Market Update – 30th July 2020.

Yesterday was slow in terms of data, and saw markets close out the trading day mixed. Much like the anticipation-driven markets that we saw in the first half of this week, yesterday was dominated solely by the US Federal Reserve Bank (Fed) and its policy meeting.

Following some weak (albeit anticipated) Q2 results being posted by companies in amidst of earnings season, in addition to a surge in coronavirus cases within the US, all eyes were on the Fed to further emphasise their dovish and accommodative tone, and they did not disappoint, seeing the US markets close the day out strongly. They left interest rates close to zero (0.25% at the upper bound) and in the press conference following the meeting, the Fed Chair, Jerome Powell, stated “The path forward is extremely uncertain, and will depend in a large part on our success in keeping the virus in check”. Powell went on to identify that the coronavirus still presents itself as a considerable risk to the economy over the medium term and as such the Fed would remain accommodative and flexible, whilst also suggesting interest rates would remain low for a long time to come. This suggestion was seen clearly in the debt market, with short to medium term yields compressing, particularly on the 5 year Treasury, seeing the US yield curve steepen as the 10 year Treasury remained relatively stable.

Even though sentiment predominantly had its eyes on the Fed and its policy announcement, Powell made it clear that any recovery would have to be driven by not only monetary stimulus, but also a strong and supportive fiscal package. This was an obvious message to the Whitehouse and lawmakers to agree a new aid package before the one set out in March (2020) runs out! Whilst the agreement on a fiscal package is awaited, the Fed committed to maintaining liquidity in the system by, at the very least, keeping its current pace of Treasury and Mortgage-Backed Security purchases steady. Powell also referred to a legislation in congress that is proposing to broadly ease capital standards, which in turn, would allow the Fed more flexibility in allowing the banks to grow their balance sheets. As, whilst the majority of US banks are well capitalised already, a temporary relaxation in their leverage ratios would stimulate broader lending in the economy. This would in turn stimulate spending, inflation and wage growth, all key to a robust recovery.

Elsewhere we saw crude oil prices edge higher yesterday as US supplies were set to have contracted last week. However, with an element of uncertainty surrounding production and demand side utilisation, crude prices are struggling to find direction as the pandemic is still presenting uncertainty. Q2 earnings season also continued with oil giant Royal Dutch Shell reporting this morning, posting a profit of $638million. Even though this is significantly down on the same period last year (which was to be expected given the impact of coronavirus on the sector), the profit was a huge boon vs the expectation of a loss of $663million. The same was true for energy company Total SE, posting a Q2 net income of $126 million. While this is down 96% from the same period last year, it was significantly better than the loss of $443million that was expected. Even though we are not suggesting the energy/oil sector (or any other sectors for that matter) are out of the woods yet, far from it, the Q2 earnings for the likes of Shell/Total beating expectation is a good footing as global economies slowly come back online.

With the Fed and broader central banks remaining accommodative, keeping economies awash with cash, in addition to well-run corporates holding firm during the lockdown, a strong and robust investment approach will continue to be key in identifying these investment opportunities at both the stock and the regional levels, as the economy continues its ‘V-shaped’ (or increasingly ‘Nike Swoosh’ shaped) recovery. However, it must also be remembered that this recovery will be littered with pockets of volatility, and as we’ve mentioned in the past, it is important to look through this noise and avoid any knee-jerk reactions!

Jonathan Wiseman, Fund Manager