Market Update 22nd – 29th May 2020
Stocks ended the week higher, with the month of May marking the start of the gradual reopening of the domestic and global economy. A steady but slow decline in new infections has allowed the partial lifting of restrictions, boosting investor confidence. The more cyclical sectors, like financials and industrials, outperformed last week, while European equities reacted positively to a proposed €750 billion recovery fund by the European Commission. The proposal requires approval by all EU members and includes €500 billion of grants to member countries.
The Euro is currently trading at $1.1115, a two month high in response to the proposal. Despite the brief pullback on Thursday evening, the US market still finished in positive territory, 3.76 % higher and this was followed by strong performance in Europe, with the Eurozone market up by 4.49%, and the UK up 1.38%. In Asia, the Hong Kong index lagged given the geopolitical tensions, up just by 0.14%, however, Japanese equities were the stand out performer in the region rising 7.30%
The news that lockdown is easing across the globe also led to a rally in equity sectors leveraged to the reopening of the economy, including an outperformance in airlines, hotels, and leisure, versus sectors that have gained from the “stay-at-home theme”, including online retailers and consumer staples. In particular, travel companies rallied, with TUI up 50% and airlines including easyJet and British Airways-owner IAG 20% higher after Germany announced a vote this week on whether to relax travel restrictions by mid-June. This was followed by Spain saying on Saturday it would be open for foreign holidaymakers from July.
The rally lost steam by the end of the week, however, over fears of worsening US-China relations after Beijing, this week announced proposals to implement a controversial national security bill over Hong Kong, raising fears over the future of its freedoms and its function as a finance hub. US Secretary of State Mike Pompeo reported to Congress on Wednesday that the Trump administration no longer considers Hong Kong to be autonomous from China, potentially jeopardising bilateral trade arrangements that apply to Hong Kong.
In what was broadly a risk on week, demand for safe-haven faltered, although there was some appetite for core Government bonds late in the week as investors braced for the US to retaliate over the Hong Kong security bill. Overall for the week, 10-year US treasury yields (which move inversely to their bond price) were largely unchanged up just 1 basis point, whilst the yields for 10-year equivalent German Bunds and UK gilts rose by 5 and 1 basis points respectively. Gold also gave up some ground, down 0.71% for the period now trading at $1,730 per ounce.
Brent Crude oil prices rose by 5.02% over the week to trade at $37.84 per barrel and WTI also rose 5.28% currently trading at $35.32. The Energy Information Administration showed that US crude oil and distillate inventories rose sharply last week, gaining 7.9 million barrels in the main due to imports, whereas analysts had, in fact, predicted a drop of 1.9 million barrels.