Monthly Review: June 2020

Monthly Review: June 2020


United States

The Atlanta Fed’s GDPNow model estimates a 39.5% contraction in the second quarter although recent economic reports suggest a recovery is underway.  Retail sales jumped a record 17.7 per cent in May, following a 14.7 per cent drop in April, and US business activity shrank at its slowest pace in four months in June according to the IHS Markit composite index.  The number of Americans claiming unemployment benefits slowed from a peak of 20.6 million to 19.5 million, equivalent to 13.4 per cent of the workforce, but remains well above the pre-pandemic level of 1.7 million.

Euro area

Business sentiment in the Eurozone’s largest economies rose at record rates in June, although the majority of German companies continue to assess the current assessment as poor according to the Ifo Institute, tempering some optimism of a V-shaped recovery.  The German government’s economic advisors forecast the economy will shrink 6.5 per cent in 2020 due to collapse in industrial production and exports, and although the recovery should start in the summer, GDP is unlikely to return to its pre-pandemic level until 2022 at the earliest.

United Kingdom

The UK economy contracted 2.2 per cent in the first quarter, the biggest quarterly decline since 1979.  The downwards revision by the ONS, from its first estimate of 2.0 per cent, reflects the sharp drop in consumer spending in late March as shops, restaurants and entertainment venues closed.  Output plunged a further 20.4 per cent in April, from a month earlier, the biggest fall on record, suggesting the UK faces a more severe recession other advanced economies – the OECD forecasts an 11.5 per cent downturn in 2020 and unemployment to rise to around 9 per cent.


The KOF Economic Barometer rose 9.8 points in June to 59.4, the first upwards movement since February as the lockdown eased and more businesses re-opened.  However, the reading continues to paint a gloomy outlook and reflects the State Secretariat for Economic Affairs’ forecast for a 6.2 per cent downturn in the economy this year.  The SECO also projects unemployment to rise to 3.8 per cent this year and to 4.1 per cent in 2021, warning the export-orientated economy could take longer to recover due to the sharp downturns in its trading partners.

Central banks:

Federal Reserve (next meeting: July 29th)

The Federal Reserve made no changes to interest rates and indicated they will remain close to zero through to the end of 2022 as it issued a downbeat assessment of the damage to the economy from the pandemic.   The Fed expects the US economy will contract by 6.5 per cent this year and unemployment will be above 9 per cent at year-end.  Whilst it anticipates a solid recovery in economic activity next year, it expects unemployment will be at 5.5 per cent in 2022, significantly higher than pre-health crisis levels.  Fed Chair Jerome Powell also warned Congress against withdrawing fiscal support which would put the recovery in jeopardy.

European Central Bank (next meeting: July 16th)

The European Central Bank announced it will increase its pandemic emergency purchase programme (PEPP) by another EUR 600 billion, exceeding most forecasts.  The programme, which now stands at EUR 1.35 trillion, was also extended to June 2021 and “maturing principal payments from securities purchased under the PEPP will be reinvested until at least the end of 2022”.   The additional stimulus comes after the ECB forecast the Eurozone economy will contract by 8.7 per cent this year and it also downgraded inflation projections to 0.3 per cent for 2020, 0.8 per cent for 2021 and 1.3 per cent for 2022.

Bank of England (next meeting: August 6th)

The Bank of England announced GBP 100 billion will be added to its quantitative easing programme to help buffer the economy against the impact of the fallout from the coronavirus crisis.  The Monetary Policy Committee, however, unanimously voted to keep interest rates at the historic low of 0.1 per cent, resisting some calls to pursue a negative interest rate policy.  Governor Andrew Bailey later revealed that he expects the BoE to unwind its assets purchase programme before interest rates are increased, marking a U-turn on predecessor Mark Carney’s view.

Swiss National Bank (next meeting: September 24th)

The Swiss National Bank maintained it policy interest rate at -0.75% in June and reiterated it will maintain sub-zero rates for “some time” after cutting both its growth and inflation outlooks.  The SNB expects the Swiss economy will contract 6 per cent this year, the most in more than four decades, and it forecast deflation through to the end of 2021 before inflation moves into modest positive territory in 2022.  President Thomas Jordan acknowleded the SNB had continued to make “substantial interventions” in currency markets to curb the appreciation of the Franc.

Market Issues:

  • Global stock and credit markets rallied for a third consecutive month as the promise of more monetary and fiscal stimulus offset concerns over the flare up in coronavirus cases in some countries.  The S&P 500 posted its biggest quarterly gain since 1998 and is now just down three per cent year-to-date.  Technology stocks have done much of the heavy lifting and the Nasdaq is more 12 per cent higher on the year.
  • Austria took advantage of the ultra-low interest rate environment to issue its second “century bond” which will mature in July 2120.  It raised EUR 2 billion at a yield of 0.88%, compared to the 2.1% in paid on a similar bond three years ago.  The new bond attracted orders of more than EUR 17 billion.
  • Gold climbed above USD 1,800 an ounce for the first time since 2011 as negative real bond yields, the rise in virus infections and heightened US-China tensions drove demand for the safe haven metal.  Physical gold is more than 17 per cent higher year to date, outperforming all other major asset classes.
  • Argentina’s debt restructuring talks reached an impasse as the government and creditors each refused to give up more ground.  The government’s latest offer to include warrants linked to Argentina’s agricultural exports was rejected as was the counter-proposal from creditors to reduce their demands for the average coupon rate from 4.25 per cent to 3.6 per cent.  The stalemate could push creditors towards taking legal action to apply more pressure on the government.  The country’s “century bond” maturing in 2117 continues to trade just below 40 per cent of face value.

Credit Markets:

  • Wirecard bonds plunged to 20 per cent of face value after the company warned EUR 1.9 billion, equivalent to 25 per cent of its balance sheet, was missing and likely doesn’t exist.  The scandal led to the arrest of its founder and former CEO Markus Braun and public prosecutors are also seeking former COO Jan Marsalek. The fintech company had a market cap of EUR 14 billion at its peak in August 2018 and an investment grade rating until June this year.
  • Amazon (A2/AA-) sold USD 10 billion of bonds at some of the lowest ever costs for a company borrowing in US corporate bond market.  The tech giant sold 3-year notes at 0.4%, below than the previous record low of 0.45% secured by Apple, IBM and Walt Disney in 2012-13, and its 7-year and 10-year notes with coupons of 1.2% and 1.5% also set new record lows previously set by Costco earlier this year.   The order book for the bond sale which also included 5, 30 and 40-year notes was more than three times oversubscribed.
  • Three major US airlines issued an aggregate USD 7.3 billion of bonds secured on their airline fleets in the space of a week.  American Airlines (Ba3) paid 11.75 per cent to issue USD 2.5 billion of 5-year secured notes, United Airlines (Baa3) 6.5 per cent for USD 3.8 billion of 7-year notes and Alaska Airlines (A) for its 7-year notes.  Restricted access to capital markets amidst the coronavirus crisis has forced companies operating in the travel industry to be more innovative to raise new funds.  Earlier in the month, Standard & Poor’s cut the senior unsecured rating of American Airlines from B to B- on concerns the capacity reductions and cost savings will only partially offset the substantial cash low deficit from the steep decline in airline bookings.
  • BP Plc (A1/A-) sold USD 12 billion of hybrid bonds to shore up its balance sheet in the wake of taking a writedown of up to USD 17.5 billion on the value of its oil and gas assets on expectations of lower long-term energy prices.  The debut hybrid issuance from the UK energy major featured US Dollar, Euro and Sterling denominated notes.
  • Chesapeake Energy Corp (Ca/D) filed for Chapter 11 bankruptcy protection, the largest US energy producer so far to fall victim to the oil price crash.  The shale producer, which at one time had a market capitalization of USD 35 billion, announced it has reached an agreement with its creditors to eliminate USD 7 billion of debt and its bonds fell to less than 5 per cent of face value.

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