1/HALF TIME
World stocks have been on a rollercoaster ride in the first half of 2020. Having slumped 35% from Feb. 20 to March 23, they are now within 10% of February’s record highs thanks to lashings of fiscal stimulus, interest rates slashed to 0% or below in most major economies, and massive amounts of QE. Borrowing costs for high-grade U.S. companies have in fact fallen below January levels.
So what happens over the rest of the year? Much depends on whether another coronavirus wave comes crashing down, further testing policymakers. And if an effective treatment or a vaccine is found, the severest global recession in living memory could also turn out to be the shortest.
Nevertheless, the crisis has exposed weaknesses such as companies’ high debt levels and their over-reliance on share buybacks.
Global markets and the tale of two quarters https://fingfx.thomsonreuters.com/gfx/mkt/yzdpxrrxwpx/Pasted%20image%201593105658002.png
2/LINES OF CONTROL
Asian market anxiety levels look set to rise another notch in coming days due to geopolitical tensions.
Hong Kong will be in the Chinese parliament’s sights when it meets on June 28-30 to finalise a security law aimed at tackling separatism, subversion, terrorism and collusion with foreign forces.
After a year of sometimes violent anti-government and anti-Beijing protests, the focus is on how far-reaching the law is, what activities constitute such crimes and what the punishment would be. Investors also want to know whether the laws will be retroactive or create new avenues for asset seizures.
China and much of Asia will also publish manufacturing surveys. But as North Korea’s military threats ebb and flow and troops amass on both sides of a disputed part of the Indo-Chinese border, geopolitics will likely trump other factors.
How much do you support or oppose to Hong Kong independence? https://graphics.reuters.com/HONGKONG-PROTESTS/xklvyzgnlpg/chart.png
3/PLEASANT SURPRISE
After the dire numbers of April and May, recent U.S. economic dataflow has delivered good news for the most part, helping keep stock markets within 10% of their pre-coronavirus levels.
On the heels of comebacks in employment and retail sales, Citi’s U.S. Economic Surprise Index, which tracks economic data relative to economists’ expectations, is at a record high.
Now the focus is on whether the rebound remains in force. Consumer confidence on Tuesday, manufacturing data on Wednesday and U.S. employment figures on Friday – both weekly and monthly – are among reports due.
Non-farm jobs actually rose 2.5 million in May, versus April’s record 20 million-plus plunge. Another improvement could allow markets to push higher – bar further coronavirus-linked lockdowns.
A pleasant surprise https://fingfx.thomsonreuters.com/gfx/mkt/oakpeaamzpr/Pasted%20image%201593096560084.png
4/INFLATION WATCH
Economies are bouncing back from the COVID-19 shock, so will inflation follow? Preliminary June euro area data may offer clues.
Already, inflation expectations are reacting to data showing the worst of the economic gloom has lifted; a long-term gauge of where markets see euro zone inflation headed is just above 1% — near its highest since early-March and almost 40 bps above record lows hit that month.
Some investors are already buying gold and other inflation hedging assets. But others say that if you dig deeper into activity indicators, they suggest little evidence of inflationary pressures picking up. And until that happens, expect the ECB to keep its foot on the stimulus pedal.
Euro zone inflation and inflation expectations https://fingfx.thomsonreuters.com/gfx/mkt/yzdvxrrdbvx/themeJUNE.PNG
5/EUROPE’S TURNING TIDE
Is the U.S. share juggernaut slowing? Seems like it. In the past month, U.S. equities have underperformed world stocks by 2.5%; Europe outperformed by a similar margin. European stocks enjoyed investment inflows in three of the past four weeks, BofA says.
Behind the shift perhaps are the growing odds of a presidential election victory for Democrat Joe Biden, worsening U.S./China ties and the continued rise in U.S. coronavirus infections that prevent economic activity from fully resuming.
Europe, meanwhile, has largely controlled the virus spread, economies are turning the corner quicker than expected and a proposed EU recovery fund is speeding up euro zone integration.
BlackRock and Goldman Sachs are among those recommending clients shift focus towards European stocks, which lagged U.S. peers throughout the previous economic cycle due to a paucity of “growth” stocks.
European outperformance looks likely until at least November’s U.S. election. Longer-term though, U.S. firms, such as tech names, may face headwinds from higher taxes especially from a Democrat administration. And in a world where investors attach increasing importance to environmental, social and governance (ESG) credentials, Europe’s higher ESG scores will be a plus.
(Reporting by Marc Jones, Dhara Ranasinghe and Thyagaraju Adinarayan in London; Vidya Ranganathan in Singapore and Saqib Iqbal Ahmed in New York; compiled by Sujata Rao; Editing by Hugh Lawson)
