Market Commentary 28th May 2020 from Charlie Hancock

Suggestions of further fiscal stimulus measures around the globe also lifted sentiment during the week. Investors are hopeful that the programmes being implemented by governments will boost economic activity to ensure any recession is short lived. Any hint of further stimulus has therefore been positive for market sentiment in recent weeks.

The travel sector continues to face huge challenges over the coming months, with significant uncertainty around revenue generation. As a result, stocks in this area have been more volatile than the wider market, selling off sharply in times of negative sentiment and rallying as the mood amongst investors turns positive. IAG PLC, the owner of British Airways, saw their share price rally by 12.60% last week, with Intercontinental Hotels Group PLC posting a 12.67% gain.

A Purchasing Managers Index (PMI) reading for the service and manufacturing sectors combined indicated that activity in the Eurozone rose strongly in May. The index reading of 30.5 was still firmly in recessionary territory (i.e. below a reading of 50), however, it was a strong improvement on the reading of 13.6 from April.

Tourism officials from the EU agreed to take whatever action is necessary to ensure a full recovery of European Tourism last week. This announcement came as Italy, Spain and Greece revealed plans to restart tourism in June in an effort to revive this crucial element of their economies.

Jerome Powell, the chairman of the Federal Reserve, indicated last week that the central bank still has tools at its disposal to help combat the economic impact of the coronavirus. Markets reacted positively to this in the early part of last week and the sentiment was boosted further by suggestions that the US government is considering more fiscal stimulus measures.

Efforts to find a coronavirus vaccine as fast as possible also had a positive impact on US equity markets last week. Investors were encouraged by the US government’s pledge of $1.2 billion to begin production of a vaccine being developed by Oxford University and AstraZeneca.

The optimism on display last week was dented by concerns around another significant trade dispute between the US and China. President Trump criticized China’s handling of the Covid-19 pandemic and accused Chinese officials of “spreading pain and carnage around the world”. In an apparent swipe at President Xi, Trump tweeted that “it all comes from the top”.

Hong Kong’s Hang Seng index suffered its worst one-day performance for nearly 5 years on Friday, after the Chinese government announced plans to bring the region’s security under control of the government in Beijing. This decision is expected to lead to further unrest in Hong Kong.

With government bond yields elsewhere around the globe rising, the decline in Gilt yields appeared to be driven by the UK government issuing bonds which were accepted by the market at negative yields for the first time in history. £3.8bn of 3-year Gilts yielding an average -0.003% were sold on Wednesday. On the same day, The Bank of England governor, Andrew Bailey, suggested that negative interest rates were under review and acknowledged that the bank may need to take further action to see inflation rise closer to their 2% target.

The European Central Bank (ECB) President, Christine Lagarde, acknowledged the difficulties Europe is facing during an interview last week. Lagarde said inflation was projected to remain below target in the coming years and that the ECB must be as accommodative as possible in order to stabilise the economy and inflation.

Economic indicators were mixed in the US last week, with an additional 2.4 million unemployment benefit claims bringing the total for the last 9 weeks to nearly 39 million. In contrast, May’s PMI data for the services sector was encouraging, jumping to 36.9 from 26.7 in April.

GBP / EUR – Current 1.1159 Previous 1.1190

The Pound rose by 0.47% against the US Dollar and declined by 0.28% against the Euro. Currency markets were relatively stable last week with little to drive significant moves in the Pound.