Despite more gloomy data and increasing tensions with China over Hong Kong, global markets rallied as investors banked on central banks continuing to support equity markets. The European Central Bank upped its stimulus programme by more than expected, helping an oil-price rally, while better than expected US jobs number spurred the rally on.
Even though the shape of economic recovery remains uncertain, it is interesting to note that the stock market has opted for an early move towards a V-shape recovery trajectory. There has been a rotation into more value, and cyclical recovery names such as airlines while the large tech companies were relatively flat over the week.
Sentiment has certainly improved, though many are aware of the idea that the full extent of Coronavirus damage will likely reveal itself in corporate results over the summer.
The shock news was that US employers unexpectedly added 2.5m jobs in May, sending the jobless rate down to 13.3 per cent, below the 20 per cent expected by markets. Following large layoff in April, the hardest hit sectors have started to hire once again providing some hope that the US may experience a more rapid recovery than many predicted.
However, the labour market is far from back to normal and the joblessness remains well above its peak after the 2008-09 financial crisis.
The European Central Bank announced an extension of their emergency quantitative easing programme, increasing the size from €750bn to €1.35trn and the duration by six months to the middle of next year. ECB President Christine Lagarde stated that although there are nascent signs of the downturn bottoming out, the improvement has so far been tepid.
The policy position is driving risk valuations higher even though society in general is less economically active, less healthy, poorer, and more fragmented than anyone can remember. Perhaps we should not be fighting the ECB as well as the Fed!
The world reacted to a more assertive Beijing. Prime Minister Boris Johnson pledged to overhaul immigration rules to grant almost 3 million Hong Kong residents a pathway to British citizenship. This was in response to Beijing’s move to impose a far-reaching security law here that many believe will dismantle the city’s political freedoms.
Some may question why the UK is picking a fight with the Eastern superpower about a former colony that was handed back in 1997, it will not achieve anything and it certainly doesn’t help Britain do business in a post Brexit world.