Equities
US stocks posted the best rally since 1998 in the second quarter. A strong rebound from the 20 per cent drop in the first three months of 2020. Traders are betting that US stocks will continue to climb, in a sign that the euphoria that has lifted the benchmark S&P 500 from its March low has not fully abated.
Trading of US equity call options, which offer investors the chance to benefit from a rally in stocks, has in recent weeks far exceeded the volume of put options, which protect investors from a slide in the market.
Generally global equity prices have remained largely unchanged over the last couple of weeks and investors watch carefully the global rebound in Covid-19 cases, coupled with a continuing concern over US/China trade relations but also a belief that the worst of this crisis is behind us.
US Central bank: When the ‘Fed’ intervenes and buys financial assets it builds its balance sheet. But the expansion of this balance sheet has stalled, prompting strategists to pare their predictions for the scale of the US central bank’s interventions in financial markets this year. An updated consensus of analysts’ forecasts showed that the balance sheet was expected to rise to $8.5 trillion by the end of 2020, roughly $1 trillion lower than the year-end level assumed in May.
Fixed Income
No significant change in bond yields over the last month with a low global interest rate regime likely to prevail for some time. Ten-year yields are US 0.67%, UK 0.18%, Germany -0.43%.
FX
The US Dollar has slided to its weakest level since September 2018. The Dollar has been a ‘safe haven’ during the current financial crisis and strengthened as the world’s reserve currency. Confidence in a global recovery from the current crisis has had a weakening effect.
Commodities
Oil: Opec and Russia are primed to start unwinding the record oil supply cuts agreed earlier this year, as they aim to raise production without undermining a recovery in crude oil prices. Brent is now above $40 per barrel.
Gold is behaving in classic ‘safe haven’ fashion and is in demand at $1800 per ounce. Historically, Gold reached an all time high of $1920.30 in September of 2011
Brexit
The differences between European and U.K. markets are looking starker than ever.
As European Union leaders forge a historic rescue deal to save the bloc’s weakest economies, Brexit talks continue to fail in making any progress. By almost every market metric, investors are rewarding European unity and punishing the U.K.’s intractable problems.
The euro is near the highest since early 2019, Germany’s DAX Index is almost positive for the year and the Stoxx Europe 600 Index has added $3.5 trillion in market value since the mid-March lows.
In Bank of America Corp.’s latest fund manager survey, investors raised their allocation to euro-zone equities by 9 percentage points, the largest increase in weighting for any region.
By contrast, the U.K. remains deeply unpopular. The pound has weakened this year, and FTSE 100 Index stocks are down 17% in 2020. The pound is only one of two major currencies where short positions outnumber longs, according to Scotiabank. In the Bank of America survey, U.K. was ranked as the most disliked region.
Money managers say the U.K. is a dangerous place to invest because of the impending cliff edge of a no-deal Brexit at the end of the year, when the transition period ends and tariffs potentially kick in. Negotiators for the U.K. and Europe say the chances of a deal being reached by the end of August are fading fast.
Misc.
Wall Street’s top five banks have posted their best quarter for a decade after the coronavirus pandemic led to frenzied market conditions and radical interventions from central banks. Despite, three of the biggest US banks setting aside $28 bn for current and future loan losses in the second quarter, this has been more than made up by an equity and bond trading boom over the last few months e.g. Goldman Sachs profit bonanza in bond trading offset a surge in loan losses. It fixed-income trading income revenues surged by 150 per cent resulting in net income for the second quarter of $2.3 bn.
The same boom helped JPMorgan Chase double its fixed income revenues in the second quarter and drove a 68% rise at Citigroup.
