Market Update – 4th August 2020.

Global equity markets have started August in a positive mood, with the FTSE-100 closing yesterday (Monday 3 August 2020) up over 130 points, or nearly 2.3% – and is today, as we write, up a further 15 points, or 0.25%.  On Wall Street, the Dow Jones ended yesterday up nearly 240 points (0.89%), while the S&P 500 rose just under 0.75%.

Market sentiment has been helped by improving coronavirus data, which suggests that many of the US hotspots (such as California, Arizona and Florida) are starting to turn the corner.

While it may take a little longer for these US states to fully reopen their economies, thankfully these lower infections and death cases do significantly reduce the risk of further disruption from any potential broader or stricter lockdown restrictions.

Although we don’t want to appear blasé or pollyannaish, the reacceleration of coronavirus cases in a number of countries and US states is unlikely to mean a return of the severe lockdowns that devastated global economic activity (consumption, investment and production) during the first half of the year, as not only would this be unpalatable from both a political and economic standpoint, but more importantly, because the death count continues to slowly decline.

However, it would be churlish to assume that rising coronavirus infections and localised lockdowns won’t have any economic impact, as it does have the potential to hurt the employment market by slowing the recalling of furloughed workers and/or increasing the risk of further redundancies – which in turn could lower consumption and dampen the economic recovery from the current ‘V-shape’ to a ‘Nike Swoosh’ (i.e. still a strong recovery, just slightly slower), especially as one of the US hotspots, California, is the largest economy in the US (it’s economy is actually bigger than that of the UK).

Nevertheless, economic data released yesterday still suggests that the global economy continues to recover strongly and is still currently on target for a ‘V-shaped’ recovery as data from the US, Europe and China all exceeded expectations.

For example, the US ISM manufacturing survey came in at 54.2, up from 52.6, as factories boosted production thanks to a big increase in new orders, as the reading jumped from 56.4 to 61.5.  The consensuses market expectations for new orders was for a reading of just 55.1 – so a reading of 61.5 is a significant beat.  As 50 is the line separating expansion and contraction, these readings do not only show that the US economy (the largest in the world) is moving in the right direction but is actually recovering very strongly.

Likewise, Eurozone Manufacturing PMI data for July was revised up to 51.8 from its earlier flash estimate of 51.1 due to gains in both output and new orders; while China’s Caixin manufacturing PMI climbed to 52.8.

Additionally, the recent reacceleration of cases in a number of US states will hopefully mean that the Republicans and Democrats will quickly come to an agreement to help support those companies and workers that have been negatively impacted by the coronavirus as neither party will want to be blamed for hurting American workers ahead of the November Presidential election – and that will further buoy global equity market sentiment.

Investment Management