World markets extended their gains this week. Optimism fuelled by world economies taking more reopening steps seemed to be the primary driver of sentiment but in the geopolitical arena, US-China tensions were put onto the front burner again.
In a short Memorial Day week, US stocks posted strong gains as the US took steps to further reopen the world's largest economy, following the lead of key regions in Asia and Europe. Investors also took heart on economic data which surprised on the upside.New home sales rose 0.6% in April while durable goods orders outside of the transportation segment fell 7.4%, roughly half as much as anticipated. Markets were also lifted by officials' statements, including Federal Reserve Bank of New York President John Williams who said the U.S. economy could see a strong recovery in the second half of the year. The S&P moved above 3,000 and closed the month up 32% from the March 23 low.
Markets turned negative late in the week amid worsening US-China tensions. During a much-awaited news conference, Trump lashed out at China but traders seemed relieved that he did not announce new tariffs or a withdrawal from the phase one trade agreement reached with Beijing earlier this year. The technology sector and communications services came under pressure after Trump threatened to close social media platforms.
Equities surged as Japanese Prime Minister Shinzo Abe lifted the state of emergency for the five last remaining prefectures including Tokyo, which generates about one-third of Japan’s gross domestic
product (GDP). Abe’s announcement which came a week earlier than expected, boosted investor confidence. The benchmark Nikkei 225 hit pre-lockdown levels this week having steadily climbed since the mass sell-off of late March.
Adding to optimism, the Bank of Japan (BoJ) offered on Tuesday to pump 1.7 trillion yen ($15.8 billion) into the economy under its lending scheme aimed at channelling money to cash-strapped firms suffering from the coronavirus pandemic. The BoJ also revealed on Wednesday that government bond holdings rose to ¥486 trillion ($4.5 trillion) in the January-March period which is a 3.4% increase compared to last year. The bond-buying spree is expected to increase even more throughout the rest of 2020.
Meanwhile, the government compiled a second extra budget totaling JPY 117 trillion (USD 1.1 trillion). The latest stimulus package brings total supplementary additions to more than 200 trillion yen ($1.85 trillion). The total represents approximately 40% of Japan’s annual GDP.
Chinese markets posted advances. Hong Kong was an exception, where equities underperformed amid escalating tensions between the US and China. The National People Congress (NPC) voted to impose national security law on Hong Kong which sparked renewed street protests in the city and US President Donald Trump announced that Washington will take measures to eliminate special treatment for the Asian financial hub, where around 1,300 American companies operate.
In central bank related news, People's Bank of China's governor Yi Gang stated the financial institution will make its monetary policy more flexible to ensure liquidity amid the coronavirus crisis. In another positive move, the NPC unveiled a fiscal stimulus package of over RMB 8.5tn, or 8.2% of GDP.
All major European stock markets posted strong advances with the pan-European STOXX Europe 600 Index ending the week 3.0% higher. Fresh fiscal stimulus proposals from the European Union helped underpin investor sentiment. The European Commission proposed Wednesday a €750 billion recovery plan to help limit the damage inflicted by the coronavirus pandemic.
The plan would provide €500 billion in grants to countries hit hardest by the pandemic such as Italy and Spain, and make another €250 billion available as loans. The €500 billion would be obtained through bond issuing and the proposal suggests repaying starts after 2027, with the maximum maturity for bonds being 2058.
The Commission's move comes close on the heels of last week's proposal from Germany and France to set-up for a 500 billion-euro fund to address the economic damage caused by the outbreak.
According to the statement on the EU governing body's website, the new recovery instrument, dubbed Next Generation EU, will consist of €750 billion “as well as targeted reinforcements to the long-term EU budget for 2021-2027, and will bring the total financial firepower of the EU budget to €1.85 trillion.”
The budget plan will now be subject to fierce negotiation among EU heads of state and government, and requires unanimous approval by all 27 nations in the bloc. Top officials hope to reach a deal by
summer. As Germany’s foreign minister Heiko Maas said on Friday, “We’re a long way off being able to successfully conclude the negotiations.”
Staying in Germany, where the GDP dropped 2.3% YoY in Q1, the country's ruling coalition is preparing to give €50.000 per month to small firms, local media reported.
On the data front, Eurozone economic confidence improved in May from a record low, survey
data from the European Commission showed. The economic sentiment index rose to 67.5 in May from 64.9 in the previous month.
The month of May marked the transition from lockdowns to a gradual reopening of the world economy. Stocks have rebounded to levels close to their February records and investors behave like the worst has passed. Despite the ongoing market recovery, the economic damage from the coronavirus is worsening and global tensions and uncertainties abound.
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What’s ahead next week:
Monetary policy decision
Bank of Canada interest rate decision (June 3)
Markit Manufacturing Purchasers Managers’ Index (May)
Employment report (May)
Manufacturing and services sector reports (May)
Household spending figures (April)
Retail sales (April)
European Central Bank monetary policy decision
German factory orders (April) and employment data (May)
Markit and ISM Purchasing Managers’ Indices (May)
Construction spending (April)
Factory and Durable Goods orders (April)
Trade balance (April)
Employment report (May)
The content of this review is for informational purposes only and should not be interpreted as specific investment advice.