Week in Review: Reopening Optimism Lifts Markets

Global markets ended the week higher, with the month of May marking the start of the gradual reopening of economies. A steady but slow decline in new infections in developed markets has allowed for the partial lifting of lockdown restrictions, boosting investor confidence. Markets were also encouraged by news of human trials of a possible vaccine for COVID-19 under development by Novavax. The S&P 500 Index broke the psychological 3,000 mark for the first time since February 2020 and is now less than 11% away from its all-time high.

Sino-U.S. tensions continue to escalate. Following on from Beijing’s move to curtail Hong Kong’s autonomy by imposing national security laws on the territory, U.S. Secretary of State Mike Pompeo, told Congress that Hong Kong was no longer sufficiently autonomous to merit special treatment. Meanwhile, the People’s Bank of China fixed its exchange rate to the U.S. Dollar at a twelve year low – more details on this in our Chart of the Week. China has repeated its intent to fulfill the terms of its phase one trade deal with the U.S. but so far, imports of U.S. products have fallen far short of what was promised in February, with China’s imports of U.S. manufactured goods running at 40% below target.

Staying with the U.S., its second estimate of  Q1 2020 GDP recorded a drop of 5.0%, higher than market expectations of a decline of 4.8%. Meanwhile, another 2.12 million Americans filed for unemployment benefits last week, more or less in line with the market’s expectations.

The European Commission (EC) unveiled a proposed €750 billion pandemic recovery plan. The proposal requires approval by all EU members and will allow the EC to distribute two-thirds of the funds in grants and the rest in loans. ECB President, Christine Lagarde, stated that the eurozone economy is likely to contract along the lines previously outlined in the bank's medium to severe scenarios, ruling out the “mild” possibility. The severe outlook is for a 12.0% GDP decline and the medium scenario is for an 8.0% drop.

In Japan, Prime Minister Shinzo Abe announced that it would be lifting its state of emergency restrictions across the country. The government also announced Japan's second fiscal bailout package, totaling USD 1.1 trillion. Investors turned bullish on the news, with the Nikkei 225 outperforming global markets for the week.

Global equities posted another strong week of gains. In the U.S., the Dow Jones (+3.75%), S&P 500 (+3.01%) and Nasdaq (+1.77%) were all positive, whilst the Euro Stoxx 50 (+4.98%), FTSE 100 (+1.39%) and Shanghai Composite (+1.37%) Indices were also stronger. Japanese stocks had a particularly strong week, with the Nikkei 225 Index up +7.31%.

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Market Moves of the Week

In local news, the Public Investment Corp. (PIC) announced this week that it is willing to convert more than R90 billion of Eskom Holdings SOC Ltd. debt into equity. The proposal has been submitted to South Africa’s National Treasury and its main client, the Government Employees Pension Fund.

The JSE All Share Index ended the week up +0.67%, led higher by the resource (+3.22%) and financial (+2.81%) sectors. The industrial sector (-2.10%) was negatively impacted by the rand which strengthened during the week, trading at R17.55 to the U.S. by Friday close.

Market Moves -31 May 2020
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Chart of the Week

As renewed tensions between the U.S. and China escalate, Chinese authorities showed their intent at the start of this week with a provocative decision to fix its currency to the U.S. dollar at a twelve year low. This is the level that the People’s Bank of China sets as a guide for the market, its exchange rate which may not vary from it by more than 2% in either direction. Monday’s fix against the dollar was the weakest since 2008. A weaker currency tends to make China more competitive, and makes life harder for U.S. exporters, so this can be seen as a very provocative gesture.

Chart of the Week - 31 May 2020
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