16 June - update from our investment partner

  • 16th June 2020

What has happened

Risk appetite had a remarkable turnaround yesterday with the US index futures off more than 3% in the morning but rallying to close almost 1% up.

Animal spirits return to hope

There were two headlines that distracted markets from the uptick in US COVID-19 new case growth which remains stubbornly high. Firstly a story that the US may allow domestic companies to work with Huawei over 5G, suggesting a thawing of recent tensions. Secondly, the Federal reserve said it would start purchasing corporate bonds directly after previously focusing on ETFs. It was the latter news that really spurred markets despite this already having been announced as part of the Secondary Market Corporate Credit Facility. As part of this programme the Fed can buy, in addition to ETFs, US corporate bonds which are less than 5 years to maturity and either investment grade quality or a fallen angel (a recent investment grade downgrade into high yield).

US cases continue to present a clouded outlook

Investors are focusing on the hot spot US states which have new case growth of c. 2% per day, these are Texas, Florida, California and Arizona with the latter seeing the largest daily increases. The governor of California has acknowledged the pick up but did note that the rate of positive tests is falling and they would take steps to stay ahead of areas where there is a flare up. Globally there have been reporting lags around the weekend so markets will be watching closely to see what the Tuesday and Wednesday figures show in terms of viral spread.

Brexit fast-tracked

The high-level meeting took place yesterday between the UK Prime Minister and Presidents of the European Commission, European Council and European Parliament. The tone after the meeting was positive with Boris Johnson signalling that he wants a trade deal agreed in principle by the end of July. This is of course very ambitious but does suggest that Johnson wants to remove some Brexit uncertainty to ensure the economy does not need to deal with additional ambiguity as it starts to reopen.

What does Brooks Macdonald think

The huge surge in money supply that we have seen spurred equities in April and May. Yesterday’s announcement from the Fed was intended to remind markets that despite the more downbeat tone of the Fed meeting last week, the central bank would continue to support risk assets and the economy.

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