Market Update – 02 Jun 2020

This last week, in the midst of the pandemic, the world’s two superpowers China and the US  have had serious social unrest to contend with.

Two weeks ago, Beijing announced it would legislate a new national security law and impose it on Hong Kong by decree, bypassing the “one country, two systems” arrangement under which Hong Kong has been governed.  The territory now appears to be on the cusp of having its status in the world change more fundamentally than it did with the handover from Britain 1997.

Fifty Six years ago yesterday,  the White House hosted 2400 people for a discussion on civil rights, today there is serious unrest and riots across America, following the death of George Floyd when being arrested by the police and the President is sending in the national guard having declared himself the ‘law and order president’.

When mentioning superpowers, it always conjures up, for me, images of superhero’s fighting for justice but this isn’t comic books it’s very real.  The unrest is very disturbing, the pictures on TV and in the media bring it into our homes and there is a tragic human cost, all of this at a time when the world faces huge challenges with COVID-19.

As a financial planner I’m writing about these events in a financial sense, it’s in no way intended as political, we live in a global economy and these major events will undoubtedly have an impact on financial markets.

Despite the unrest markets continue to respond positively.

China is seeing a ‘V-shaped recovery, which is a strong economic bounce back however we still shouldn’t expect this to be the norm.  The Chinese has strong manufacturing industry and activity in the country has been expanding in May. Among other markets in Asia, Vietnam and Taiwan could pull off a similar economic recovery.

However elsewhere around the globe it’s not likely to be the same, economies that go down typically stay down for two or three months before they come back up and that’s likely the story we will see in Europe and the United States so what’s known as a U-shaped recovery.

Although markets have been positive of the last few weeks, they are still down approximately 20% since the start of the pandemic and if the expectation is that they will just rise once Covid-19 dies down, then that expectation is likely to be wrong.

With the damage that’s been done so far, the sort of indicators we need to look for are unemployment numbers and economic data.  Unemployment figures are double digits in the United States and Europe and countries like Australia.

Economic data is unknown as businesses are only now beginning to re-open and it’s likely that we will see cities and even countries switch lockdown on an off as they get worried about second waves of virus infection. Also, we will see deflation as there is insufficient demand for goods and massive restructuring in some core industries.

The focus, rightly, has been and continues to be COVID-19 but as well as pandemic waves we are likely to see two or three economic waves: Unemployment, bankruptcy and business failures will occur.  Central Banks will continue to add stimulus to support the economies which by default reduces volatility.

The markets continue to look ahead, seeking good news, virus vaccines, economic re-opening and the like but with global social unrest added to the mix the financial markets will be bumpy for some time.

Stay Safe