Top financial market stories of the week

Monday 10th August 2020-Friday 14th August 2020

1. UK loses 750,000 jobs during the pandemic — Tuesday

Figures from the Office for National Statistics (ONS) revealed on Tuesday that the UK had lost almost 750,000 jobs since the start of the lockdown in March. The number of employees on UK payrolls was 730,000 lower in July than in March, a 2.5% fall, mainly caused by companies freezing hiring. Employment fell by 220,000 in the second quarter when the strictest restrictions were in place. This is the biggest quarterly decline since the global financial crisis.

The main points from the ONS report were:

  1. A rise in the number of unemployment benefits claims from 2.69 million in July, an increase of almost 1.5 million since March.
  2. Pay excluding bonuses fell 0.2% in the second quarter from the year earlier. This was the first negative reading for basic pay since records began in 2001.
  3. There were 274,000 fewer openings in the three months through July than in the previous quarter.
  4. Around 7.5 million workers, including furloughed employees, were temporarily away from work in June, with over 3 million off for at least three months.

Despite this, the official UK unemployment rate remained near all-time lows in June, missing expectations for a rise in jobless numbers and lagging behind the reality. The ONS stated that the 3-month unemployment rate remained near record lows at 3.9% in June. Economists had expected unemployment to rise to 4.2% in June. The single-month rate also fell from 4.1% in May to 3.8% in June. The headline unemployment rate remained stable “because of increases in people out of work but not currently looking for work,” the ONS said.

The unemployment rate is based on a representative survey of the UK’s labour force, rather than a comprehensive audit of the jobs market and many economists have raised concerns over the ONS sampling method. Sanjay Raja, UK economist at Deutsche Bank stated, “There are clear sampling issues with the ONS’ numbers. Survey and vacancy data are all consistent with a marked rise in unemployment.”

2. UK retail sales remain strong in July — Tuesday

UK retail sales saw its second consecutive month of growth since the start of the pandemic. According to a report from KPMG and British Retail Consortium, on a total basis, sales increased by 3.2% in July, against an increase of 0.5% in July 2019. This was above the 3-month average growth of 0.4% and the 12-month average decline of 1.9%.

Online purchases accounted for 42% of all sales in July, a smaller share of that the 50.5% recorded in June. Spending on food was also up, with sales up 6.1% on a total basis and in-store sales of non-food items declined 29.3%.

3. German investor confidence rises on hopes of a recovery — Tuesday

A survey by the European Economic Research Centre (ZEW) showed that German investor sentiment had risen far higher than expected in July. The ZEW survey rose from 59.9 points in July to 71.5 in August, exceeding a forecast for 58.0 in a Reuters poll of economists. ZEW president Achim Wambach, stated, “Hopes for a speedy economic recovery have continued to grow.” He also added that very poor earnings expectations for the banking sector and insurers regarding the coming six months give cause for concern. ZEW found that investor sentiment towards the recovery of the eurozone as a whole had improved too, climbing 4.4 points from July to 64 points this month.

The German economy is expected to contract by 6.3% overall in 2020 and rise by 5.2% the year after. However, it is hoped that the EU’s €130bn stimulus package will help the country return to growth much faster.

4. Gold rebounds from its biggest daily decline in 7 years — Tuesday/Wednesday

Gold’s per ounce price fell $129 in the international market on Tuesday, marking the biggest one-day decline in seven years for the precious metal. According to the Financial Times, Gold prices reached a low of $1,864 early on Wednesday. By mid-afternoon, they had recovered, up 1.3% at $1,935 an ounce. Spot silver dropped 15% to $24.7931, the biggest decline since October 2008. Gold prices touched a new high of $2,063 last week but has been moving down since then. Bond yields tend to move inversely to gold prices and the decline of gold was accompanied by a sell-off in US Treasuries, with the yield on the 10-year note climbing 8 basis points to 0.65% on Tuesday.

Demand for precious metals as haven assets slipped after Trump’s comment on potential tax cuts and falling hospitalisations in California and New York. Further eroding support for gold was a Covid-19 vaccine that Russian President Putin said was approved for use. Analysts still believe, however, that conditions for gold remain favourable and the strong market for precious metals is likely to continue.

5. The UK plunges into recession after 20.4% contraction in Q2 — Wednesday

The UK fell into its deepest recession on record in the first half of the year as the lockdown led the economy to shrink by more than a fifth. The economy contracted by 20.4% in the second quarter of the year, worse than any other G7 nation, taking the UK into its first recession since the 2008 financial crisis. This drop was significantly greater than the 2.2% drop in GDP from the first quarter in January to March. However, in June output was up 8.7% month on month, as shops reopened, factories began to increase production and house-building continued to recover.

The ONS stated that the pandemic had erased 17 years of economic growth in only two quarters, taking the level of GDP back to the equivalent position in June 2003. Britain’s decline was more than double the 10.6% fall in the US over the same period and also surpassed declines in France, Germany and Italy among G7 nations that have reported second-quarter figures so far.

However, UK stocks stayed strong and on Wednesday the FTSE 100 closed 2% higher and the FTSE 250 also rose 0.5%. Strong gains for key stocks, including oil major Royal Dutch Shell and HSBC, helped the index higher.

6. Dividends of 445 firms on LSE have been cut since the pandemic — Thursday

Approximately 445 companies listed on London Stock Exchange (LSE) have cancelled, cut or suspended dividend payments in 2020, according to an analysis from exchange-traded fund provider GraniteShares. The majority of companies that had reduced dividends were AIM stocks (a sub-market of the LSE for smaller and medium-sized firms) — 139 companies. Half of FTSE 100 had reduced dividends, alongside 108 FTSE 250 companies.

Will Rhind, founder and CEO at GraniteShares, said: “Last year, dividends paid by British companies hit an all-time high or £110 billion — an increase of 10.7% on 2018…Given the current economic crisis and the likely rise in job losses, it will be some time before we see a return to the level of dividends paid before the coronavirus crisis started.” He also expects to see a rise in professional investors making greater use of shorting and leveraged investment strategies to boost returns.

7. US Treasury forced to fund stimulus after weak demand at bond auction — Thursday

The Treasury sold a record amount of 30-year bonds to weak demand, the final sale of $112 billion this week. The Treasury sold $26 billion in bonds, up from $22 billion at its last quarterly refunding in May. The bid-to-cover ratio, a measure of overall demand, was at 2.14 for this auction — the lowest since July 2019. According to Reuters, the 30-year bond yield rose to the highest level in a month in the morning as traders anticipated the additional supply. Yields continued to gain after the new debt sold at a high yield of 1.406%, the second-highest rate offered at auction since the beginning of the pandemic. The lack-lustre result caused a sell-off in the Treasury market and long-dated Treasuries sold off at a faster pace than short-dated notes, sending yields higher.

The Treasury last week increased auction sizes across the curve and said that it plans to continue to shift more of its funding to longer-dated debt in coming quarters as it finances measures to offset the impact of the coronavirus epidemic.

With bond yields so low in recent weeks, investors have gravitated to stocks for the prospect of superior returns which has helped lift the S&P 500. US stocks came close to hitting an all-time high on Thursday as the S&P 500 was left 20 points short of the record high of 3,393.52, set in February, finishing 0.2% down and the Nasdaq finished 0.3% higher.

8. China’s economic recovery underwhelms and misses expectations — Friday

China’s retail sales declined in July, dashing expectations for a modest rise, as consumers in the world’s second-largest economy failed to show strong signs of a recovery. Data from the National Bureau of Statistics on Friday showed weaker-than-expected year-on-year industrial output growth and retail sales extending declines into a seventh straight month.

Industrial output grew 4.8% in July from a year earlier, in line with June’s growth but less than a forecast 5.1% rise. Retail sales decreased 1.1%, missing predictions for a 0.1% rise and following June’s 1.8% fall. The decline in retail sales was broad across many industries with garments, cosmetics, home appliances and furniture all worsening. The exception was auto sales, which surged 12.3%, turning around from an 8.2% fall in June.

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