This has been another good week for global recovery and rising asset prices.
At the point of writing, the FTSE 100 is up around 4% on the week and the Dow Jones is up around 3%. This continual rise in markets is certainly helping our client portfolios. Here are some of the things I am noticing this week.
Despite the shocking scenes of demonstrations, violence and looting in the US; markets largely ‘shrugged off’ negative news.
Two million people in the US signed on as unemployed last week – but four million came off unemployment benefit – this was very unexpected and encouraging news.
Investors were buoyed by the successful human trials for the CV19 vaccine created by Novavax. There are currently some 159 potential vaccines worldwide under development and several of them are closing on the greatest financial prize of our time.
Meanwhile, we can see what one fund house quoted this week as a ‘determined, downward trajectory in CV 19 infections’ in the UK, Italy, Spain and Germany. The US infection rate is also slowing.
In the Eurozone, we saw the EU unveil a 750 billion euro pandemic recovery plan which looks set to gain approval by all member states as it is a compromise, with two thirds of the funds to be given as grants and one third as loans. The money will be borrowed from the markets with Spain and Italy standing to be the main beneficiaries.
Other countries within the EU have taken extra individual actions to further stimulate their economies. Germany, for example, have been working on a 50-100 billion euro stimulus package of their own whilst bailing out their airline Lufthansa to the tune of nine billion euros.
France has taken a different approach, injecting some eight billion euros into their car manufacturing industry to try and get ahead in readiness for the recovery.
In Brazil, India and Russia, there have been very worrying rapid increases in CV19 infection rates. Our clients will recall that we cut back their Emerging Market portfolio exposure in our emergency April review.
I could see then that developing countries in Latin America and Asia would really struggle both from a healthcare perspective and an economic one. Not only have these markets been hit by a massive downturn in demand from developed countries, but they also do not have the fiscal firepower of the UK, US, Germany or Japan to kick-start their economies.
All across the developed world, we are seeing countries coming swiftly out of lockdown. Japan opened up the rest of its regional zones this week. This was ahead of schedule and prompted an excellent rally in the Japanese stock market.
China are seeing a narrowing of their annual decline in output, but they still have some way to go. Indeed, they have fallen badly short of the amount of US imports that they committed to make – in line with the new US China trade deal. They are now frantically buying US agricultural equipment to make good on that deal.
Watch this space, however. This week has been very quiet on China but it was the week that they passed a law making it now illegal in Hong Kong to ‘insult’ the Chinese national anthem. Beijing also swiftly increased its military defence spending by a further 6.6% to the cost of other domestic budgets.
If you are missing the days of Brexit – don’t worry! It’s all coming back our way! Remember that the UK media are (generally) in the EU camp when it comes to reporting – so it’s time to tune out the mind games of certain negotiators and their avid followers. In December, we overwhelmingly voted for a certain course of action. I am hopeful at this stage that Cabinet Ministers will not be dragged back into the long grass of ‘Brexit Extension Land!’
One of the metals we watch with interest is copper. The copper index is sometimes referred to as ‘Doctor Copper’ and it tells us a great deal about global industrial output. Copper against Gold has been decimated in the past six months but the tide turned this week with recent Gold values falling back modestly against copper. This is another tentative sign that things are coming back.
Finally, let us deal with Bonds and Interest rates. In times of crisis, we watch for ‘widened spreads’ between Government Bond yields and Corporate Bond yields. The wider the spread – the greater the panic.
‘Spreads’ are now at reassuringly lower levels. Indeed, the issuance of new good quality Corporate Bonds is also falling. This supports our judgement that most companies in the developed world have now raised a substantial ‘war chest’ to see them through another virus increase this autumn – should it occur.
I have said repeatedly that markets hate uncertainty. I stopped viewing CV19 as anything like it’s initial risk to developed markets some months ago. This is because companies, governments and the public are far better prepared for another increase of infection numbers.
The greater ‘unknowns’ right now are China, the CV19 contagion in Emerging Markets, the Brexit Trade Deal and Deflation.
Bonds love periods of low interest rates. Indeed, we feel that both Equity and Bond Markets have the potential to do really well in the coming 5-10 years as the world wrestles with unravelling low interest rates.
With UK inflation somewhere around 0.8% last month, we are now dangerously close to a ‘Japan style’ deflation economy. This might be avoided because of central bank intervention, but countries like the US may not get away without having to introduce negative interest rates.
My message for the coming months would be to expect very uneven outcomes for different markets. If ever there was a time to be receiving professional investment advice – this will prove to be it. Spotting the opportunities whilst dodging the traps is something we relish helping our clients with.
My hunch is that we might see a spike of inflation for a short period in the coming year. However, the long story will be of low interest rates for quite some time.
In Wales we have been allowed out for good behaviour! However, we need to be very good before we can travel more than five miles. The news that schools will return on the 29th of June and effectively ‘give back’ some of the lost time in child care by running the term on to August is very welcome news for our local economy.
Time will tell as to whether a cautious Welsh approach or a more decisive English one was best. However, it is good to see that finally we have a planned way out of this lockdown and markets seem to be recognising this.
I expect that I will have at least a couple more weekly briefings to deliver before we are fully out of lockdown. Hang on in there, week by week we are edging closer to a better future.
My best wishes and I am here if you need anything at all.
Darren
