Market Analysis June 2020

Reflecting on the developments in June, stock markets rebounded as economies commenced their reopening processes, bolstered by consistent governmental and central bank suppo In the second quarter, US equities outperformed their counterparts in major markets. While the initial part of the quarter underscored the significant economic fallout from lockdowns, the subsequent easing of restrictions and the emergence of early signs of economic recovery spurred widespread gains in equity markets. Supportive monetary policies from the Federal Reserve, along with encouraging data like a slowdown in weekly unemployment insurance claims and a robust rebound in retail sales from April to May, contributed to the market's positive momentum. Federal Reserve Chair Jerome Powell emphasized that the central bank was not considering rate hikes at the moment.

Despite these positive factors, a resurgence in Covid-19 cases dampened some of the investor optimism. As some states reconsidered or reversed their lockdown-easing strategies, new cases surged towards the end of June, particularly in Texas, Florida, California, and Arizona.

Consumer discretionary stocks, boosted by the retail sales improvement, outperformed, along with the resilient information technology sector. Energy and materials sectors also demonstrated robust performance, while defensive sectors like utilities and consumer staples lagged behind.

In the second quarter, Eurozone equities recorded substantial gains as countries embarked on phased reopenings. While some countries like the Baltic nations and Austria had lifted lockdowns as early as April due to successful containment efforts, others such as Spain, France, and Italy followed suit later in the quarter.

The announcement of EU recovery plans further invigorated shares. Ursula von der Leyen, President of the European Commission, proposed the ability to borrow €750 billion for a recovery fund targeting regions hit hardest by the pandemic. This would supplement the €540 billion rescue package from April. The European Central Bank also expanded its pandemic emergency purchase program to €1.35 trillion.

Despite a 3.6% contraction in the eurozone economy in Q1, driven by widespread lockdowns in March, economic activity surveys indicated a notable improvement as spring progressed. The flash eurozone composite purchasing managers' index (PMI) surged to 47.5 in June from 31.9 in May and 13.6 in April. (PMI surveys assess manufacturing and services sector activities; a reading above 50 signifies expansion.)

All sectors experienced positive returns during the quarter, with information technology, industrials, materials, and financials enjoying some of the strongest gains, fueled by the news of lockdown relaxations. However, the energy sector lagged as an underperformer.

During the quarter, UK equities rose as the nation emerged from national lockdowns, having successfully contained the initial wave of Covid-19. Sectors sensitive to economic shifts performed well, driven by improving global sentiment. Notably, the mining sector reaped the rewards of China's economic recovery and stimulus measures.

Despite a 20.4% contraction of the UK economy in April, as indicated by the latest monthly estimates, Google mobility data hinted at a potential return to positive growth in May, with a flattening out of the decline in travel to work. The government phased out the furlough scheme and began reopening schools and industries. This revealed the impact of government initiatives to cushion unemployment and income loss, reflected in Q1-Q2 borrowing figures.

In response, the Bank of England expanded its quantitative easing program, and while negative interest rates were under "active review," they were deemed unlikely. The Debt Management Office reported the sale of negative-yielding gilts for the first time. The deadline for extending the Brexit transition period expired on December 31, 2020.

The Japanese equity market rebounded in Q2, reporting a total return of 11.3% after experiencing some early April weakness. Despite minor currency volatility in June, the yen remained relatively stable throughout the quarter. The market's recovery stemmed from investors' positive reactions to indications of a global peak in virus cases, rather than specific Japanese developments. Stocks tied to the economic cycle, along with global equities and pharmaceuticals, spearheaded the recovery. Conversely, domestic-focused stocks like transportation, insurance, and utilities lagged, while airlines remained frail due to concerns about medium-term profitability.

Compared to other developed nations, Japan's Covid-19 case trajectory and mortality rates were distinct over the past three months. A state of emergency was initially declared in seven prefectures, including Tokyo, on April 7, and later extended nationwide. However, the imposed restrictions on social and business activities remained less stringent than those in Europe. Prime Minister Abe announced a phased lifting of the state of emergency, beginning May 14 for certain prefectures and concluding May 25 for Tokyo. Japan's fiscal response to the crisis was heightened, resulting in the formulation of a second supplementary budget in May. Additionally, the Bank of Japan introduced further monetary policy initiatives.

Asia ex Japan equities reported robust Q2 gains, fueled by major central banks' fresh stimuli, continued regional normalization, and global economic reopenings. Export-oriented markets like Indonesia, Thailand, and Taiwan outperformed the regional index, while Hong Kong SAR underperformed due to increased geopolitical tensions. China slightly underperformed, maintaining its strong performance from Q1. The healthcare, materials, and energy sectors excelled, whereas utilities, financials, and industrials made the least progress.

Over Q2, heightened investor sentiment and a rebound in riskier assets correlated with a slowdown in new Covid-19 cases and the initiation of lockdown easing across nations. Despite economic data suggesting a substantial contraction in activity, multiple indicators exceeded bleak expectations. Central banks reiterated their commitment to supporting economies and markets through asset purchases and similar interventions.

Government bond yields exhibited some divergence during the quarter. While the 10-year yields of the US and Germany remained relatively stable, yields more susceptible to risk sentiment dropped, leading to higher prices. The US 10-year yield concluded the quarter just one basis point lower, maintaining a narrow range despite experiencing a dip in early June due to robust US labor market data.

In Europe, Italy's 10-year yield fell over 22 basis points to 1.26%, buoyed by hopes of coordinated support measures across the eurozone. The UK 10-year bond yield declined by 18bps to 0.17% as Brexit returned to focus, and the UK two-year yield slipped below zero for the first time as negative interest rates were discussed by the central bank.

Corporate bonds outperformed government bonds as risk appetite surged, with high yield returning 11% (particularly strong in the European market) and investment grade yielding 7.9%. The US energy sector displayed robust performance in both investment grade and high yield categories. Emerging market bonds experienced a significant rebound, with hard currency government, quasi-sovereign, and corporate bonds delivering returns of over 11%, and local currency bonds climbing by nearly 10%. However, EM currency performance lagged behind other risk assets, reflecting concerns about Covid-19, especially in Brazil.

Global stock markets demonstrated robust growth in the second quarter, with the MSCI World index gaining 19.4%. The Thomson Reuters Global Focus index displayed impressive participation in the upswing, wrapping up the quarter with a 15% increase. The convertible primary market exhibited activity reminiscent of 2007, and the influx of new issues maintained valuations at lower levels.