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Please see article below from Brewin Dolphin’s ‘Markets in a Minute’ update received 15/07/2020.

China shares rally as state media declares bull market

Global share markets were mixed over the past week, although China has been a standout performer after investors piled in, encouraged by a state-owned newspaper that effectively declared a “healthy” bull market was on the way in Chinese equities.

Investors took the message to heart, and Chinese shares surged by almost 6% at the start of last week on trade volumes roughly double the average.

In the UK, a rally late in the week lifted the FTSE100 comfortably above the 6,000 level but performance in most markets was fairly muted due to the ongoing downbeat news around the coronavirus, worries about tensions between the US and China, and uncertainty around stimulus packages.

Last week’s markets performance*

  • FTSE100: -1%
  • Dow Jones: 0.95%**
  • S&P500: 1.75%**
  • Dax: 0.84%
  • Nikkei: -0.07%
  • Hang Seng: 1.4%
  • Shanghai Composite: 7.3%

*Performance in the week to Friday 10 July
**Performance from close of business on 2 July to Friday 10 July due to Independence Day holiday.

A mixed start to this week…

Share markets largely continued their bullish run on Monday, with the FTSE100 gaining 1.33% and European markets hitting their best levels in almost a month as reports suggested progress on two vaccine candidates in the US. China and other Asian markets continued their strong run.

However, the S&P500 and the Nasdaq in the US both closed down yesterday amid worries about the rolling back of reopening plans in some states due to rising coronavirus cases. That led to Asian markets falling sharply today.

Chinese policymakers have also become uneasy about the rapid rise in Chinese stocks, leading to two state-backed funds to begin offloading equities in a bid to cool the overheating market. The Chinese government has also sought to dissuade investors from accessing unauthorised sources of margin financing. The Shanghai Composite closed down by 0.8% today. In early trading in the UK and Europe, shares were heading down.

Stimulus cliff-edge in US, knife-edge summit in Europe

There can be no doubt that both the US and Europe need more stimulus to maintain their recovery, or at least prevent a sharp deterioration. In the US, a central plank of March’s $2trn stimulus package is being debated; the extra $600-a-week in unemployment benefits, which is paid on top of each state’s existing unemployment benefits, is due to end on July 31. This means a potential cliff-edge income drop for around 20m unemployed Americans that would cause average unemployment payments to fall by about 60%. Also, cash payments to households have already been received, and probably spent.

Fortunately, both the Democrats and Republicans want the extra stimulus to keep flowing, so it is more than likely we will see these benefits extended.

This coming Friday the EU will debate the €750bn coronavirus recovery package at a special summit, and it is far from certain the fund, dubbed Next Generation EU, will pass in its current size or format – the current proposal is that the fund is made up of grants and loans, and more fiscally conservative states, particularly the Netherlands, are objecting to the grants element and also, reportedly, the size of the package.

Virus news

While the headline figures from case growth around the world, and particularly the US, still make dire reading, a glimmer of hope can be seen in the decline in Swedish cases, although this could be for any number of reasons (less testing, some more lockdown measures). Crucially, however, there was an important suggestion that immunity may have spread more widely than believed, which has global implications.

Marcus Buggert of The Centre for Infectious Medicine at Karolinska Institutet, Sweden, said: “Our results indicate that roughly twice as many people have developed T-cell immunity compared with those who we can detect antibodies in.”

Apparently, this could mean herd immunity is achievable with far lower infection rates of, say, 20% rather than the 60% suggested more commonly.

Overall the trends in Covid cases may be improving but it is hard to say due to fluctuations in testing and the distortion of the Independence Day holiday in the US. Even outside Sweden, European cases seem to have been suppressed for now. The case growth rate in Brazil could be peaking but there is little sign of any improvement in Mexico, South Africa or India.

In Asia, after a week in which Tokyo recorded 100 new cases per day, they subsequently jumped more than 200 on Thursday.  Hong Kong will close its schools early for the summer holidays after finding 34 new locally transmitted cases on Thursday.

On the vaccine front, research into T-cell immunity is now being incorporated into vaccine development, in addition to the focus on antibodies we have seen so far. If successful, this could significantly boost any vaccination’s efficacy and the duration of immunity, though it is still very early days.

Summer statement boosts housing sector

In his summer statement last week, Chancellor Rishi Sunak refused to extend the government’s furlough scheme past October as widely expected, but he announced a stamp duty holiday until next March for properties worth up to £500,000. That boosted shares in housebuilders, and it may prompt an uptick in housing transactions. New buyer enquiries at estate agents were close to record levels in June, according to last week’s survey from the Royal Institution of Chartered Surveyors. Its survey, which questions surveyors around the country, suggested a slight recovery in prices and a big increase in properties being listed for sale. But looking ahead, views were a little more negative, implying price declines of 5% over the remainder of the year.

New buyer enquiries vs Nationwide average house price

 RICS House price balance vs Nationwide average house price

 Make the most of higher-rate tax relief in your pension while you can

Sunak hinted that efforts to address the dire situation that is the national finances will begin in November’s Budget. This may finally sound the death knell for one of the most attractive tax breaks in the UK, namely higher-rate tax relief on pension contributions.

It’s hard to see any more obvious revenue-raising step that would be so effective, and it has been speculated about for a decade. It would suggest anybody who hasn’t taken advantage of this year’s allowance should seriously consider doing so before the autumn.

One of the main focuses of this update are the views on potential monetary and fiscal policy actions from governments, particularly the UK, EU, China and US. It now seems that market analysts have turned their attention to how governments will act to deal with the financial consequences of this pandemic in the long term and how that will affect the markets as they begin to recover.

Paul Green 15/07/2020