis points down. Sterling remains volatile on Brexit uncertainty, which is likely to dominate headlines in the coming weeks. Gold was relatively flat for the week, while Oil prices were up +0.4%.

CIO Analysis

Global markets were quiet last week on thin trading, as per usual near the end of the summer months. As we enter September, a traditionally volatile month, our attention falls on UK macro data, which exemplify how recent economic performance is inextricably linked to Covid-19. Aggregate output and the rebound are correlating with the breadth and length of the measures to fight the virus. The US, which saw a lot of places remain open as it took a state-by-state approach, saw the quickest rebound starting June, and started levelling off in July. Europe followed, with data stronger in late June and July, and levelling off in August. Last week’s data for the UK, where PMIs soared, are showing a similar pattern of pent-up demand following the end of the universal lockdown, and are expected to level off in the next couple of months. Given that we still have at least 5-6 months before a vaccine becomes readily available, we believe investors should be focusing on three things going forward: a) the progression and pickup of viral loads, as well as measures taken to combat it in markets that matter, b) the dispersion in returns among sectors and geographic regions (the UK is still 18% down for the year, and Europe 7% in local currency terms) and c) signs of further monetary and fiscal easing, especially in the US. 

David Baker, CIO


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