June Market Commentary

For the second month in a row, we went back to the previous month’s Commentary before we wrote a word. How did we leave April in this rapidly changing world? With the Prime Minister having just come out of hospital and having become the father of a baby boy. With plenty of bad news to digest as financial institutions seemed to compete with each other to make dire predictions – but with the good news that all the markets we cover in the Commentary had risen during the month.

May didn’t quite bring us a clean sweep: the markets in Hong Kong and India fell during the month. But the majority of the other markets on which we report made gains. They are still a long way from recovering all the ground they have lost due to the pandemic, but most countries are now starting to ease lockdown – and taking significant steps to help their economies recover.

There has, though, been plenty of bad news in May. That was inevitable, and there will be more to come in June. As Chancellor Rishi Sunak has said, it will be impossible to protect every company and every job – be that in the UK or elsewhere. So May was the month when some of the threatened job losses became a reality. It was also the month when tensions over Hong Kong escalated rapidly.

There was, though, good news if you looked for it – not least for the carmakers of Sunderland. Whether Elon Musk’s new son will look back on May 2020 quite so fondly when he’s a teenager is another matter…

UK

The UK – like virtually every country – continued its policy of economic stimuli as it ‘fought back’ against the global pandemic. Chancellor Rishi Sunak announced that the furlough scheme – which by the end of May covered 8.4m employees – would be extended to October, although firms will gradually be asked to contribute an increasing amount towards the cost. There was also more help for the self-employed although, inevitably, there were still plenty of stories of people ‘falling through the cracks’ in the safety net.

We are now seeing gradual moves to get the UK back to work. As we write, car showrooms and outdoor markets have re-opened, and ‘non-essential’ shops will re-open from 15th June (although we suspect that every shop is essential to its owner).

Marks and Spencer, though, put into words what many people have already accepted. Customers may “never shop the same way again,” said M&S boss Steve Rowe. “Whilst some customer habits will return to normal, others have changed forever.”

With footfall in high streets, retail parks and shopping centres falling by 80% in April, it is hard to disagree. Nor is it any wonder that so many shops are seeking to renegotiate rents with landlords, or simply refusing to pay. Sandwich chain Pret A Manger was one company that admitted to calling in consultants to help renegotiate its rents as it “radically adapted” its business model to cope with more people working from home.

Away from the high street, the month got off to a bad start with Make UK forecasting that manufacturing output would fall by 55% in the second quarter, a record number of firms issuing profit warnings and Rolls-Royce announcing that 8,000 jobs would be lost.

As we noted above, May was the month when many threatened job losses became a reality – EasyJet were one company to announce that they would be cutting “thousands of jobs” – and you do wonder how many more will be lost as the furlough scheme winds down.

Boris Johnson has already hinted at a specific post-crisis jobs programme, similar to the Future Jobs Fund brought in after the 2008 financial crash. He spoke of a scheme that would create, “high class jobs for the country.” There were also suggestions over the weekend of Chancellor Rishi Sunak delivering an emergency Budget early in July as he looks to set the country on the path to recovery – and manage the huge Government borrowing that has been necessary.

There was, though, some good news for the UK. The economy ‘only’ contracted by 2% in the first quarter of the year and Nissan gave the North East a huge potential boost when it closed a factory in Spain, prompting widespread speculation that it would be moving production of two Renault SUV vehicles to Sunderland.

Almost half a million firms have applied for the ‘Bounce Back’ loans – with more than £14bn paid out so far – and as well as extending the furlough scheme, Rishi Sunak also announced a second payment to the 2m self-employed that have applied for grants.

What did the FTSE-100 index of leading shares make of it all? As we reported above, most leading stock markets were up in May, and the FTSE was no exception. Having started the month at 5,901, it rose 3% to end the month at 6,077. The pound fell 2% against the dollar in May, closing the month at $1.2342.

Brexit and Trade

A year ago, the idea of something completely eclipsing Brexit in the headlines would have been inconceivable.

In May 2019, the race to succeed Theresa May had just begun. Well, we all know how the race eventually turned out. The UK subsequently left the EU on 31st January and we’re now negotiating the terms of the final divorce.

Simultaneously, the UK is also cosying up to new suitors, with the UK/US trade talks having officially started and City AM reporting in the middle of the month that talks between the UK and Japan are expected to start soon.

Meanwhile, the dance with the European Union continues, with both sides said to be growing weary of the other’s intransigent negotiating position. Another report in City AM mid-month suggested that the UK ‘is now ramping up preparations for no deal.’

David Frost, the UK’s chief negotiator, was reported as saying that the EU’s position would “need to evolve” – especially on key areas such as fishing – if there was to be any hope of a deal being done. Key talks are due to be held in mid-June between Boris Johnson and Ursula von der Leyen, the President of the EU Commission. They may well be pivotal in deciding the ‘deal or no deal’ question – we will, of course, report back next month.

Europe

We have hailed it as something of a triumph that the UK economy ‘only’ contracted by 2% in the first quarter of the year, so it seems churlish not to extend the same compliment to Germany. Europe’s biggest economy contracted by just 2.2% in the first three months of the year: technically, this pushed the country into a recession, but by the end of the second quarter, all the world’s economies will be in recession.

The broader European picture was not quite so rosy. The Eurozone as a whole saw its economy contract by 3.8% in the first three months of the year, with the EU commission forecasting a ‘deep and uneven recession.’ Its tentative forecast was that economic activity this year would decline by 7.5%, before a recovery in 2021.

There was plenty of grim company news, with Renault saying it was planning 15,000 job cuts around the world, despite the French government announcing an €8bn (£7.2bn) rescue package for the car industry. Across the border, Lufthansa agreed a €9bn (£8.1bn) rescue deal with the German government – a deal promptly denounced as illegal by Ryanair boss Michael O’Leary.

A rather larger rescue package was mooted by European Commission President Ursula von der Leyen. “This is Europe’s moment” she said, proposing a €750bn (£673bn) rescue package made up of grants and loans for every member state.

Whether this is too little, too late – especially for a beleaguered economy like Italy’s – we will have to wait and see. In the short term, though, it was enough to ensure that both Europe’s leading stock markets finished the month positively. The German DAX index was up by an impressive 7% to 11,587: the French stock market rose 3% to 4,695.

US

Scanning through our notes for the US section of the Commentary, it was hard to find a good news story for the whole of May and yet – as you’ll see below – the Dow Jones index enjoyed a good month.

The month got off to a bad start as Markit’s Purchasing Managers’ Index for April reported the biggest fall in manufacturing output on record. Legendary investor Warren Buffet sold all his shares in US airlines, and GE announced that it would cut up to 25% of its aviation staff – possibly amounting to 16,000 jobs.

The jobless figures mounted every week, with figures showing that 21m Americans had lost their jobs in April. By the end of May, nearly 40m people were claiming unemployment benefits.

Jerome Powell, Chairman of the Federal Reserve, warned that the US economy could “easily” contract by 20-30% during the pandemic, and that the downturn might well last into 2021.

Car rental firm Hertz filed for bankruptcy protection after the pandemic caused demand to “collapse”.

Retail figures for April showed the second consecutive month of record decline. ‘Coronavirus pummels US retail sales’ reported Reuters, suggesting that the economy was on track for its biggest second quarter contraction since the Great Depression.

As we reported last month, the US government has fought back with ‘an unprecedented fiscal and monetary stimulus, passing bills worth around $3tn (£2.4tn) while the Federal Reserve has slashed interest rates.’

This will, of course, involve an unprecedented amount of borrowing. The US expects to borrow a record $3tn (£2.4tn) in the second quarter. To give you an idea of the scale of that borrowing, it is more than five times the previous quarterly record, set at the height of the 2008 financial crisis.

And yet, as we commented above, the Dow Jones index enjoyed a good month, rising by 4% to 25,383. Despite everything, there seems to be optimism and confidence in the US that the pandemic will ultimately see new companies bringing new products to new markets. As we write on the morning of 1st June, two American astronauts have joined the International Space Station, orbiting Earth some 260 miles above China. They got there in SpaceX’s Dragon Endeavour spacecraft – a commercially made spacecraft. The optimists could well be right…

Far East

One of the constant themes throughout May was tension between the US and China: it began economically and ended the month not very diplomatically.

In an interview with Fox Business News, President Trump suggested that Chinese companies listed in the US may in future have to follow US accounting rules. A bill to this effect was overwhelmingly passed by the US Senate a few days later, which could see Chinese companies like Alibaba being forced to de-list in the US.

A few days later, the US announced new export controls aimed at limiting Huawei’s access to semiconductor technology. Huawei protested that this would put “its very survival” at risk.

By the end of the month, though, everyone’s focus had switched to Hong Kong as China voted to impose a national security law on the territory. This would make ‘subverting the authority’ of China a criminal offence but – perhaps even more worryingly – the law would allow China to place its own security forces in Hong Kong.

One pro-democracy legislator in Hong Kong said, “Hong Kong as we knew it is effectively dead.” The US duly led the protests from around the world, but you suspect that they will have little real impact. We can only wait and see what develops.

Elsewhere in the Far East, China scrapped its annual growth target for the economy; the first time this has ever happened. Japanese leaders might be wishing they could do the same, as the economy shrank by 3.4% in the first quarter of the year, pushing the country into recession for the first time since 2015. With factory output down by 9.1% in April, the figures for the second quarter will make grim reading.

But economists expect the Japanese economy to pick up from June and it was this – rather than the bad news – that impacted the country’s Nikkei Dow index, which rose 8% in the month to 21,878. The South Korean market was also up, climbing 4% in May to 2,030. China’s Shanghai Composite index was unchanged in percentage terms at 2,852. Unsurprisingly, the Hong Kong market was down, falling 7% to 22,961.

Emerging Markets

As we have seen above, nearly 40m Americans are now claiming unemployment benefit – but that figure is dwarfed by India. By the second week of May, over 120m people had lost their jobs in India, with the unemployment rate at a record high of 27.1%. Despite the government announcing a $264bn (£214bn) rescue package, the Indian stock market was one of only two markets on which we report to fall, dropping 4% in May to end the month at 32,424.

There was equally bad news in Brazil, with Economy Minister Paulo Guedes warning that the country could face “economic collapse,” with dangers of “food shortages and social disorder.” President Jair Bolsonaro opposes stay-at-home measures, arguing that they will do unnecessary damage to the Brazilian economy. In May, the stock market sided with the President, rising 9% to 87,403.

It was a more subdued month in Russia, the other major emerging market we cover. The Moscow stock market rose 3% to close May at 2,735.

And finally

We’ll admit that two months ago, we were worried. With lockdown having just started, we thought that our ‘And finally…’ section might become redundant. That the ‘new normal’ might be a rather serious place: the Commentary might simply end with the performance of the Russian stock market.

We needn’t have worried. The human spirit – and its propensity to do something silly – has triumphed.

Our hero this month is Tesla boss Elon Musk: he is, of course, also the CEO of SpaceX, but the month wasn’t all rockets to the stars. Musk started the month by tweeting that he thought the Tesla share price was too high – and promptly wiped $14bn (£11.3bn) off the value of his own company.

Never mind: a week later his girlfriend, Canadian singer Grimes, gave birth to their first child, a bouncing baby boy. They duly announced that the little chap would be named X Æ A-12 (pronounced X-Ash-A12). Of course! What else?

Not so fast, said California’s legislators. You can’t use numerals in a child’s name. So the child is now called X Æ A-Xii which is, of course, far more conventional. We wonder what their dog is called…

As we have seen above, there is a real desire for the hospitality industry to restart, and not just in the UK. But what do you do about social distancing?

The managers at Café & Konditorei Rothe in Schwerin, north east Germany, solved the problem by politely requesting that their customers wear swimming pool ‘noodle hats’ to ensure social distancing. Essentially, you can have a coffee, but you need to drink it wearing a hat with three large foam ‘arms’ on it.

They were, though, rank amateurs compared to the owners of a seafood bar called Fish Tales in Ocean City, Maryland. A hat? Chance would be a fine thing. Customers at Fish Tails must wear a giant, inflatable ‘spare tyre’ supported on wheels if they want to have a drink.

Finally, some more good economic news – and a comfortable winner of the Tongue Twister of the Month award. Not only have we been baking more bread during lockdown, we’ve also become gardeners. The BBC’s headline was simple: ‘Seed Sales Soar.’

Try saying that after a few socially-distanced beers at Fish Tales…