Skid marks

Corona continued to dominate the scene in July, on one hand with confident reports on vaccine development, on the other hand with new infection rates rising again. In addition the negative figures for economic growth showed the extent to which the pandemic had slowed down in the second quarter. Gold reached a new all-time high with further falling interest rates and a weaker US dollar.

In July the stock markets initially performed well, but lost gains in Europe and Asia. The German DAX index rose nearly up to 8% in July, but by the end of the month only 0.02% remained. The broad European index Stoxx Europe 600 fell -1.11%. In Asia, the Hang-Seng index (Hong Kong) dropped -3.99%. In the USA, the S&P 500 index rose 0.61%. Worldwide, equities measured by the MSCI World fell slightly -0.18% - all index data on Euro basis.

Investor confidence on the stock markets was boosted by reports of progress in the development of potential Corona vaccines. Some leading indicators also improved significantly. In Germany the ifo business climate index rose from 86.3 to 90.5 points and the purchasing managers' index for industry increased from 45.2 to 50.0 - from 50 points upwards, an expansive economy can be expected. The purchasing managers' index for services climbed from 47.3 to 56.7 points. The Purchasing Managers' Indices for the euro zone and the USA developed even better.

Positive signals came from the US labor market: 4.8 million new jobs were created in June and the unemployment rate fell from 13.3% to 11.1%. US consumers spent 5.6% more than previous month. In China industrial production as well as imports and exports increased and Chinese industrial companies were able to increase their profits by 11.5% year-on-year in June. The stock markets were also supported by the continued very expansionary monetary policy, with the ECB confirming its EUR 1,350 billion PEPP bond purchase program and the Federal Reserve reaffirming that it will continue to do everything necessary to protect the US economy from Corona damage. At their recent summit the EU countries voted in favor of the reconstruction fund proposed by the EU Commission with a volume of 750 billion euros, 390 billion of which will be spent in the form of subsidies.

However, market sentiment dimmed in the second half of the month as news was dominated by local Corona outbreaks, rising new infections, various withdrawals of easing measures and the recent designation of risk areas. The negative economic growth data also showed how deep the Corona slowdown is: The German economy slumped by -10.1% in the second quarter of 2020 compared to previous quarter and that of the euro zone by -12.1%. In the USA the economy slumped by -32.9% - more severely than ever before. However the US figure extrapolates the economic output of the second quarter to the whole year; according to German calculations the US economy contracted by around -9.5%.

At the same time, market experts were expecting significant declines in profits in the second quarter. According to the analyses, companies from the Stoxx 600 Europe and S&P 500 indices should fear losses of about -54% and -44% respectively. On the other hand, the May figures from Germany for new orders (+10%), industrial production (+8%) and exports (+9%), which improved accordingly compared to previous month, were optimistic. Compared to previous year, however, these figures also showed the deep Corona cut.

In view of these economic data, high-quality government bonds performed well. The yield on 10-year German government bonds fell from -0.45% to -0.52% and that on their US counterparts fell from 0.66% to 0.53%. The US dollar decreased significantly against the Euro. One Euro rose from USD 1.12 to 1.18. Falling interest rates and a weaker US dollar supported the gold rally. The price of the fine ounce rose from USD 1,784 to USD 1,975 and reached a new all-time high.




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