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Financial markets rebound as coronavirus uncertainty continues

World markets review — Second quarter 2020


 


Equities


Global stocks staged a powerful rally, rebounding sharply from a first-quarter selloff sparked by the coronavirus pandemic. U.S. stocks erased nearly all of the losses suffered in February and March as investors looked optimistically toward an economic reawakening. Gains were tempered, however, by a resurgence of the virus in some regions during the final weeks of the quarter.


Information technology stocks led markets higher as e-commerce, networking and streaming companies benefited from government-imposed lockdowns in many countries. All sectors in the MSCI World Index advanced, but defensive-oriented investments generally lagged the overall market, including consumer staples and utilities stocks.


This table shows returns for a number of equity indexes. The S&P 500 climbed 2.0% in June, 20.5% in 2Q 2020, but fell 3.1% through the year-to-date 2020. The MSCI All Country World Index climbed 3.2% in June in U.S. dollars and 2.9% in local currency, 19.2% in 2Q 2020 in U.S. dollars and 18.3% in local currency, but fell 6.3% through the year-to-date 2020 in U.S. dollars and 5.3% in local currency. The MSCI ACWI ex USA climbed 4.5% in June in U.S. dollars and 3.7% in local currency, 16.1% in 2Q 2020 in U.S. dollars and 13.9% in local currency, but fell 11.0% through the year-to-date 2020 in U.S. dollars and 9.0% in local currency. The MSCI World  climbed 2.6% in June in U.S. dollars and 2.4% in local currency, 19.4% in 2Q 2020 in U.S. dollars and 18.5% in local currency, but fell 5.8% through the year-to-date 2020 in U.S. dollars and 5.3% in local currency. The MSCI Emerging Markets Investable Market Index climbed 7.5% in June in U.S. dollars and 6.8% in local currency, 18.9% in 2Q 2020 in U.S. dollars and 17.6% in local currency, but fell 10.1% through the year-to-date 2020 in U.S. dollars and 5.7% in local currency. The MSCI EAFE climbed 3.4% in June in U.S. dollars and 2.6% in local currency, 14.9% in 2Q 2020 in U.S. dollars and 12.6% in local currency, but fell 11.3% through the year-to-date 2020 in U.S. dollars and-10.5% in local currency. The MSCI Europe climbed 4.1% in June in U.S. dollars and 3.2% in local currency, 15.3% in 2Q 2020 in U.S. dollars and 13.1% in local currency, but fell 12.8% through the year-to-date 2020 in U.S. dollars and 11.6% in local currency. The MSCI Pacific climbed 2.4% in June in U.S. dollars and 1.7% in local currency, 14.2% in 2Q 2020 in U.S. dollars and 11.7% in local currency, but fell 9.0% through the year-to-date 2020 in U.S. dollars and 8.8% in local currency.

 


Fixed income


Government bonds rose modestly while investment-grade corporate and high-yield debt rallied off the lows of March. Much of the momentum in bonds was driven by extraordinary market interventions orchestrated by central banks around the world, including the U.S. Federal Reserve, the European Central Bank and the Bank of England.


In foreign exchange markets, the euro rose significantly against the U.S. dollar after the ECB exceeded market expectations with a massive increase in its bond-buying stimulus program. The dollar also fell against many other currencies as safe haven buying waned; it finished the quarter essentially flat against the British pound and the Japanese yen. 


These tables show returns for a number of fixed income indexes and exchange rates. The Bloomberg Barclays U.S. Aggregate gained 0.6% in June, 2.9% in the second quarter of 2020 and 6.1% year-to-date 2020. The Bloomberg Barclays Global Aggregate gained 0.9% in June, 3.3% in the second quarter of 2020 and 3.0% year-to-date 2020. The Bloomberg Barclays U.S. Corporate IG index gained 2.0% in June, 9.0% in the second quarter of 2020 and 5.0% year-to-date 2020. The Bloomberg Barclays U.S. Corporate HY index gained 1.0% in June, 10.1% in the second quarter of 2020, but fell 3.8% year-to-date 2020. The JPM EMBI Global Diversified index gained 3.5% in June, 12.3% in the second quarter of 2020, but fell 2.8% year-to-date 2020. The JPM GB-EM Global Diversified index gained 0.5% in June, 9.8% in the second quarter of 2020, but fell 6.9% year-to-date 2020.

 


Regarding exchange rates, the Euro advanced 1.0% against the U.S. dollar in June, 2.4% in the second quarter of 2020, and 0.1% through the year-to-date 2020. The Japanese yen fell 0.1% against the U.S. dollar in June, advanced 0.1% in the second quarter of 2020, and 0.7% through the year-to-date 2020. The British pound fell 0.1% against the U.S. dollar in June, 0.4% in the second quarter of 2020, and 6.7% through the year-to-date 2020. The Canadian dollar advanced 1.5% against the U.S. dollar in June, 4.5% in the second quarter of 2020, but fell 4.8% through the year-to-date 2020. The Australian dollar advanced 3.7% against the U.S. dollar in June, 12.5% in the second quarter of 2020, but fell 2.1% through the year-to-date 2020. The Swiss franc advanced 1.4% against the U.S. dollar in June, 2.1% in the second quarter of 2020, and 2.2% through the year-to-date 2020.


North America


U.S. equities rallied as the economy showed early signs of recovering from recession, supported by massive stimulus measures and the reopening of shuttered businesses. The Standard & Poor’s 500 Composite Index had its highest quarterly return since 1998, rising 21%, even as a spike in COVID-19 cases caused elevated volatility late in the quarter. The index gained 39% from its March 23 bottom, erasing most of the losses from its first bear market in 11 years. The tech-heavy Nasdaq Composite advanced 31% as growth stocks significantly outpaced value.


Unprecedented levels of fiscal and monetary stimulus helped keep markets afloat despite the bleak economic picture. The Federal Reserve followed its easing measures in March with an announced $2.3 trillion stimulus program that extended credit to banks that issue Paycheck Protection Program (PPP) small-business loans and outlined plans to buy corporate and municipal bonds.


The unemployment rate climbed in April to its highest level since the Great Depression after the labor market shed over 20 million jobs. Economic activity bounced back in May as many retailers reopened their doors, but still remained well below prepandemic levels. Retail sales jumped 17.7% in May following two months of record declines.


Several large technology stocks hit all-time highs amid a strong rally for growth shares. These companies have benefited from stay-at-home measures that have placed a premium on online services for work, communication and entertainment. An increase in gaming lifted shares of graphics card manufacturer NVIDIA up 44%. PayPal surged 82% as consumers increasingly turned to e-commerce and digital payments. Shares of Apple, Microsoft, Amazon and Facebook also reached record levels in June. 


The energy sector returned 31%, bouncing back after a 50% decline in the first quarter. West Texas Intermediate crude oil soared 92%, supported by the easing of travel restrictions and OPEC production cuts. All sectors rose, but defensive stocks lagged the broader market. Financials remained pressured by rock-bottom interest rates and the grim economic outlook. 


Bond markets rebounded sharply, driven by unprecedented support from the U.S. Federal Reserve and optimism regarding economic recovery. Corporate bonds led the rally, with high-yield bonds soaring 10% and investment-grade bonds gaining 9%. Investment-grade credit spreads narrowed by 122 basis points to 150 bps. U.S. Treasuries rose 0.5%, bringing their year-to-date return to 9%. The benchmark 10-year Treasury yield ended the quarter at 0.66%, down 1 bp.


The Federal Reserve shored up credit markets by keeping interest rates near zero, buying massive amounts of government debt and rolling out several emergency lending programs. At its June policy meeting, the central bank maintained the benchmark fed funds rate at a range of 0% to 0.25%, a level at which most participants projected it would remain until at least 2022. 


 


Europe


European stocks rose sharply, posting the best quarterly returns since 2015. Investors cheered monetary and fiscal stimulus measures intended to blunt the economic impact of the coronavirus pandemic, including a massive new bond-buying pledge from the European Central Bank. Overall, the MSCI Europe Index gained 15%, rebounding from a dismal first quarter, and the euro rose 2% against the U.S. dollar.


ECB officials approved a €600 billion increase in the central bank’s pandemic relief program, committing to purchase as much as €1.35 trillion of government bonds and corporate debt over the next 12 months. Meanwhile, European Union leaders proposed issuing centrally backed bonds for the first time ever, with the proceeds going to fund pandemic relief efforts in Europe’s hardest-hit countries. If it is approved, the €750 billion plan would create a new type of bond backed by all 27 EU members.


Among national markets, German stocks rallied as Europe’s largest economy reopened manufacturing plants in key export industries, including automobiles, electrical equipment and chemical goods. German stocks in aggregate gained 26%; shares of German industrials giant Siemens rose 38%. British stocks lagged the overall market, rising 8% amid growing COVID-19 cases and ongoing uncertainty over the terms of the U.K.’s departure from the European Union.


Information technology stocks enjoyed the biggest gains, rallying in tandem with the U.S. tech sector. Shares of ASML soared as the Dutch semiconductor equipment maker reported no drop off in demand for the high-end chipmaking systems it provides to other semiconductor companies. Only one sector declined. Energy stocks fell 3% as some European oil majors reported massive writedowns after oil prices plummeted earlier in the year. BP and Royal Dutch Shell both lost about 9%.


In fixed income markets, eurozone government bonds advanced overall on news of the ECB’s aggressive new bond-buying initiative. The yield on Germany’s benchmark 10-year note remained essentially flat, ending the quarter at –0.46%. Similar maturities in France declined 9 basis points to end the period at –0.11%. Yields rose in some countries that were hit harder by the pandemic, including Italy and Spain.


 


Asia-Pacific 


Japanese stocks rebounded as the country appeared to contain its coronavirus outbreak and lifted a seven-week state of emergency. The MSCI Japan Index rose 12% and the MSCI Pacific ex Japan Index rose 20%. The Japanese yen was essentially flat against the U.S. dollar.


The Japanese economy fell into recession, with first quarter output contracting by 2.2% on an annualized basis. Exports plunged in May, hurt by weak automotive shipments to the U.S. Industrial production and retail sales tumbled by double digits in April and May. The International Monetary Fund has projected that Japan’s economy will contract by 5.8% in 2020. Core inflation held at –0.2% for a second consecutive month in May.


To counter the economic impact of the pandemic, the Bank of Japan pledged to buy an unlimited amount of government bonds, quadrupled its planned purchases of corporate debt to ¥20 trillion until September 2020 and increased its support for corporate lending by banks, but left its –0.1% policy rate unchanged. The Japanese government launched two stimulus packages of ¥117 trillion each in the quarter. 


All but one Japanese stock sector advanced. Information technology (+18%), health care (+18%) and materials (+14%) stocks rose the most, while the real estate (+0.4%) and consumer staples (+3%) sectors posted the smallest gains. The utilities sector fell 4%. 


Hong Kong saw renewed civil unrest as China imposed a national security law that deepened concerns about the territory’s autonomy from the mainland. In response, the U.S. moved to revoke Hong Kong’s special trading status, coloring its future as an Asian business hub. Gross domestic product fell 8.9% in the first quarter, the worst drop on record, extending the recession that began in the second half of 2019. Hong Kong stocks rose 9%, lagging gains elsewhere in the region.


Australian stocks surged 29% as authorities unleashed stimulus measures to support an economy teetering on the verge of its first recession in nearly 30 years. GDP fell 0.3% in the first quarter, the first decline in nine years. The Australian currency rallied 12% against the U.S. dollar, recovering much of the ground it lost in the first quarter’s sharp selloff. In New Zealand, stocks rose 28% for the quarter and 7% for the year to date, making it one of three countries in the world in positive territory for the first half of 2020.


 


Emerging markets


Emerging markets stocks bounced back as China’s economy restarted, commodity prices rebounded and central bankers in developing countries cut key lending rates and rolled out stimulus measures to help blunt the impact of the global economic slowdown. The MSCI Emerging Markets Investable Market Index surged 19%.


Chinese stocks rose as economic activity increased after quarantine measures were eased. Industrial activity rose in April and May as more factories resumed operations and construction activity picked up. However, given heightened global economic uncertainty, China’s policymakers chose not to set an economic growth target at the annual parliament meeting in late May but did pledge to roll out additional stimulus measures if needed. Overall, the MSCI China IMI gained 3% for the year to date, outpacing major equity benchmarks despite China’s escalating geopolitical tensions with the U.S. and other countries.     


Internet-platform companies in China boosted returns for the emerging markets index. These companies all benefited from increased demand for online services during the COVID-19 pandemic, ranging from mobile gaming to food delivery to the purchase of consumer goods. Leading gainers included Tencent, JD.com and Meituan Dianping.


Taiwan’s top semiconductor companies also notched strong returns. Taiwan’s exports of electronic components rose 13.2% in May from the year-earlier period, bolstered by demand for computer chips used in industrial automation, data centers and 5G telecommunications. This helped boost gains for Taiwan Semiconductor, the world’s largest contract manufacturer of silicon chips, and components maker MediaTek.


Countries that produce oil and industrial metals rebounded sharply. Russian equities surged amid a strong rally in the price of crude oil, the country’s leading export. Brazilian stocks soared as prices for iron ore and other raw materials rose. Meanwhile, Brazil’s legislature approved an emergency quantitative easing program, and the central bank continued its rate-cutting campaign as first-quarter GDP shrank 1.5% compared with the last three months of 2019.


A number of developing countries across the world rushed to debt markets to raise funds to help weather economic shutdowns, as well as to take advantage of lower rates and investor demand for high-yielding debt. Qatar sold $10 billion of bonds; Egypt, $5 billion; Indonesia, $4.3 billion; and Brazil, $3.5 billion. Both U.S. dollar-denominated and local currency emerging markets debt rose, with Indonesian, South African and Mexican dollar bonds all notching double-digit returns



This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.

The statements expressed herein are as of the date published, are subject to change at any time based on market or other conditions and are based on information from sources believed to be reliable. This information is intended to highlight issues and should not be considered advice, an endorsement or a recommendation. Permission is given for personal use only. Any reproduction, modification, distribution, transmission or republication of the content, in part or in full, is prohibited.


Certain market indexes are unmanaged and, therefore, have no expenses. Investors cannot invest directly in an index. 


Unless otherwise noted, all returns are in U.S. dollars and assume the reinvestment of dividends. Country stock returns are based on MSCI indexes. 


Bloomberg Barclays indexes are unmanaged, and results include reinvested dividends and/or distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal income taxes.  


Bloomberg Barclays U.S. Aggregate Index represents the U.S. investment-grade fixed-rate bond market.


Bloomberg Barclays Global Aggregate Index represents the global investment-grade fixed income markets. 


Bloomberg Barclays U.S. Corporate Investment Grade Index represents the universe of investment grade, publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity, and quality requirements.


Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Capped Index covers the universe of fixed-rate, non-investment-grade debt. The index limits the maximum exposure of any one issuer to 2%. 


Dow Jones Industrial Average is a price-weighted average of 30 actively traded industrial and service-oriented blue chip stocks.


J.P. Morgan Emerging Markets Bond Index (EMBI) Global Diversified and related country-specific indexes track total returns for U.S. dollar-denominated debt instruments issued by emerging market sovereign and quasi-sovereign entities: Brady bonds, loans, eurobonds.


J.P. Morgan Government Bond Index – Emerging Markets (GBI-EM) Global Diversified and related country-specific indexes cover the universe of regularly traded, liquid fixed-rate, domestic currency emerging market government bonds to which international investors can gain exposure.


MSCI indexes are free-float-adjusted, market-capitalization weighted indexes. Developed market index results reflect dividends net of withholding taxes. Emerging market index results reflect dividends gross of withholding taxes through December 31, 2000, and dividends net of withholding taxes thereafter. Each index is unmanaged, and its results include reinvested dividends and/or distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal income taxes.


MSCI All Country World Index (ACWI) is designed to measure results of more than 40 developed and emerging equity markets. 


MSCI All Country World (ACWI) ex USA Index is designed to measure equity market results in the global developed and emerging markets, excluding the United States. 


MSCI EAFE® (Europe, Australasia, Far East) Index is designed to measure developed equity market results, excluding the United States and Canada. 


MSCI Emerging Markets Investable Market Index includes large, mid-cap and small-cap segments, targeting a coverage range of close to 99% of more than 20 emerging equity markets. Individual emerging markets listed herein represent a subset of the MSCI Emerging Markets Investable Market Index.


MSCI Europe Index is designed to measure developed equity market results across 15 developed countries in Europe. 


MSCI Pacific Index is designed to measure the equity market performance of the developed markets in the Pacific region. It consists of Japan, Australia, Hong Kong, New Zealand and Singapore. 


MSCI World Index is designed to measure equity market results of developed markets. The index consists of more than 20 developed-market country indexes, including the United States. 


Nasdaq Composite Index is a broad-based market-capitalization-weighted index that measures all domestic and international-based common-type stocks listed on The Nasdaq Stock Market.


S&P 500 Index is a market-capitalization-weighted index based on the results of 500 widely held common stocks. This index is unmanaged, and its results include reinvested dividends and/or distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal income taxes.


Bloomberg® is a trademark of Bloomberg Finance L.P. (collectively with its affiliates, “Bloomberg”). Barclays® is a trademark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Neither Bloomberg nor Barclays approves or endorses this material, guarantees the accuracy or completeness of any information herein and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith. 


This report, and any product, index or fund referred to herein, is not sponsored, endorsed or promoted in any way by J.P. Morgan or any of its affiliates who provide no warranties whatsoever, express or implied, and shall have no liability to any prospective investor, in connection with this report. 


MSCI has not approved, reviewed or produced this report, makes no express or implied warranties or representations and is not liable whatsoever for any data in the report. You may not redistribute the MSCI data or use it as a basis for other indices or investment products. 


The S&P 500 (“Index”) is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Capital Group. Copyright © 2020 S&P Dow Jones Indices LLC, a division of S&P Global, and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC.

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