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Ok. Got itThe US economy contracted in the second quarter by an annualised rate of 32,9%, the largest decline since World War II. Read our latest market review.
Markets were encouraged by incrementally positive news on a Covid-19 vaccine and other treatment trials, as well as a fresh stimulus from policymakers. This buoyancy faltered towards month-end as second-quarter economic data confirmed the ravages from the pandemic and lockdown measures. The US economy contracted in the second quarter by an annualised rate of -32,9%, the largest decline since World War II. Although this data is backward-looking, the US Federal Reserve has been more tentative in its outlook, highlighting a slower pace of recovery following a resurgence in Coronavirus cases over the past month. Despite sentiment souring by month-end, the S&P 500 gained +5,6% in July, while technology heavyweight Nasdaq gained +7,4%.
The Morgan Stanley Capital International (MSCI) World Index gained +4,8% in July, supported by a rebound in emerging markets of +9,0%, which benefitted from a weaker US dollar.
Relief measures around the world are being extended as countries remain in different stages of lockdown. The UK announced a £30bn stimulus plan while the US is debating a further $1 trillion package to replace the one that expired at the end of July. With global interest rates at historic lows and debt levels at historic highs, many investors have sought comfort in gold as a traditional store of value. The metal has already rallied more than 30% over the year, with investment flow via exchange-traded products exceeding the impact from lower jewellery demand and central bank buying. With geopolitics simmering in the background and US elections yet to come, the precious metal may continue to hold appeal for more reasons to come.
The Eurozone printed a Q2 gross domestic product (GDP) number of -12,1%, formally declaring a recession and setting another record for quarterly decline in activity. Although southern countries, Italy and Spain, have been worst hit, activity in France also declined by double digits. Divisions in the bloc are as pronounced as ever, but the pandemic has served as somewhat of an equaliser when it comes to immediate priorities.
After drawn-out deliberations, European leaders agreed a landmark €750bn recovery fund, as well as a new seven-year budget. Opposition from the frugal four countries resulted in a smaller amount of €390bn (€500bn was initially proposed) to be made available as grants, with the remainder of the support to constitute loans. Although the recovery fund will be temporary, the EU will run a federal deficit for the first time in its history, making this turn of events truly momentous.
Despite the compromises that were made, the deal signals a common understanding that decisive action was crucial for the current crisis and future viability of the monetary union, which brings to mind the small matter of Brexit, where agreement on key topics seems some way off. With a more united Europe, negotiations are likely to heat up as the end-of-the-year deadline edges closer.
Tensions between the US and China continue to escalate. Washington closed China’s embassy in Houston, claiming espionage and intellectual property theft. China retaliated, ordering the closure of the US consulate in Chengdu, extending the Americans the same 72-hour courtesy they were afforded.
The two countries have been at odds over a growing list of issues, more recently China firming their authority over Hong Kong. Companies increasingly have been caught in the crossfire. Bytedance, which owns the popular video app TikTok, has been forced to consider the sale of the US arm of TikTok after President Trump announced he may ban the app. Huawei, arguably of greater strategic importance, has become highly politicised with the latest sanctions from the US making it impossible for the firm to source US-made chips for its equipment. At worst, recent developments confirm what many analysts refer to as a 'new Cold War’ – at best, a new low in diplomatic relations.