Following the bounce in markets that we saw on Wednesday, broader markets closed down yesterday (Thursday 16 July 2020). This pull back was partly driven by weakening Chinese sentiment, which was not only seen in the, weaker than expected, retail sales data (that came in at -1.8%), but also driven by Beijing’s desire to temper the recent rally in Chinese markets, amid increasing tensions with the US. However, despite Chinese markets having one of their worst days since February, we believe their outlook remains strong (as we saw from the bounce in Q2 GDP at 3.2%), as like the majority of other Asian and Emerging Markets, they have not diluted their economic data with temporary fiscal support (like furlough schemes) that would distort unemployment data, consumer demand and inflation. With that in mind, Chinese markets did recoup some of the losses overnight.
Elsewhere, we saw the European Central Bank (ECB) leave policy unchanged, with their headline Deposit Facility Rate remaining at -0.5%. Whilst a negative rate is not great for the banking sector, it will likely remain in place for some time to come, in order to stimulate lending, consumption and ultimately ensure inflation meets targets. We saw the effects of current stimulus earlier today when Europe’s CPI (Consumer Price Index) for June, a broad measure of inflation, came in at 0.3%, significantly stronger than May’s data. With the ECB continuing to remain accommodative, it seems likely that monetary stimulus will begin to play second fiddle to fiscal policy. The €1.35 trillion pandemic bond buying programme remained unchanged, however the message in yesterday’s press conference from the ECB President, Christine Largarde, was that the bank will remain accommodative and have kept the repurchasing of the €1.35 trillion asset purchase programme open ended, even if its absolute level remains unchanged. They will also look towards a more targeted approach to their fiscal stimulus measures. So, with this in mind, we believe that European interest rates will remain low for some time to come, as at this stage it does not seem likely that rates will be increased ahead of the current asset buying programme being slowed. The supportive nature of the ECB presents opportunities for well-run corporates to recover following the pandemic, but the road will remain bumpy. We await details of today’s meeting of EU leaders in Brussels, as they look to hammer out the details of a substantial economic stimulus package, which the ECB are assuming “will come about”.
US retail sales were released yesterday afternoon coming in at 7.5%, smashing expectations. This further supports what we have been saying, that the US consumer is still spending, and whilst the US jobless claims data we saw was slightly worse than anticipated (1.3 million), continuing claims beat expectations… but it must be remembered, US jobs data is likely to be in far better health than these numbers suggest, as in the US “furloughed” staff are counted in the unemployment data.
Whilst we appreciate the current climate is daunting, the current levels of central bank support gives markets a sturdy footing to continue a ‘V-shaped’ (or perhaps increasingly a ‘Nike Swoosh’) style economic recovery… albeit with some bumps along the way!
Jonathan Wiseman, Fund Manager