Monthly Review : July 2020

Monthly Review : July 2020


United States

US employers added 4.8 million jobs in June and the unemployment rate fell to 11.1 per cent. However, the report pre-dated a new surge in coronavirus cases which prompted lockdowns to be reintroduced. Congress is split on partisan lines over how to get Americans back to work with Senate Republicans pushing to cut the weekly USD 600 emergency jobless benefits by two-thirds. The US economy contracted at an annualised rate of 32.9 per cent in the second quarter, or 9.5 per cent from the previous three months, the sharpest decline in the post-war era.

Euro area

European leaders agreed a EUR 750 billion package to rebuild economies hit hard by the pandemic. The recovery fund was brokered during a marathon summit in Brussels which at times provoked a bitter debate between the ‘Frugal Four’ and other EU members. EUR 390 billion will be distributed as grants from 2021 to 2023 and the remainder as low interest loans with conditions attached. Italy will be the largest beneficiary, receiving EUR 209 billion, followed by Spain. The package will be funded by AAA-rated EU issued bonds, to be repaid by 2058.

United Kingdom

The number of paid employees in the UK fell by 650,000 in the second quarter, the largest drop on record, and the Office for National Statistics warned the unemployment rate could rise to 12 per cent by the end of the year, even if just one in seven furloughed workers becomes unemployed. The emergency fiscal stimulus and lower tax receipts have dented public finances – the government’s cash deficit of GBP 174 billion in the second quarter was more than twice the previous record set in Q4 2009. The UK’s debt-to-GDP ratio has climbed to 99.6 per cent, the highest since 1961.


Switzerland’s unemployment rate fell to 3.2 per cent in June, from 3.4 per cent a month earlier, but the number of people out of work was more than 50 per cent higher than in June 2019. The government’s scheme to compensate workers temporarily moved to shorter hours has helped avoid more severe layoffs. Fitch affirmed Switzerland’s AAA ratings with a stable outlook, supported by its diverse and high value-added economy. Fitch forecasts the government’s fiscal balance will swing into a deficit of 8.5% of GDP in 2020, from a 1.2% surplus in 2019.

Central banks:

Federal Reserve (next meeting: September 16th)

The Federal Open Market Committee made no significant changes to monetary policy during its two-day meeting in July. Fed Chair Jay Powell warned that the increase in Covid-19 cases across many parts of the country will impact consumer spending and the pace of the economic recovery has slowed. However, he added it is too early to make any meaningful forecasts given that “the path of the economy is going to depend to a very high extent on the course of the virus.” Powell also stressed “fiscal policy is essential” to support the Fed’s measures in a prod to Congress to come together and agree a new package of emergency stimulus.

European Central Bank (next meeting: September 10th)

The ECB made no changes to its monetary policy at its July meeting as President Christine Lagarde noted there was “exceptionally elevated uncertainty” over the speed and extent of the recovery. Consumer spending has rebounded but the Eurozone faces a deep recession and inflation is well below the target rate. The ECB also asked banks to extend the freeze on dividends until at least January and to be “extremely moderate” when awarding staff bonuses. Capital and liquidity buffers are needed to absorb losses stemming from the pandemic and to enable banks to continue lending to households and businesses.

Bank of England (next meeting: August 6th)

Chief economist, Andy Haldane, revealed he voted against the additional GBP 100 billion of asset purchases announced in June on concerns a rapid, or “V-shaped”, recovery from the deepest recession in centuries will push inflation above the 2 per cent target rate. The sole dissentor also warned of a “dependency culture” on monetary stimulus in financial markets. The UK High Court ruled against the Venezualan governement’s claim for access to USD 1 biillion of gold held at the BoE on the grounds that the UK recognises opposition leader Juan Guaido as president.

Swiss National Bank (next meeting: September 24th)

SNB Chairman Thomas Jordan once again reitierated that foreign currency purchases and negative interest rates are “more necessary than ever” in a speech to the IMF. He added “foreign exchange market interventions were and still are the most direct and thus the most effective instruments besides the negative interest rate.” The SNB has stepped up interventions in recent months to curb some of the upward pressure on the safe haven Franc which has risen to a five-year high versus the Euro and its -0.75% policy rate is the lowest in the world.

Market Issues:

  • GDP reports revealing the extent of the deepest economic contractions on record didn’t stop global stock and credit markets moving higher for a fourth straight month. The US economy declined at an annualized rate of 33 per cent in the second quarter, yet the S&P 500 gained 5.6% during the month, moving back into positive territory year-to-date, and US high yield bonds returned 4.8% in July, the best monthly performance in almost nine years. Emerging markets led the gains in government bonds and equities, boosted by the 4.2% fall in the dollar index.
  • The UK government bond yield curve sank into negative territory out to seven years as the Bank of England’s bond buying programme more than offset a deluge of new supply – the Debt Management Office plans to raise GBP 385 billion from bond sales between April and November this year. It also suggests some market participants expect the BoE to follow other central banks and take interest rates below zero. Governor Andrew Bailey has signaled a reluctance to go this way but he also hasn’t explicitly ruled out such a move.
  • Gold surged to a new all-time high of USD 1,980 per troy ounce, before settling down at USD 1,973 at the end of the month. The precious metal has risen by more than 30 per cent in 2020, fueled by safe haven demand amidst the pandemic and escalating US-Sino tensions, ultra-low or negative interest rates around the world and the weakening of the US Dollar – the dollar index has fallen to its lowest level since mid-2018.
  • Argentina’s largest bondholder groups put forward a new proposal to restructure USD 65 billion of the country’s foreign debt, which included “significant economic and legal concessions” on their part. In monetary terms the concessions amount to an anticipated recovery value of 55 cents on the dollar, down from around 60 cents on the dollar requested at the outset of negotiations. Economy minister Martin Guzman moved quickly to reject the counterproposal, insisting the government’s earlier proposal to suspend interest payments until 2021 and extend maturities until 2046 was a final offer. The government’s offer puts the anticipated recovery value at closer to 53 cents on the dollar. Guzman asserted Argentina will request a new IMF program, with or without a deal in place with private creditors.

Credit Markets:

  • Rolls-Royce (Ba2/BB) was downgraded to junk status by Moody’s. It cut the rating of the iconic British engineering company by two notches due to the considerable uncertainties over the extent of the recovery in flying hours and commercial aircraft deliveries amid the pandemic –revenues are generated on the number of hours its engines are used by airlines. Rolls-Royce has announced plans to cut 9,000 jobs, mainly from its civil aerospace division, as part of a plan to generate savings of GBP 1.3 billion, but Moody’s forecasts it will still suffer substantial cash outflows in 2020 and 2021 at least. CEO Warren East revealed the company is looking at options to strengthen its balance sheet with media reports suggesting it wants to sell its ITP Aero division which manufactures parts for the Typhoon fighter jet.
  • International Airlines Group (Ba1/BB), the owner of British Airways and Iberia, revealed it is considering a rights issue of up to EUR 2.75 billion to shore up its balance sheet amid the coronavirus pandemic which has decimated air travel. The announcement was made just days before the UK government imposed a 14-day quarantine period on everyone arriving from Spain and the shares of European airlines fell back towards the lows of mid-May. IAG chief executive Willie Walsh had already warned that British Airways is “fighting for its survival” when the UK’s flag carrier announced plans to cut up to 12,000 jobs and in July it retired its entire fleet of Boeing 747s, four years ahead of schedule.
  • Hammerson (Baa3/BBB), the UK shopping centre owner, tapped GBP 300 million from its revolving credit facility and the same amount from the government’s Covid Corporate Financing Facility as it strives to avoid suffering the same fate as its larger rival Intu which entered administration in June. The coronavirus lockdown has led the majority of tenants at its 18 shopping centres and retail parks to withhold rent as retail footfall collapsed. Hammerson had agreed to sell seven UK retail parks to Orion European Real Estate Fund for GBP 400 million but the deal collapsed in May.
  • Inter Milan’s media unit, Inter MediaCo (BB-), sold EUR 75 million on bonds maturing in December 2022 at a yield of 8.285%. It received a BB- rating with a stable outlook from Fitch ahead of the debt sale and after Inter had secured qualification for next year’s UEFA Champions League. Match-day revenues for European football clubs have fallen to zero, putting strong pressure on their liquidity positions and contractual income streams from broadcasting and sponsorship revenue is vital to mitigate some of the impact of the coronavirus pandemic. Serie A is the fourth most valuable football league by annual revenue and Champions League qualification provides lucrative broadcast revenues.
  • Tesla (B2/B+) was upgraded two notches to B+ by Standard & Poor’s after the electric vehicle manufacturer improved profitability and cash-flow generation in the second quarter – the fourth consecutive quarterly profit pushed Tesla shares to an all-time high and its market cap is now larger than all other automakers. S&P also noted that Tesla’s increased installed capacity on three continents leaves it well placed to satisfy rising global demand for electric cars.

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