MARKETS CAUTIOUS AS THEY WAIT TO SEE IF RECOVERY IS BEING CURBED

This week markets appear to be checking which way the wind is blowing for the second half of the year. On Wednesday, chancellor Rishi Sunak delivered his summer statement and set out the government’s plan to minimize the economic damage of the coronavirus. This includes several measures to head off a looming spike in unemployment. The government’s plans will cost around £189bn this year and the overall deficit could be more than £350bn, around twice the peak deficit after the financial crisis. Whether this is enough will only become clear in time. A slight fall in gilt yields suggests bond markets remain comfortable with the increased rate of issuance.

Although Chinese equities are up around 10 per cent this week, most financial markets appear to be a bit more pessimistic. With the global total of confirmed coronavirus cases above 12 million and the US setting daily records for new infections, recovery may take longer than had been expected. The more negative outlook means many equity markets are slightly down this week and sovereign bond yields are also down slightly.

CHINA: EQUITIES UP AS CITIZENS URGED TO DO THEIR DUTY

Despite all the attention on US equities, the recent surge in Chinese equities has seen them overtake the US as the best performing stock market this year. The CSI 300 index is up 30 per cent in the last three months and is up 16 per cent for the

last six months. In comparison, the S&P 500 is up 22 per cent over three months and is down 3 per cent over the last six months.

Most of China’s gains have come in the last month, with the index up 22 per cent in the last 30 days. While some of the positive sentiment is from China’s relatively rapid recovery from the coronavirus shutdown, recent growth appears to have little to do with valuations or improving economic data. On Monday, the CSI 300 jumped almost 6 per cent after a state-run newspaper urged people to join a ‘healthy bull market’. The Chinese authorities have previously used the media to boost stock market returns but the results often prove short-lived.

GOLD: RALLY POINTS TO NERVOUSNESS DESPITE EQUITY GAINS

Gold broke through the psychologically important level of $1,800 an ounce as it continues to benefit from the cautious sentiment amongst some investors. The last 12 months have seen the gold price rise 28 per cent and it is up 44 per

cent over two years. It is nine years since gold was last at $1,800. Gold was benefitting from investor uncertainty before the outbreak of Covid-19, but concerns over the path of economic recovery have accelerated the price growth seen this year.

The first half of 2020 has seen a record inflow of investor money to gold ETFs with almost $40bn invested in gold-backed ETFs. Gold’s attraction as a store of value in volatile markets has been enhanced by central bank intervention in financial markets. Record low sovereign bond yields mean investors in gold are not giving up as much in the way of yield on their investment. This rise of the gold price has coincided with a period of rapidly rising equity prices and shows the split in attitudes currently at play in financial markets.

BOOHOO: COUNTING THE COST OF GOVERNANCE FAILURES

It has been a dramatic few weeks for online fashion retailer Boohoo. After 18 months of rapid share price growth, its shares fell 39 per cent in three days after allegations of worker exploitation. Just a few weeks ago the company

was celebrating its recent acquisitions and rising online sales as longer-established rivals struggle with lockdown and declining high street sales.

Instead of looking to further growth, the company has spent the week trying to salvage its reputation after allegations of suppliers illegally underpaying workers and one of its factories was linked to the coronavirus outbreak in Leicester. Several retailers have withdrawn Boohoo’s clothes while the company reviews its supply chain. Several ethical funds, including ASI UK Ethical Equity and Premier Ethical, are reviewing their investments. However, Boohoo’s share price had stabilised by the end of the week and Jupiter Asset Management, the company’s biggest independent shareholder, has taken advantage of the drop in share price to increase its stake.