8 June - update from our investment partner

  • 8th June 2020

What has happened

Friday’s rally was driven by a frankly remarkable payrolls report. The end result was a broad rally over the course of last week with the US up 5% in local currency terms. The rally favoured value sectors however with gains being focused in Europe as well as the banking sector with European banks up over 20% last week alone.

US Unemployment report

The nonfarm payrolls report is arguably one of the most important data sets in US economics. It is the most widely followed report on the employment status in the US and is used to forecast economic growth, consumer spending and inflation projections. Whilst it is not unusual for economists to be wrong footed by this report it is normally within a sensible margin of error. The actual report showed employment rising by 2.5 million jobs in May vs an expectation of a net loss of 7.5m jobs. Unemployment also fell to 13.3% against an expectation of 19%. Markets expected the rebound in jobs growth, and economic data more broadly, to occur in June or July of this year. If the recovery actually began in May this may mean the economic ‘scarring’ caused by coronavirus may be far less developed than some had feared.

OPEC+ coordination continues

OPEC+ agreed to a one-month extension to its production cuts and warned of a stricter approach to those that are breaching these rules. This comes as Saudi Arabia and Russia become increasingly wary that OPEC+ members may not be sticking to the agreed limits. This extension has buoyed oil prices today as a breakdown of the agreement was a tail risk to markets coming in to the weekend. Due to the rally in the oil price, some US shale oil producers are starting to come back online, this should temper further prices gains from here.

What does Brooks Macdonald think

Markets have been happy to look through poor economic data given the abundant liquidity on offer, any suggestion that the dire data would cease sooner rather than later is a positive. The US unemployment report has improved the odds that the COVID-19 recession will be shorter than expectations with a recovery supercharged by the coordinated actions of governments and central banks. Global risk assets had an exceptionally strong week last week and this additional news simply fanned the flames of the rally.

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