Top Financial Market stories of the week
Monday 22nd June 2020-Friday 26th June 2020
1. New rise in coronavirus cases cause gold to rise — Monday and Wednesday
Gold prices climbed towards their highest level since 2012 on Monday. Historically low interest rates, a weakening dollar and monetary stimulus from global central banks have allowed the appeal of gold and other precious metals to increase which has pushed prices up. Gold spot prices moved to within a few dollars of a seven year high, rising 1% to $1,762 an ounce.
The price of gold in the spot market on Wednesday rose as much as $10 to $1,779 an ounce, its highest level since October 2012, before edging back to $1,772. The Financial Times reported that “the rally reinforced the impression that investors are worried regarding the outlook for global trade due to the pandemic, with caution also evident in stock markets. Concern that government bond yields will struggle to keep pace with inflation in the coming months has also boosted demand for the precious metal, which has gained about 16% in price this year.”
2. Wirecard collapses with debts of more than €3bn — Monday and Thursday
At the start of this week, Wirecard, a German payment processor and financial services provider (listed on the Frankfurt Stock Exchange as part of DAX index) admitted for the first time the scale of its multi-year accounting fraud. The fintech group warned that €1.9bn of cash on its balance sheet probably does “not exist” since it had previously mischaracterised its biggest source of profits. This led to founder and former CEO of the company Markus Braun being arrested on Monday on suspicion of false accounting and market manipulation, although he was released on bail.
The price of Wirecard’s shares declined by 33% after the annoucement and the company was stuck in urgent negotiations with banks owed €2bn. However negotiations did not come to fruition and on Thursday, Wirecard filed for insolvency. Auditor EY stated there were “clear indications that this was an elaborate and sophisticated fraud, involving multiple parties around the world in different institutions, with a deliberate aim of deception”.
This has been the first failure of a member of Germany’s distinguished Dax index and is likely to inflict big losses on creditors as well as reputational damage on regulators led by BaFin and Wirecard’s longstanding auditors EY.
3. Investors withdraw $105bn from US money market funds in four weeks — Tuesday
Money market funds received inflows of of $1.2tn, according to data from Investment Company Institute. The Financial Times reported that money market funds are often popular with corporate treasurers looking for a place to put excess cash and also investors looking for a safe haven in times of economic strain.
However, these funds have now seen outflows for four consecutive weeks, totalling almost $105bn. Bankers have reported that this may be because investors are diverting cash into higher yielding investments, for example corporate bonds. ICI data showed retail money market funds have also recorded withdrawals, although at a slower rate.
4. IMF warns global economy will take $12tn hit from pandemic — Wednesday
The International Monetary Fund (IMF) has stated the global economy will take a $12tn hit from the coronavirus pandemic and that it will take at least two years for global output to return to levels seen at the end of 2019.
The IMF said the coronavirus pandemic had been more negative for activity in the first half of 2020 than expected, and recovery was also projected to be slower. Global growth is forecast to be 5.4% in 2021, down from 5.8% in April, but would plummet to zero in the event of a second wave of the pandemic early next year.
The IMF’s World Economic Outlook predicts there to be a 4.9% decline in global output this year. It had previously predicted a 3% decline in April. They said consumption and services had dropped significantly lower than expected and the hit to global labour markets had been “catastrophic”.
Gita Gopinath, the IMF’s economic counsellor warned that the IMF also expects living standards to drop in more than 95% of countries this year as a result of the pandemic. She cautioned central banks and governments against withdrawing emergency support even as the recovery appears to take hold: “Policymakers should remain vigilant and policies will need to adapt as the situation evolves… substantial joint support from fiscal and monetary policy must continue for now, especially in countries where inflation is projected to remain subdued.”
5. US airlines continue to raise significant levels of capital — Wednesday
US airlines, triggered by the pandemic, increased the size of debt and equity fundraisings to reach almost $10bn this week. On Tuesday, Alaska Airlines issued close to $1bn worth of debt backed by 28% of its fleet of aircraft.
On the same day, American Airlines undertook a $2bn fundraising split between shares and convertible notes and also increased its debt by adding $1bn to its secured bond one day later.
The move comes as airlines continue to do what it takes to tap into sources of capital to keep themselves running since airline passanger numbers in the US fell 81% from the same time last year, according to the Transportation Security Administration. Delta Air Lines, Southwest Airlines and JetBlue Airways have also all tapped into debt markets in recent weeks to boost liquidity. US airlines have already raised $46.5bn this year, excluding the $50bn government aid package legislators approved in March.
6. US stocks rally as banking regulations are eased — Thursday
Bank stocks in the US rose due to the easing of post-2008 crisis rules that will make it easier to invest in venture capital funds and free up capital set aside for derivatives. The Federal Reserve and four other regulatory agencies announced on Thursday that they have finalised a rule that will ease restrictions curtailing the ability of banks to make investments in such areas as hedge funds.
The regulations known as the ‘Volcker Rule’ gave an immediate boost to bank stocks since the rule change could free up billions of dollars in capital in the banking industry. Easing rules on derivatives is expected to release up to $40bn in capital for the banks. The S&P 500 and the Nasdaq index both closed up 1.1% higher leading US markets to their third positive close in four days. Citigroup rose 3.7%, Bank of America was 3.8% and Goldman Sachs gained 4.6%.
7. Shopping centre giant INTU falls into administration — Friday
Intu’s shopping centre empire has crashed into administration and its shares have been suspended, having failed to reach a deal with its lenders over its £4.5bn debt. The group owns 17 sites in the UK, although centres are due to stay open for the time being.
The group has suffered significantly because of lower rent payments from retail tenants since the coronavirus outbreak. The firm’s latest update on rent collection said it only received 40% of rental and service charge income for the first quarter of the year due to the lockdown.
Market analysts have predicted it is likely that some of that debt will be defaulted on. The price of its largest bond, backed by the Metrocentre shopping centre in Gateshead, declined almost a fifth over the past month alone.