Performance, June 2020
US indicators and infections numbers moved in opposite directions
- The number of infections in several US states showed ominous trends over June – to such a degree that for instance Florida and Texas began to roll back their re-openings. Moreover, the notorious immunology professor and member of Trump’s coronavirus task force, Anthony Fauci, also shared his concerns. This was supplemented by new outbreaks in for instance China and uncontrolled infection numbers several places in South America. The numbers seemed ominous but in addition a string of economic indicators were published over June indicating a recoil in the previously so hard-hit economies. Yet, from a low level but an improvement which was also backed up by new economic initiatives from central banks and governments.
The democratic presidential candidate, Joe Biden, has taken the lead
- Recent opinion polls show that Joe Biden has taken the lead over Donald Trump. The latter has been under fire due, among other things, to his handling of both the coronavirus crisis and the handling of turmoil in the wake of a lethal arrest of the black American George Floyd in the US state of Minnesota. Subsequently, demonstrations against police violence against black people have spread to several places in the US and internationally. Joe Biden is leading with approx. 7 percentage points compared with his 3½ years younger republican rival. However, nothing seems to have been decided yet up to the US presidential election on 3 November.
The coronavirus pandemic seems to have changed the world – and has sent certain shares skyrocketing
- Investors in the global capital markets have been busy evaluating on the consequences of the coronavirus crisis and its consequences for posterity. Many questions have emerged as to how much is temporary and how much has changed for ever. Investors have so far clearly taken sides – in favour of global software companies and companies within online shopping. The two industries have risen by 24% and 30%, respectively, this year. This is in stark contrast to companies within the oil equipment industry and within airline industry. The value of both these industries was practically reduced by 50% in the first half year.
Investors saw price increases in June but also large fluctuations
- In early June, global equity markets were 2.2% higher than at the beginning of the month but over the month the fluctuations were large. At their best, the markets were up by more than 5%, and at their worst, a decline of more than 1% had been realised. The markets have been fluctuating to the tones of new out-breaks of infections in China and repeated infection records in the US on the one hand and considerable economic backup from governments and central banks on the other hand. In addition, equity investors have kept an eye on the development of drugs against coronavirus, and we have seen new positive results – although it was no actual vaccine. New consumption habits benefited especially IT equities which were again leading in June, up by almost 7% on average whereas for instance utility had a difficult time.
Flat development in interest rate markets
- June started on a very optimistic note with much better-than-expected unemployment figures from especially the US showing fewer jobless claims than expected. This resulted in a short-term interest-rate increase as 10-year US government bonds rose to 0.85% from 0.60%. The sentiment quickly turned since Covid-19 infection figures were again on the increase in several countries. Especially Latin America and the US experienced a revival of the virus. For the full month, the interest-rate level therefore landed practically unchanged in both the US and Germany. The Danish bond market has been comparatively calm. The issue of mortgage bonds has been increasing but as we have seen a generally good demand, mortgage bonds performed well. The central bank’s large need for issues for the financing of the rescue packages is proceeding according to plan and has not affected the relative valuation of government bonds noticeably.
Credit spread continued to narrow in emerging markets
- Prior to COVID 19 the credit spread in emerging markets was trading at around 300 basis points. When fear of the economic consequences of COVID 19 was at its highest in March, the credit spread peaked at 720 basis points. Since then, the credit spread has narrowed, and this continued in June when it started at 510 basis points and closed at 475 basis points. Many countries have sent up their budget deficits and hence their indebtedness during the crisis. Brazil is for instance expected to land at a budget deficit of more than 15% of GDP this year, and the debt is expected to hit 100% of GDP. Countries such as South Africa, India, Saudi Arabia and Peru are also anticipated to incur two-digit budget deficits. On the other hand, countries such as Indonesia, Russia, Malaysia and Thailand hold prospects of budget deficits around 5%, which places these countries in a better position.
Credit markets in June
The trend in credit yield spreads was somewhat more moderate than in previous months. Hence, investment grade spreads ”merely” narrowed by 18 basis points whereas high yield spreads narrowed by 16 basis points. The reason why the spreads narrowed the most for investment grade was probably that the ECB cannot buy high yield bonds.