A Touch of the Jitters

It seems investors cannot quite bring themselves to ignore completely COVID-19 as it rampages around the globe. Nevertheless, the more adventurous have managed to find a new ‘Gold Rush’ destination in China’s A shares to supplement the ongoing appetite for the US IT and  Communication Sectors. The latter are, of course, also favoured by many institutions as defensive stocks, which adds to their ‘glister’ and some of China’s tech giants are also benefitting in the same way. However, by the end of a week of exuberance, even official channels in China were toning down their earlier encouragement with references to the crash there in 2015.  

Meanwhile, many investors, surely wisely, have been hedging their bets by buying the real yellow stuff and/or gold mining stocks. They have also been scooping up any investment grade paper that offers a positive yield and, in the case of Euro Area sovereign bonds, even negative yields which can be made positive via currency swaps for non-euro based investors. This unusual combination of adventurousness and caution is also affecting FX rates as the dollar is sold by investors seeking diversification from US equities, especially as a disappointing Q2 corporate earnings season looms. 

Economic data, in particular Services PMIs, continue to offer comfort to those of a half-full glass disposition via sharp month on month improvements and also to those of a half-empty disposition via dreadful year on year numbers. Moreover, the COVID-19 epidemic itself is far from over and even less the political, social and economic consequences. The growing international row over the ‘security legislation’ in Hong Kong is a new worry that could lead to highly disruptive trade and finance sanction. For now, however, the 2020 ‘Gold Rush’ looks set to continue with all the typical lucky strikes and pitfalls.

The pound has fared surprisingly well in the face of the somewhat frantic COVID-19 crisis measures and the intensifying uncertainty over the Brexit negotiations. A flood of poor economic data may stall its modest rally in July. The Debt Mamagement Office are busily taking advantage of the demand for ‘safe’ assets to stage auctions that are well covered, especially  Index-Linker.s US Treasury auctions are also going well with the latest 10-year setting a record low yield of 65bps. No signs of indigestion yet!