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Last Week in the City: Markets rally despite bleak news

Garry White, Chief Investment Commentator, provides a round-up of the market moves and the global investing outlook this week ending 5 June.

Garry White, Chief Investment Commentator, provides a round-up of the market moves and the global investing outlook this week ending 5 June.
Garry white employee

by
Garry White

in Features

05.06.2020

Despite more gloomy data from companies and economies 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.

The FTSE 100 was up 5.2% over the course of the week by mid-session on Friday, with the FTSE 250 up 5.9%.

For a round-up of market action in May from our Chief Investment Officer Jon Cunliffe click here.

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Fireside chat with Garry White: How to read the news. In this episode, Garry discusses how consuming too much news can have a negative impact on mental health and how he copes with constant negative headlines. Listen here.

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Economics

Data released late Friday is expected to show that the US unemployment rate shot up to almost 20% in May, a new post World War Two record. The Atlanta Fed also projected that US second-quarter GDP will collapse 52.8%. A continued contraction in manufacturing has been holding back consumption and private investment, two cornerstones of the economy.

Three former UK chancellors were questioned by the Treasury Select Committee about the effects of Covid-19 on the UK economy. Alistair Darling, George Osborne and Philip Hammond agreed that unemployment could reach levels not seen since the 1980s.

UK consumer confidence fell to its lowest level in more than a decade at the end of May, even as the country's coronavirus lockdown began to ease. The GfK consumer confidence barometer stood at minus 36 at the end of May, a decrease of two points compared with a reading from two weeks earlier. This is its lowest level since January 2009.

German factory orders plunged 25.8% in April compared to a month earlier, when they fell by 15%. The figure was far below the 19.7% contraction analysts had been expecting.

Australia is set for its first recession in 29 years as a result of the Covid-19 pandemic. Its economy shrank by 0.3% in the first three months of the year, amid bushfires and the early stages of the outbreak. Figures in the second quarter are expected to be much bleaker

Covid-19

The European Central Bank (ECB) made a larger-than-expected increase to its emergency bond-buying program. It expanded purchases by €600bn to €1.35 trillion – and extended them until at least the end of June 2021. “Action had to be taken,” ECB President Christine Lagarde said. While there are nascent signs of the downturn bottoming out, “the improvement has so far been tepid.”

AstraZeneca said it will be able to supply two billion doses of a potential virus vaccine following two new deals. Last month, the Uk drug group said it could manufacture one billion doses of the vaccine it is developing with scientists at Oxford University. On Thursday, it signed two deals, including one backed by Bill Gates, allowing it to double production.

Britain's biggest airline, British Airways, refused to attend a meeting with Home Secretary Priti Patel to discuss the UK's quarantine plans. From 8 June the government will require all travellers to the UK to quarantine for 14 days or face a £1,000 fine, a move that has proved controversial. The airline, owned by IAG, called it "another blow to our industry" but did not comment on reasons for not meeting the home secretary. Ryanair’s chief executive Michael O’Leary called the plan “useless”. Ryanair plans to restore 40% of its flights from 1 July, subject to travel restrictions being lifted with the EU. But the quarantine plans will hit impact demand from foreign travellers wanting to come to the UK if they must self-isolate for 14 days upon arrival. Rival easyJet said it will resume flights 50% of its 1,022 routes in July and 75% in August, although with a lower frequency of flights equating to around 30% of normal July to September capacity. Passengers will be required to wear face masks on board.

Adidas’s sales in China rebounded quicker than expected after lockdown restrictions were lifted. It warned investors in April that it would take several months until sales in China were back to last year’s level – but has revealed that last month’s sales in the region were already higher than in 2019. “Overall revenue growth in Greater China turned positive for the month of May,” the company said in a statement.

FTSE reshuffle

Index compiler FTSE Russell confirmed that cruise giant Carnival and budget airline easyJet will be been ejected from the FTSE 100 in the latest quarterly index reshuffle, as the effects of the Covid-19 crisis continue to weigh heavily on the travel sector. British Gas-owner Centrica and engineering firm Meggitt have also dropped from the FTSE 100 into the FTSE 250.

Companies set for promotion, meanwhile, are ones that have benefited from the recent economic disruption and changes to consumer behaviour. Online security firm Avast has earned promotion into the topflight along with home repairs company Homeserve , B&Q owner Kingfisher and gambling firm GVC.

After the FTSE reshuffle this week told a tale of our times, we look at index investing – an investment strategy that involves sticking with the winners – here.

Geopolitics

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. This could lead to a “brain drain” of about 40% of the population of the former British territory.  Donald Trump said he will end any preferential US treatment for the former British colony and increased the tension by commemorating the 1989 Tiananmen Square massacre, with Secretary of State Mike Pompeo meeting survivors at the State Department. State-backed Chinese tabloid The Global Times, a mouthpiece for the regime, said: “Some Western politicians have made a series of unreasonable, domineering, arrogant, hypocritical and double standard statements about the national security legislation.” HSBC and Standard Chartered gave their backing to China's new security. Both banks made statements saying the proposed law can help maintain long-term stability in the troubled city.

China may discover that more countries in the world now intend to stand up to Beijing’s actions, as the US finds a rare political unity in opposing its actions from technology to Hong Kong. We look at the issue in more detail here.

The US’s global move to stop Huawei equipment being used in next-generation telecoms systems moved to the UK this week. US Senator Tom Cotton told MPs that he fears China is trying to use the telecoms equipment-maker to "drive a hi-tech wedge between us". Mr Cotton said that the US, UK and other allies could team up to develop superior 5G technologies of their own. Huawei said the claims lacked evidence. "It's clear that market position, rather than security concerns, is what underpins America's attack on Huawei,” the Chinese company said. Garry White looks at the new space race to own 5G infrastructure here.

Originally planned to boost growth and cut unemployment through green investment, the European Union’s Green Deal is being relaunched as a way of helping recovery from the depths of the Covid-19 recession. Commission President Ursula von der Leyen, who wooed the Greens and centre-left parties to secure her job, will be under increasing pressure to deliver on the anti-global warming strategy she set out to win her position. We examine the proposals here.

Energy

Hopes of an economic recovery increasing demand for oil has lifted the price. There are rumours that Opec and its wider group of supportive countries will extend their current deep cuts to production for longer. It had planned to cut 9.7 million barrels a day of output until the end of June – and is now considering continuing at this level for maybe another quarter. Brent crude prices rose 16% over the week to trade at about $40 a barrel at mid-session on Friday. Charles Stanley examines what’s going on in oil markets here.

Russian President Vladimir Putin declared a state of emergency after 20,000 tonnes of diesel oil leaked into a river within the Arctic Circle. The spill happened when a fuel tank at a power plant near the Siberian city of Norilsk collapsed last Friday. The plant is owned by a subsidiary of Norilsk Nickel, which is the world's leading nickel and palladium producer.

Technology

As the era of 5G communication dawns, science fiction is becoming science fact; the age of the fully autonomous robot is now upon us. A deal was recently signed that will allow robots to connect to the cloud, so they can be manually operated and programmed “on the fly” via the internet. Garry White argues that this is a crucial step in the rise of the machines, which are proving their usefulness in the Covid-19 pandemic here.

Social media companies were dragged into the difficult politics surrounding the US protests following the death of African American George Floyd in police custody. Civil rights leaders accused Facebook’s chief executive Mark Zuckerberg of setting a "dangerous precedent" by allowing a post by Donald Trump to remain on its site. The US president's post, about the widespread protests following the death of George Floyd, was hidden by Twitter last week for "glorifying violence". In the post, the president wrote he would "send in the National Guard", and warned that "when the looting starts, the shooting starts".

Property

Housebuilder Taylor Wimpey reported a “very high” level of demand for appointments at its sale centres and show homes after reopening last month.

The average house price fell for the third month in a row in May. Across the UK, a 0.2% month-on-month decline in property values in May took the average house price to £237,808, Halifax said. It followed monthly falls of 0.6% in April and 0.3% in March.

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