Monthly Review - July 2020
- 09 August 2020
- 5 mins reading time
The financial stimulus being provided by governments and central banks continues to support equity prices. It’s also adding to demand for bonds, pushing their prices up and their yields down.
The Office for National Statistic’s data showed that the UK economy grew by 1.8% in May, suggesting that the long-road to recovery might have begun after the 20.3% contraction in April. But UK stock prices declined in July as concerns grew over rising virus cases as well as stock prices appearing to have risen higher than seemed to be justified.
US equities had a better month. The S&P 500 rose by more than 5% in July after the Federal Reserve (equivalent to the Bank of England) pledged further financial support. Technology stocks continued to perform well as demand for online services, such as Netflix and Amazon, remained high.
By contrast, stocks across the European continent were dragged down by data showing that the eurozone economy shrank 12.1%. Asia-Pacific stocks performed relatively well, despite a rise in the number of virus cases and in international tensions.
The main driver of stock price rises in the region was the lower value of the US dollar which helps to make dollar-denominated debt commitments less expensive.
Bond prices were pushed up by two factors. Firstly, general nervousness among investors led to money being pulled out of higher-risk rated assets, such as stocks, and put into lower risk-rated ones, including bonds.
Secondly, central banks have been buying lots of lower-risk rated bonds as part of their efforts to inject new money into the financial system. While supporting cash-strapped households and companies, this also pushes bond prices up and their yields down.
There was a further fillip for the prices of bonds issued by some nations within the eurozone. Countries with substantial debt burdens and more vulnerable economies, such as Italy, looked most likely to benefit from the European Union’s unprecedented €750 billion Covid-19 recovery fund. That reduced the perceived risk attached to the respective countries’ bonds, pushing prices up and yields down.
As investors sought lower-risk rated opportunities, the demand for and prices of precious metals rose. Gold’s 8.6% gain was outstripped by the 30.0% rise in the price of silver.
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