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July global market commentary: US markets strong but Europe lags

05 August 2020

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by Peter Little, Fund Management

Global markets recorded a fourth consecutive positive month, with the S&P 500 Index’s 5.6% return in July enough to push it into positive territory YTD (+2.4%). However, it is still trailing the tech-heavy Nasdaq 100 Index (+25.5% YTD), which extended its YTD lead in July as 2Q20 results confirmed the dominance of most large-cap US tech companies. Two-thirds of S&P 500 companies reported 2Q20 results in July, with aggregate earnings down 11% YoY – the US financials sector was one of the sectors dragging the averages down. US large-cap banks and consumer finance companies’ earnings were hit as they reserved $36.9bn in 2Q20 against potential future bad debts. This is in addition to the $57bn they provided for in 1Q20. Energy companies also recorded an earnings slump (-75% YoY) as they reported results for a quarter where Brent crude oil averaged $33/bbl – 50%-plus lower than the 2Q19 average oil price of $68/bbl.

US equity markets were strong despite a resurgence in COVID-19 infections which saw some US states having to reintroduce movement restrictions. Moderna reported the production of antibodies in all patients tested in a COVID-19 vaccine trial, renewing hopes for the prospect of an effective vaccine being produced sooner than expected. The US and China continued their tit-for-tat spat in July which included the closure of China’s Houston embassy amidst accusations of Chinese theft of US intellectual property. US Congress was unable to reach a deal by month-end on new US fiscal stimulus measures (touted to be c. $1trn) as enhanced unemployment benefits of around $600 per week for about 30mn unemployed Americans ran out at the end of July.

European leaders reached agreement on a EUR750bn stimulus package in a significant step for the EU in bringing a closer fiscal relationship among its member states, although these member states still need to get the additional budget approved by their respective parliaments. Unfortunately, the announcement of a stimulus plan did little to stimulate European stocks, with the Eurostoxx 50 Index down 1.5% MoM. Developed markets (MSCI World +4.8% MoM) lagged emerging markets (MSCI EM +8.9% MoM) in July thanks to a strong performance from the BRICs countries (Bovespa +8.3% MoM, MSCI Russia +3.1% MoM, Nifty 50 +7.9% MoM, Shanghai Composite +12% MoM).

Global central banks continue to do what they can to keep interest rates extraordinarily low and seem unlikely to abandon that strategy any time soon. That, along with the prospects of heightened geopolitical risks and increasing debt burdens, has sent investors flocking to gold, which had its best month (+11% MoM) since 2012 as it hit an all-time high of $1,983/oz during the month, leaving it up 30% YTD. The US dollar had a poor month, recording MoM declines of 5.5%, 4.8% and 2%, respectively, against the British pound, the euro and the Japanese yen.

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