The Great Lockdown in the first quarter followed by the Grand Reopening in the second quarter took the financial markets on a wild swing. Given the unprecedented nature of the various forms of lockdowns, global equities have plunged to bear levels in a very fast manner. Massive fiscal stimulus, ultra-low levels of interest rates, central banks interventions and optimism on the reopenings helped the stock market to rebound as fiercely and aggressively as it initially fell.
As the month comes to an end, we see an improvement in fundamentals and hopeful signs of recovery but the rising number of virus cases in certain regions and the risk of a second wave of infection remain the element of caution.
The government and central banks have absorbed nearly all the shocks of the virus on the financial markets by injecting massive liquidity in the economy, keeping credit flowing and supporting their economy with huge fiscal stimulus plan among many others unconventional plans. On the reassurance that the intervention measures are not going to fizzle out anytime soon, investors have pushed global stocks higher. As we head into a new quarter, the recovery outlook is looking more uncertain as compared to the expectations we have seen a month ago.
The fear of a second wave and the prospects of rolling back reopening measures are overshadowing the recovery outlook.
Source: Bloomberg Terminal
Major US equity indices have rallied throughout the second quarter – Nasdaq Composite has even hit a record high during the month of June. The alarming situation in the US is the spike in the number of virus cases in certain states which are prompting fears of a second wave of outbreak. Certain states will be forced to impose some forms of lockdown restrictions if the situation worsens. In the coming quarter, investors will likley brace for more volatility while monitoring the following for near term directions:
Most importantly, market participants took note that the US interest rates will stay near to zero through 2022, ruling out the probability of raising rates anytime soon and a V-shaped recovery for the US economy.
European stocks appeared to be flaring better than US stocks and the outlook seems also a bit more promising as we are about to enter the third quarter. Unlike the US, the Eurozone was not economically strong pre-COVID-19 crisis. The historic unity that European countries have shown during the coronavirus crisis has boosted confidence. The unprecedented and massive stimulus packages combined with more optimism on the virus front are helping European bourses to hold ground. Consumer and business surveys are also showing signs of improvement. However, investors will continue to keep an eye on the pandemic situation, trade tensions and Brexit negotiations.
The main driver behind the performance of the European stocks compared to the US is the number of new coronavirus cases in the US compared to Europe.
Source: Bloomberg Terminal
The ASX200 has rebounded significantly over the last 3 months and have traded above the 6,000 mark in June before retreating lower due to virus fears. As of writing, the benchmark is poised for its best quarter in over a decade.
Major currencies have appreciated against the US dollar as risk sentiment has improved in the second quarter and haven currencies like the US dollar, the Yen and Swiss franc have lost momentum. Commodity-linked currencies were among the best performers against the US dollar lifted by higher commodity prices.
Australia and New Zealand were able to better contain the spread of the virus and eased lockdown measures quicker compared to its peers. The Antipodeans currencies have rallied in the second-quarter. However, the US-China tussle and the resurgence of the virus is keeping a lid on gains.
The US dollar index which tracks the performance of the greenback against a basket of currencies came off this quarter’s lows on the back of its safe-haven status and upbeat economic data. In the last few days, the US dollar found some on and off bullish momentum as traders sought safety with haven assets.
The Sterling Pound remained on the downside and emerged as the worst-performing G10 currencies against the US dollar dragged by Brexit jitters. The quarter will end with no real progress on the Brexit front. We therefore expect negotiations to intensify in the coming quarter.
The oil market recovered a semblance of normality during the second quarter. The production cuts by OPEC and non-OPEC allies officially kick-started at the start of May. A combination of productions, buoyant inventory reports and the prospects of increasing demand has supported the oil market. Crude oil future prices caught the rebound wave as demand and supply fundamentals have improved.
However, the oil market has also been feeling some pressure dragged by virus fears and recent bearish oil reports showing that demand is not rising as expected. On the other side, manufacturing surveys and data are showing a pick-up in activities which will fuel demand for oil. The oil outlook remains mixed and we expect traders to keep monitoring weekly reports and PMIs to gauge oil demand.
As a classic safe haven, the demand for gold has increased during the few months. The XAUUSD pair has rallied throughout the second-quarter and is currently trading at $1,772.
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