Market news - 20 July 2020 - Sarasin & Partners UK

The ECB paused its programme of further economic support on Thursday, as the committee opted to wait to assess how the current recovery pans out before offering additional stimulus measures. Policy rates were left unchanged and there was no extension to the previously-announced EUR1.35trn PEPP programme (expiring in June 2021). Since their last meeting in June, there has been cause for some optimism as retail sales rebounded and industrial production started to recover. President Lagarde described a “significant but uneven recovery” but cautioned that price pressures remain subdued and this means that “ample monetary stimulus remains necessary to support the economic recovery and to safeguard medium-term price stability”.

Material progress on the Europeany Recover Fund was made at the weekend’s European Council meeting, with the “Frugal Four” (Netherlands, Austria, Denmark and Sweden) apparently prepared to accept that as much as €390bn of the funds come in in the form of grants (with the remainder coming in the form of low-interest loans).

US retail sales increased 7.5% in June, leaving sales just 0.6% below the pre-lockdown February level (May: +18.2%). The increase in June was driven by motor vehicles and parts (+$8.4bn), clothing and accessories (+$8.8bn) and restaurants and bars (+$7.9bn), but 10 of the 13 categories saw an increase over the month. Sales at restaurants and bars increased 20% in June (May: +31.6%) whilst sales at food and beverage stores declined-1.2% over the month – spending has been volatile between the two categories as some states go in and out of lockdown.

Industrial production was up 5.4% in June (May: +1.4%, consensus: +4.3%), largely driven by auto manufacturing (+105%). Non-auto manufacturing also increased 3.9% and economists took the increase in business equipment production (+11.8%) as a positive indication of capex returning.

The US NFIB Small Business Optimism Index increased 6.2 points in June to 100.6. This represents the highest monthly reading since February, when the index reached a record low of 90.9. Eight of the ten sub-categories improved in June as small-business owners indicated that they expect the recession to be short-lived.

China GDP rebounded +3.2% yoy in Q2 2020 (consensus: +2.4%), following the first annual decline in over a decade in Q1 (-6.8%). Industrial production figures were in line with consensus, +4.8% in June yoy (May: +4.4%). Industrial businesses have benefited from the support of the Chinese State in recent months, as the government offered extended lending facilities for local governments investing in infrastructure. This in turn has boosted materials such as steel production. Fixed asset investment was down -3.1% yoy in H1 to CNY28.2 trillion, slightly better than expected. Private investment dropped 7.3% (-9.6% January – May) whilst public investment increased 2.1% over the month (-1.9% January – May)

UK unemployment was unchanged in the 3 months to May at 3.9% (consensus: 4.2%). Total hours worked fell further to 877.1m (from 959.9m), and the unemployment rate is still reflecting the 9.3m furloughed workers benefiting from the scheme that will last until October. Job vacancies fell over the month to a new record low – 60% lower than the number of vacancies available this time last year. Total weekly pay fell 0.3% in the 3 months to May, but regular pay rose 0.7%.

Global equities were ~1% higher over the week, driven by the US and Europe, with notable underperformance of Chinese equities after remarkable recent gains (with the Shanghai Composite rising 15% from mid-June to mid-July). The Nasdaq also pulled back slightly after a protracted phase of outperformance.

Driving gains were hopes of further fiscal stimulus to be announced at the European Council meeting over the weekend as well as positive developments on some of the numerous Covid vaccine research projects currently underway.

Market news 20 July 2020