Market Update – 25th June 2020.

As global equity markets are currently trading on every news headline, the mood has quickly turned from positive to negative.  As a result, global equity markets fell heavily yesterday – and this has unfortunately followed through into this morning.  For example, on Wall Street, the Dow Jones fell over 700 points, or just over 2.7%, while the broader S&P 500 index fell nearly 2.6%.  In the UK, the FTSE-100 which yesterday fell nearly 200 points, or 3.11%, initially opened this morning down a further 90 points (just over 1.5%) – although as we write, it has recovered slightly and is currently down around 20 points (0.3%).

The reasons for this negative sentiment are threefold:

  1. coronavirus continues to spread in the US with states including California and Florida recording their largest daily increase in infections;
  2. news that Donald Trump was considering tariffs on $3.1bn of imports from the UK and EU;
  3. the IMF (International Monetary Fund) now expects a deeper recession than it expected two months ago.

Although we fully understand and appreciate that this market volatility is unsettling and we are advocates of caution and risk management when it comes to managing client investments, we believe it is completely wrong to be despondent and say that the recent rally has run its course or that global equity markets will now sell-off.

While these localised coronavirus outbreaks in the US could slow the US recovery if it keeps unemployment levels elevated, we need to put everything into perspective:  the number of cases as a proportion of those tested is declining (albeit slowly) across most of the country as the new infections tend to be more localised and as we have been reporting in these commentaries, US economic data is recovering.  In addition, fresh lockdowns have, by and large, been ruled out by US politicians.  Furthermore, evidence from Asia and Europe suggests a second-wave isn’t an inevitability.

With reference to the potential US tariffs, while this would obviously be unhelpful to UK and EU companies as they start to emerge from the coronavirus lockdowns, the proposed $3.1bn levy on imports is a small drop in the ocean given the US imports nearly $500bn of goods from the EU and UK.  As such this appears to simply be political posturing ahead of the US Presidential elections in November – especially as the announcement came shortly after the EU said that it was considering stopping Americans entering the region until the US coronavirus outbreak is fully under control.

While last night’s new headlines were dominated by the IMF after they lowered their 2020 growth forecast for the UK from -6.5% to -10.2% due to the coronavirus lockdowns, it wasn’t a surprise to us given we have been saying in these commentaries (for example, please see here) that the UK economy would probably shrink by high single digits or low double digits.  In fact, the IMF didn’t actually say anything that we didn’t already know – i.e. the economy has hit a brick wall thanks to the coronavirus lockdown restrictions.  Regular readers of our commentaries, will know that this is not like a normal economic downturn as the coronavirus outbreak is a transient issue, and as such we believe that while we will experience a sharp and painful economic downturn, it should also be relatively short with a sharp acceleration on the other side of this horrible coronavirus outbreak as much of our expenditure is only being delayed – hence our view that 2021 could be one of the strongest years for economic growth since the global financial crisis in 2008/9.

Unfortunately, we do all need to accept that equity markets hate uncertainty and therefore volatility will remain elevated in the short-term – however, yesterday and today’s moves look to us, to simply be another case of equity markets playing on the swings, not a big slide.

In the meantime our attention is on today’s US initial jobless claims and US durable goods orders – which we will update you about in tomorrow’s commentary.

Investment Management Team

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