HEADLINES POSITIVE, DETAILS MIXED
Alan McIntosh, Chief Investment Strategist at Quilter-Cheviot
Global stock markets continued their strong rally last week, rising by over 5%. Sentiment was buoyed by more monetary stimulus from the European Central Bank, a fiscal package from Germany, but also, an extraordinary set of employment data from the US.
Economists were expecting US job losses of over 8 million in May, to add to the 20 million registered in April. Instead, employment increased by 2.5 million, the largest monthly increase since records began in 1939. Roughly half of these jobs came from re-employment within the leisure and hospitality sectors.
Markets have seized upon this as a sign that the economic recovery from lockdown is moving at a much faster pace than previously anticipated. Unsurprisingly, share prices in the most economically sensitive sectors such as financials, industrials, oil and travel & leisure saw the sharpest recovery, while more defensive areas lagged. With most markets now within 10% of the previous highs seen in February, the question is, are stock markets too optimistic?
To help answer this you need to break it down into component parts – the trajectory of Covid-19, the economic measures taken to mitigate its effects and the speed of re-opening from lockdown. On the first point, figures would suggest that the epicentre of coronavirus has moved south, with countries such as Brazil now suffering badly. Most northern hemisphere countries are now seeing a reduction in new cases. The response from governments and central banks has dwarfed that of the last financial crisis, with monetary and fiscal packages worth trillions of dollars being deployed to help mitigate the effects of lockdown.
More controversially perhaps, is the speed with which certain countries, the UK included, are easing restrictions from shuttering their economies. The narrative has moved towards a speedier relaxing of restrictions on populations, while acknowledging the potential increase in future Covid-19 cases. This is a trade-off but ultimately a political decision. Markets are of the view that the worst is past us. Only time will tell.