Top financial market stories of the week

Monday 13th July 2020-Friday 17th July 2020

1. S&P Global slashes emerging market growth forecasts — Monday

S&P Global, a ratings agency, cut its emerging market forecasts on Monday, predicting a 4.7% decline on average in 2020 due to the pandemic. They also warned that all of the countries would be left with permanent scars.

In its report, S&P stated, “We project the average EM GDP (excluding China) to decline by 4.7% this year and to grow 5.9% in 2021. Risks remain mostly on the downside and tied to pandemic developments.” They have revised down their predictions due to the fact that the pandemic is worsening in many emerging markets and is set to cause a larger hit to foreign trade (i.e. a steeper fall in exports) than foreseen in April, when S&P predicted a 1.8% contraction.

The gap relative to the pre-coronavirus GDP path could be as large as 11% of output in India, 6%-7% in most of Latin America and South Africa, 3%-4% in most of Emerging Europe, and 2% in Malaysia and Indonesia. Latin America’s forecasts saw the biggest cut and the region is now expected to suffer a 7.4% GDP slump this year, including a 7% drop in its largest economy, Brazil.

Another key takeaway from S&P’s report was that, “EM’s will face rising leverage, weak revenues, and potential for rising social unrest, given that the pandemic has made evident deep income disparities and poor access to health services.” They added that investor sentiment remains fragile although improved financial conditions and gradual economic recovery from EM’s key trading partners is likely to support economic recovery.

2. UK GDP rises a mere 1.8% in May — Tuesday

Britain’s economy bounced only 1.8% in May, following the steepest decline on record in April, according to the Office of National Statistics. May’s figure follows a 6.9% contraction in March and a record breaking 20.3% fall in April which was the only complete month of full lockdown. As a result, in May the UK economy was still 24.5% smaller than in February, pointing to a long recovery to pre-crisis levels.

May’s figure was much lower than the prediction from a poll of economists by Reuters of 5.5%. GDP also tumbled by nearly a fifth, down 19.1% in the three months to May, according to the ONS. The data showed the services sector (accounts for three-quarters of the economy) grew by 0.9% in May, while manufacturing rose 8.4% and construction by 8.2% as factories and building sites started to get back on stream. This has severely dampened hopes that the UK economy could achieve a V-shaped recovery.

3. Treasury’s forecaster predicts 3 possible scenarios for UK as economy recovers — Tuesday

The Office for Budget Responsibility (OBR), the official forecaster for the Treasury, laid out 3 scenarios on Tuesday, regarding the UK’s economic recovery. The OBR stated that, “The UK is on track to record the largest decline in annual GDP for 300 years”, warning that the economy could shrink by as much as 14.3% in 2020. Their central scenario also now no longer believes a V-shaped recovery is possible.

In its upside scenario, the OBR predicts that activity will rebound fairly quickly, recovering its pre-virus peak by the first quarter of 2021, and there is no enduring economic scarring. UK GDP is set to fall by 10.6% in even its most optimistic projection, although it will snap back rapidly next year. The government’s budget deficit hits £263bn this year, or 13% of GDP, before gradually dropping back by 2025 to end up near the levels expected before coronavirus struck.

In its central scenario, the OBR has predicted that output will recover more slowly, regaining its pre-virus peak by the end of 2022 with GDP falling by 12.4% in 2020. Unemployment will more than doubling from 1.3m last year to 3.5m in 2021. The budget deficit may hit £322 bn or 16% of GDP and job losses and business failures will be significant.

In its downside scenario, the OBR predicts that output will recover even more slowly, returning to its pre-virus peak only in the third quarter of 2024. This results in a more significant loss of business investment, company failures and persistently high levels of unemployment. Unemployment may peak at 13% in the first three months of 2021 in this scenario-a jobs crisis worse than the period of high unemployment under the Thatcher government of the 1980s and GDP will fall by 14.3% this year, marking the worst recession for three centuries.

4. Stocks rally as hopes of COVID-19 vaccine progress grips sentiment — Wednesday

Positive vaccine news from US biotechnology giant Moderna and suggestions that there had also been progress for the Oxford Covid-19 vaccine backed by AstraZeneca fuelled the sentiment of traders and investors and caused stock markets around the world to climb higher.

The FTSE 100 closed 112.9 points higher (increasing by 1.8%) on Wednesday and the major European markets also leapt higher as a result of the positive news with the German Dax increasing by 1.84% and the French Cac 2.03% higher. The Stoxx 600 added 1.8% for its third increase in four trading days. US stocks made gains for a second day, with the S&P 500 index closing up 0.9%.

5. Global consumer confidence sees record drop in second quarter of the year — Wednesday

Global consumer confidence suffered a record drop in the second quarter as the pandemic continued to dampen job prospects and strain personal finances, according to a report from The Conference Board. The Conference Board’s index of consumer views plunged from a solidly optimistic reading of 106 at the start of the year to a pessimistic level of 92 (above 100 is considered positive). The 14-point drop is the most on record dating back to 2005 for the index, and is twice as deep as the largest drop during the global financial crisis.

As confidence dipped, global consumers spent more on necessities and less on discretionary items in the quarter, likely reflecting their home-bound states, according to the report. North American and European markets were affected more by a worsening job outlook and this hit confidence in major markets such as the US, Canada, France, Germany, and the UK. Latin American and some Asia-Pacific markets saw a drop in confidence propelled mainly by falling expectations about personal finances in the next year, whereas emerging markets such as Argentina, Brazil, and Russia were weighed down by both job and finance worries.

6. Iron ore surpasses gold as this year’s best performing commodity — Wednesday

Iron ore prices have surged to around $112 per ton on Wednesday, a level which has not been seen August 2019. The commodity has increased by almost 21% since the start of 2020, meaning it has surpassed gold which has gained 19%.

The rise is prices of iron ore is thought to be due to signs that China (the world’s largest steel producer) is seeing a solid recovery. Beijing recently announced plans to boost spending on infrastructure through an increase in local government borrowing and according to the Financial Times, “a state-backed rally in Chinese equity markets has also played a big role, as investors looking for China-growth proxies have piled into iron ore derivatives”.

7. Huge sell-off in China cause global stocks to slide — Thursday

China’s CSI 300 index recorded its worse day since February on Thursday, falling 4.8%. According to Bloomberg, this month’s frenzy in Chinese stocks had pushed the value of the country’s equity market to almost $10tn , a level that marked the top of the bubble five years ago. Since then policymakers have taken steps to rein in speculation in equities, including effectively withdrawing liquidity from the financial system. The CSI 300, which was up almost 17% for the month on Monday, has now given up half those gains.

Increasing tensions with the US, the central bank’s clampdown on easy money and a drop in retail sales are also adding up as reasons to start selling. Moutai, China’s biggest domestically listed company, tumbled 7.9% in its worst decline since October 2018, wiping out a record $25bn of value.

Overseas investors continued to decrease their holdings of mainland-listed shares, selling nearly $4bn worth of the stocks through exchange links in the past three days. The plunge of the CSI also led other stock markets around the world to decline with the Nasdaq Composite closing 0.7% lower and the S&P 500 0.3% following two straight days of gains. The Stoxx Europe 600 fell 0.5%, while the FTSE 100 finished 0.6% lower.

8. European Central Bank holds rates steady and continues bond-buying programme — Thursday

The European Central Bank (ECB) made no changes to its expansive efforts to tackle the economic impacts of the coronavirus pandemic, leaving interest rates and its crisis bond-buying programme unchanged on Thursday. Last month, the ECB significantly expanded its firepower in response to the crisis by increasing the size of the programme by €600bn (£538bn).

The bank was seemingly content to wait for more concrete information on how its current stimulus measures are impacting the Eurozone economy. However they did state they will “continue purchases under the €1.35tn pandemic emergency purchase programme until at least the end of June 2021 and, in any case, until it judges that the coronavirus crisis phase is over”. The bank’s governing council chose to leave its key interest rate, known as the deposit facility rate, unchanged at minus 0.5%.

ECB president Christine Lagarde noted, “Incoming information since our last monetary policy meeting in early June signals a resumption of euro area activity, although the level of activity remains well below the levels prevailing before the coronavirus pandemic.”

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