Quarterly Markets Review – Q2: June 2020

A look back at markets in Q2 when shares rebounded as economies started to re-open, while governments and central banks continued to provide support.

  • The easing of Covid-19 lockdowns and early signs of economic recovery saw risk appetite return rapidly in Q2, supporting equity and credit markets.
  • US equities rebounded in Q2 and outperformed other major equity markets. Improving jobs and retail sales data provided cause for optimism.
  • Eurozone shares posted strong gains in Q2 as lockdown restrictions were eased. Another source of support was news of EU plans for post-Covid-19 recovery with the European Commission proposing a €750 billion fund.
  • UK equities rose over the period. Having contained the first wave of Covid-19, national lockdown measures were eased. Meanwhile, economic indicators suggested the downturn had past its worst point.
  • Japanese shares gained, supported by the improved global picture. Stocks sensitive to the economic cycle tended to fare best while domestic-focused stocks underperformed.
  • Emerging market (EM) equities advanced amid global monetary and fiscal stimulus. However, there was an acceleration in the number of new daily cases of Covid-19 in some EM countries.
  • In government bonds, US and German 10-year yields saw little change in the quarter. Corporate bonds outperformed government bonds.
  • In commodities, the energy component rallied as oil-producing countries agreed temporary production cuts.

Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.


US

US equities rebounded in Q2 and outperformed other major equity markets. At the beginning of the quarter, data confirmed the severe economic impact of lockdown measures. However, the subsequent easing of lockdown restrictions, ongoing loose monetary policy from the Federal Reserve (Fed) and early indications of a recovery led to widespread equity market gains. Weekly claims for unemployment insurance slowed substantially and retail sales rebounded strongly from April to May. As yet, the Federal Reserve (Fed) is “…not even thinking about thinking about raising rates”, according to Jerome Powell, chairman of the US central bank.

However, investor optimism was tempered by a subsequent rise in Covid-19 cases that has prompted some states to rethink or reversing the easing of lockdown measures. US-wide, the trend of new cases accelerated rapidly into the end of June. The states of Texas, Florida, California and Arizona saw notable increases in cases and hospitalisations.

The improvement in retail sales was supportive of consumer discretionary stocks, which outperformed, along with information technology, which has been consistently resilient through the crisis. Energy and materials also made strong gains. More defensive areas such as utilities and consumer staples lagged behind.

Eurozone

Eurozone equities posted strong gains in Q2 as countries began to lift lockdown restrictions. The Baltic countries and Austria were among the first to loosen their lockdowns in April due to their relative success in containing Covid-19. Worse affected countries such as Spain, France and Italy waited until later in the quarter before relaxing measures.

Another source of support for shares was news of the EU’s plans for post-Covid-19 recovery. European Commission president Ursula von der Leyen called for the power to borrow €750 billion for a recovery fund to support the worst affected EU regions. This would be in addition to a €540 billion rescue package agreed in April. The European Central Bank also offered support, expanding its pandemic emergency purchase programme to €1.35 trillion.

Data showed the eurozone economy shrank by 3.6% in the first quarter, compared to the final three months of 2019, as lockdown measures were widely introduced in March. However, surveys of economic activity showed marked improvement through the spring. The flash eurozone composite purchasing managers’ index (PMI) for June rose to 47.5, compared to 31.9 in May and 13.6 in April. (50 is the level that separates expansion from contraction. The PMI surveys are based on responses from companies in the manufacturing and services sectors).

All sectors posted a positive return in the quarter. Information technology saw some of the strongest gains along with industrials, materials and financials, as news of lockdowns lifting buoyed economically-sensitive sectors. The energy sector was the main underperformer.

UK

UK equities rose over the period. Having contained the first wave of Covid-19, national lockdown measures were eased. Meanwhile, economic indicators suggested the downturn had passed its worst point. A number of economically sensitive areas of the market outperformed amid a general improvement in investor sentiment, largely driven by global considerations. The mining sector, for instance, performed very well, in part due to the ongoing recovery in Chinese economic activity and new stimulus measures.

The latest monthly estimates revealed that the UK economy contracted by 20.4% in April (the first full month of the UK national lockdown). However, Google mobility data suggests that the fall in travel to work also bottomed out that month. This supports the view that GDP could have returned to positive growth in May.

The government began to ease lockdown measures with people encouraged to return to work where necessary and a phased reopening of schools and various industry sectors confirmed. This occurred as the cost of the government programmes announced in Q1 to cushion the blow from unemployment and the loss of income as a result of the lockdowns became apparent in borrowing figures released in Q2.

The government confirmed a phased end to the furlough scheme and the Bank of England (BoE) expanded its quantitative easing programme. The BoE’s governor told parliamentarians that negative rates were under “active review” while the Debt Management Office reported it had sold negative yielding gilts for the first time. However, negative base rates are seen as unlikely. Brexit returned to the agenda as the deadline passed for an extension of the transition period, which expires on 31 December 2020.

Japan

After weakness in early April, the Japanese equity market recovered to record a total return of 11.3%. Although there was some short term currency volatility in June, the yen remained in a fairly stable range throughout the three months.

As the quarter unfolded, investors reacted positively to signs of a peak in virus cases globally, rather than specific news on Japan itself. As a result, economically sensitive and global stocks, together with pharmaceuticals, tended to lead the market recovery. Domestic-focused stocks such as transportation, insurance and utilities typically lagged behind the overall market rise. Airlines continued to weaken as concerns mounted over their inability to restart profitable services in the medium term, even when lockdowns began to ease. Smaller companies were very weak relative to the overall market in first few days of April but gradually recouped this decline and actually outperformed large caps over the quarter as a whole.

Compared to other developed countries, Japan continued to experience a rather different trajectory of recorded virus cases and mortality over the last three months. A state of emergency was declared by the central government across seven prefectures, including Tokyo, on 7 April, which was later extended nationwide. Even so, the practical restrictions on social and business activities remained far less restrictive than those seen in Europe. Prime Minister Abe was then able to announce a staged lifting of the state of emergency, starting from 14 May for some prefectures and culminating on 25 May for Tokyo.

The Japanese government also continued to step up its fiscal response to the crisis and drew up a second supplementary budget, as expected, in May. Following the increase in its pace of exchange-traded fund (ETF) purchases from March onwards, the Bank of Japan also announced additional monetary policy initiatives.

Asia (ex Japan)

Asia ex Japan equities recorded a strong return in Q2 – albeit advancing by slightly less than the MSCI All-Country World Index. Markets were buoyed by fresh stimulus from major central banks, ongoing normalisation within the region and the reopening of economies across the world, which began to exit Covid-19 lockdowns.

The export-oriented markets of Indonesia, Thailand and Taiwan outperformed the regional index on hopes of a recovery in global demand in the second half of 2020. Indonesia also benefited from strong currency appreciation. India and Korea both outperformed too. India’s central bank provided additional support in April which was followed by the announcement of a major fiscal stimulus package in May. The country also benefited from lower oil prices. Meanwhile, a better-than-expected earnings season boosted the Korean market, as did the announcement of additional economic support from the government. 

By contrast, Hong Kong SAR underperformed amid increased geopolitical tensions. China announced the imposition of a national security law in Hong Kong SAR, which came into effect on 30 June. Singapore and, to a lesser extent, Malaysia underperformed. China slightly underperformed, after strong outperformance in Q1. During the second quarter, economic activity continued to recover, with manufacturing PMI improved to 51.2 in June, though exports fell by 3.3% year-on-year in May after expanding in April. Meanwhile the government announced further fiscal support at the National People’s Congress in May. However, geopolitical concerns increased as the US-China confrontation expanded beyond trade and technology issues. In terms of sectors, healthcare, materials and energy were among the top performers, while utilities, financials and industrials advanced the least.

Emerging markets

Emerging market (EM) equities rallied, recording their strongest quarterly return in over a decade, with US dollar weakness amplifying returns. This was despite an acceleration in the number of new daily cases of Covid-19 in some EM countries. The MSCI Emerging Markets Index increased in value but slightly underperformed the MSCI World Index.

EM countries with high foreign financing needs outperformed, notably Argentina, which was the best-performing market in the MSCI EM index, as well as South Africa and Indonesia. In South Africa, after initially announcing a strict lockdown, the government started to reopen the economy, and economic activity started to recover, as evidenced by June manufacturing PMI which showed marked improvement. The exporter markets of Thailand and Taiwan outperformed on hopes of a recovery in global demand in the second half of 2020. Brazil recorded a strong gain despite a headwind from currency weakness

By contrast, Egypt and Qatar were the weakest index markets, though both still posted solid gains. Mexico underperformed as the government remained reluctant to provide more meaningful fiscal support. China also underperformed, having outperformed by a wide margin in Q1. Economic activity continued to normalise and additional stimulus was announced at the National People’s Congress in May. However, US-China tensions increased, extending beyond trade and technology issues. China proposed a new security law for Hong Kong which was implemented at the end of June. In addition, tensions with India increased, amid skirmishes on the disputed Himalayan border.

Global bonds

The quarter saw a forceful rebound in investor sentiment and riskier assets as the rate of new Covid-19 cases started to slow and countries began easing lockdown measures. Economic data confirmed a sharp contraction in activity, but several measures significantly exceeded very low expectations. Central banks continued to strongly affirm their intention to support economies and markets through asset purchases and other measures.

Broadly, government bond yields saw a degree of divergence over the quarter. The US and Germany’s 10-year yields were little changed, but those more sensitive to risk sentiment declined (meaning prices rose). The US 10-year yield remained in a narrow range, and finished one basis point lower. It sold off in early June following a stronger-than-expected US labour market data release, though the move reversed later in the month.

In Europe, the more noteworthy development was a decline in the Italian 10-year yield of over 22 basis points (bps) to 1.26%. Italian bonds benefited from hopes of moves toward more coordinated support measures in the eurozone.

With Brexit back in focus, the UK 10-year bond yield was 18bps lower at 0.17%. The UK two-year yield dropped below zero for the first time, finishing at -0.08%, as the central bank discussed the possibility of negative interest rates.

Corporate bonds performed strongly, outpacing government bonds, as they benefited from stronger risk appetite. High yield performed particularly well with total returns (local currency) of 11%, led by the European market. Investment grade returned 7.9%. The US energy sector performed well across investment grade and high yield. Investment grade bonds are the highest quality bonds as determined by a credit ratings agency; high yield bonds are more speculative, with a credit rating below investment grade.

Emerging market (EM) bonds also rebounded to produce strong gains. Hard currency government, quasi-sovereign and corporate bonds returned over 11%. Local currency bonds were up nearly 10%. EM currency performance was mixed, broadly lagging behind other risk assets, as concerns over Covid-19 remained heightened, notably in Brazil.

Global stock markets had a strong second quarter with the MSCI World index gaining 19.4%. Convertible bonds, as measured by the Thomson Reuters Global Focus index, showed a remarkable participation in the gains, with the index finishing the second quarter up 15%. The convertible primary market showed activity not recorded since 2007 and the record volume of new issues kept valuations low.

Commodities

The S&P GSCI (Commodities) Index rallied strongly in Q2, recovering some of the ground lost in Q1 and aided by US dollar weakness. The energy component posted a sharp gain, as OPEC (the Organisation of Petroleum-Exporting Countries) and Russia agreed to make temporary production cuts. This masked volatility in April caused by oversupply and storage concerns.

The industrial metals component recorded a positive return, led by iron ore and copper. Precious metals advanced too, with silver the standout performer. The agriculture sector posted a negative return, with coffee and wheat prices notably weak.  


The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

Monthly Markets Review – May 2020

A review of markets in May when shares were supported by an increasing focus on how lockdowns would be lifted.


  • Equity markets rose on the whole in May as Covid-19 lockdown measures began to be lifted and further support measures were announced. Escalating tensions between the US and China, however, limited emerging market equity gains.
  • US shares gained ground amid optimism over the re-opening of the economy. Q1 GDP growth was revised down to -5.0%, compared to the first estimate of -4.8%.
  • Eurozone equities advanced as some countries began to allow some parts of their economies to reopen. The European Commission proposed a €750 billion recovery package.
  • UK equities rose in May. A number of economically sensitive areas performed well amid the improvement in investor sentiment. Sterling fell as worries over a no-deal Brexit resurfaced.
  • Japanese shares posted gains, with pharmaceutical stocks leading the advance. Lockdowns across the country were lifted in stages during the month.
  • Emerging market (EM) equities advanced but underperformed developed markets. Performance was dampened by the re-emergence of US-China tensions.
  • Corporate bonds outperformed government bonds as the more optimistic backdrop saw investors favour higher risk assets. US 10-year government bond yields were little changed during the month.

Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

US

US equities gained in May, with investors cheered by plans to ease the Covid-19 lockdown measures both domestically and in many countries around the world. Every US state had made plans to reduce restrictions by mid-May. The US dollar fell, becoming less attractive as a safe haven as risk appetites climbed. The rise in optimism came in spite of the confirmation that the economy had contracted by slightly more than expected in Q1.

Real GDP for Q1 was revised down to an annual rate of -5.0%, a bigger decline than the 4.8% drop first estimated. It was the biggest quarterly drop since an 8.4% fall in Q4 2008. Much of the weakness was due to a sharp fall in consumer spending, especially in consumer purchases of services. In addition, there were some concerns that the US-China trade relationship could sour again. However, neither issue managed to recapture investor focus, which landed on economies restarting around the world.

US equities rose in line with other world equity indices. All sectors in the S&P 500 rose with materials and industrials, more cyclically-exposed, performing strongly. IT stocks were once again notable outperformers. Consumer staples and energy lagged behind the wider market but still made positive progress.

Eurozone

It was another month of gains for eurozone shares in May as many European countries began to ease out of lockdown. Stock markets were further supported by news of the EU’s plans for post-coronavirus recovery.

European Commission president Ursula von der Leyen called for the power to borrow €750 billion for a recovery fund to support those EU regions that have been worst affected by Covid-19. This would be in addition to the €540 billion rescue package agreed in April. She also proposed a new suite of taxes to pay back the debt. The plan still needs the approval of member states, with the recovery fund expected to be on the agenda for the 19 June European Council summit. In addition, comments from European Central Bank (ECB) board members suggested that the ECB’s asset purchase target could be increased at the June meeting.

All sectors saw positive returns with gains for both economically-sensitive sectors and those perceived to be more defensive. The industrials and utilities sectors were among the top gainers while energy and consumer staples saw a smaller advance. Forward-looking economic data showed how activity is picking up as lockdowns started to be relaxed: the Markit composite purchasing managers’ index (PMI – a survey of companies in the manufacturing and service sectors) rose to 30.5 in May from 13.6 in April. However, this is still well below the 50 mark that separates expansion from contraction.

UK

UK equities rose over the period. A number of economically-sensitive areas of the market outperformed amid the general improvement in investor sentiment. The mining sector performed particularly well in response to a recovery in Chinese industrial activity.

The government began to ease lockdown measures with people encouraged to return to work where possible and a phased reopening of the retail industry and schools confirmed. Meanwhile, the UK’s departure from the EU returned to the agenda as the end of June deadline to extend the Brexit transition period, which expires on 31 December 2020, came into view.

Renewed concerns that the country could be heading for a “no deal” Brexit weighed on sterling, as did the prospect of negative interest rates. The Bank of England governor told parliamentarians that negative rates were under “active review” while the Debt Management Office confirmed it had sold negative yielding gilts for the first time.

The Office for National Statistics reported that the UK economy had contracted by 2% in Q1 2020 as lockdowns in response to the Covid-19 pandemic took their toll on activity towards the end of Q1. The preliminary estimate was less negative than consensus estimates, though it does represent the largest fall in GDP since the fourth quarter of 2009 and the global financial crisis.

Japan

The Japanese market rose steadily for most of May to end with a positive total return of 6.8%. The yen was quite stable, weakening just marginally against the US dollar during the month.

Equity investors globally have responded to an assumed reopening of economic activity, although the actual path for any return to a more normal environment for corporate earnings remains very uncertain. The Japanese market was led up in May by pharmaceuticals. There was a brief recovery for some financial stocks, including leasing companies, together with airlines, which have been among the hardest hit sectors throughout this crisis. Small caps also performed relatively well and have now recouped almost all of the underperformance seen from January to mid-March.

The results season concluded for the fiscal year, which ended in March. Investors have naturally focused more on the outlook than the historical results, but only a minority of companies have provided any guidance for the fiscal year to March 2021. 

Japan’s statistics on both the infection rate and the mortality rate from coronavirus remain significantly better than most other developed economies. The population seems to believe this is more by luck than judgement on the part of the government: the public’s approval rating of Abe’s administration has fallen to its lowest levels since he became prime minister at the end of 2012. Nevertheless, the prime minister was able to announce a staged lifting of the state of emergency, starting from 14 May for some prefectures and culminating on 25 May for Tokyo. Abe’s cabinet drew up a second supplementary budget in May, as expected.

Asia (ex Japan)

Asia ex Japan equities bucked May’s global market trend by posting a loss.  Hong Kong, where a new national security law was proposed, was the worst-performing market in the region. The other Greater China markets of China and Taiwan also posted losses as Beijing’s relationship with the US became strained once again amid talk of delisting Chinese companies from US markets and imposing compensatory tariffs for Covid-19.

Elsewhere, India, where the financial sector was as drag, also posted a loss, so too did Singapore. Meanwhile, a better-than-expected earnings season boosted the Korean market, while the ASEAN (Association of Southeast Asian Nations) markets of Thailand and Malaysia also posted strong gains. Across the region, the worst-performing sectors were real estate and financials, while healthcare and consumer discretionary outperformed.

Emerging markets

Emerging market (EM) equities registered a positive return in May, as lockdowns began to ease worldwide, although performance was dampened by the re-emergence of US-China tensions.

Argentina was the best-performing index market. Brazil, where the central bank promised to intervene to support the currency if necessary, and Russia, aided by currency strength and a rally in crude oil prices, also outperformed.

Chile and Egypt, which sought additional support from the International Monetary Fund (IMF), were the weakest index markets. China also lagged behind as the intensifying US-China confrontation expanded beyond trade and technology issues to broader geopolitical tensions and China moved to impose a national security law on Hong Kong.  

Global bonds

Investor optimism grew over the month, with riskier assets performing well. The rate of new Covid-19 infections continued to moderate and various countries started to ease lockdown measures.

Central banks gave assurances that support would continue and, in Europe, there was progress towards a co-ordinated agreement on fiscal support measures. Economic activity data showed some improvement, with higher frequency indicators suggesting the situation is less dire than widely feared. These factors outweighed concerns over renewed tensions between the US and China.

The 10-year US Treasury yield was little changed at 0.65%, trading in a relatively tight range throughout the month. The two-year yield finished slightly lower.

In comparison, European government yields saw meaningful moves, reflecting developments around potential fiscal support. Germany’s 10-year yield rose from -0.59% to -0.45%, while Italy’s fell from 1.76% to 1.49%. The Spanish 10-year yield fell from 0.73% to 0.57%.

The UK 10-year yield was slightly lower, from 0.23% to 0.18%, while sterling weakened. UK yields fell below zero in shorter maturities, reacting to speculation that the Bank of England might be considering employing negative interest rates. The UK’s two-year gilt yield fell from 0.01% to -0.04%.

Corporate bonds outperformed government bonds, with global high yield (HY) returning 4.5% (source: BofAML, local currency) amid stronger demand for riskier assets. The spread on HY (the difference in the yield of a corporate bond versus a similar maturity government bond) tightened by 107 basis points (bps). Investment grade saw total returns of 1.3% (source: BofAML, local currency). Across both, positive performance was driven predominantly by cyclical sectors, which continued to recover ground. Investment grade bonds are the highest quality bonds, as determined by a credit ratings agency, while high yield bonds are more speculative, with a credit rating below investment grade.

The increased demand for riskier assets also led to positive returns for emerging markets bonds and currencies, led by higher yielding markets. Currencies of oil exporters made gains as oil prices recovered. The Mexican peso and Russian rouble were among the strongest performers.

The overall MSCI equity index returned 4.5% in May. Convertible bonds as measured by the Thomson Reuters Global Focus Index, outperformed stocks with a gain of 5.4%. There was a record volume of new issues with $26 billion of new paper which kept valuations low.

Commodities

There was a bounce-back in commodities markets in May. This was led by oil as Brent rose by 40% amid a loosening of lockdown measures in many countries. Precious metals, led by silver (+19.3%), and industrial metals, led by iron ore (+10%), also gained.


The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

Monthly Markets Review – March 2020

A look back at markets in Q1 2020 when the spread of coronavirus across the world saw stock markets fall sharply.


  • The spread of Covid-19 profoundly affected global markets in the first quarter. Equities suffered steep declines and government bond yields fell (prices rose) as investors favoured their perceived safety.
  • Shares fell across developed markets as coronavirus spread and countries went into lockdown to try to contain the outbreak. Governments and central banks announced measures to support businesses and households and reduce borrowing costs.
  • Emerging market (EM) equities also tumbled, slightly underperforming developed markets as a strong US dollar proved to be an additional headwind.
  • Government bonds saw yields fall (meaning prices rose) as investors sought out assets perceived to be lower risk. Corporate bonds underperformed government bonds.
  • In commodities, oil prices plunged as the spread of coronavirus weakened the outlook for demand, at the same time as there was a breakdown of an agreement between oil producers to constrain supply.

Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

US

US equities declined significantly over the quarter as the coronavirus outbreak spread. Confirmed US cases of Covid-19 rose from 150 to over 100,000 between 4 March and 27 March, and the economic impact grew clearer. Jobless claims rocketed by over three million in the last week of March and economic indicators suggest more pain will follow.

The Federal Reserve (Fed) cut interest rates twice in March for the first time since the global financial crisis and announced unlimited quantitative easing (buying bonds). US interest rates now stand at 0-0.25%. The US Senate also passed a $2 trillion stimulus package. The proposed package includes $250 billion worth of direct payments to households, $500 billion for loans to distressed companies and $350 billion for small business loans.

All sectors saw significant declines. Energy stocks were hit hard, with the addition of the oil price war weighing heavily. Financials and industrials also fell sharply. The information technology and healthcare sectors held up better, albeit with what would be considered steep falls in any other quarter.

Eurozone

Eurozone equities experienced a sharp fall in Q1 due to the spread of coronavirus. Italy and Spain became some of the most severely affected countries. Nations across Europe took steps to restrict the movement of people and shut down parts of the economy in an effort to slow the spread of the virus. Growth in Europe was already fragile – the eurozone economy grew by just 0.1% in Q4 2019, with Germany registering zero growth. A sharp economic downturn is expected.

Forward-looking indicators showed how economic activity has collapsed. The flash Markit composite purchasing managers’ index (PMI) for March fell to a record low of 31.4, compared to 51.6 in February. The PMI survey covers companies in both the services and manufacturing sectors, and an index reading below 50 indicates economic contraction.

All sectors fell over the quarter. Defensive areas of the market such as healthcare and utilities held up best. Financials and industrials were among the worst hit sectors. Regulators have pushed for banks across Europe to suspend dividends and share buybacks until at least the autumn. This would help increase their capacity to manage rising non-performing loans as borrowers struggle to make repayments.

The European Central Bank announced the Pandemic Emergency Purchase Programme (PEPP) – a €750 billion scheme. The PEPP will fund the purchase of government and corporate bonds until the end of the Covid-19 crisis. Governments across Europe also announced spending packages to help businesses and households bridge the gap between the loss of income during this period of disruption and the expenditures required to survive.

UK

UK equities tumbled as efforts to deal with the coronavirus pandemic hit economic activity indiscriminately and simultaneously. Prior to these events, domestic politics and Brexit had dominated the narrative around UK assets and the economy for much of the quarter. At the height of the market sell-off, all assets (including government bonds) fell amid fears around the stability of the financial system.

Against this backdrop, sterling hit multi-decade lows versus the US dollar as investors sought safety in cash, particularly US dollars. In line with other central banks, the Bank of England materially reduced interest rates, cutting by 65 basis points to 0.10%. This response was co-ordinated with the UK government, which unveiled an unprecedented series of fiscal support measures, in line with initiatives by many other developed nations.

Oil and gas was the worst performing industry groups over the period, selling off on concerns about falling demand in the wake of the virus, as well as the failure of negotiations between OPEC (the Organisation of the Petroleum-Exporting Countries) and Russia to control the global supply of oil. The consumer services sector also performed very poorly as investors sought to calibrate the effect of a sharp fall in consumer demand as the UK and other governments introduced lockdown measures.

Japan

After a relatively stable start to the year, the Japanese market fell steeply in late February and early March before recovering some ground to end the quarter with a total return of -17.5%. Even allowing for the exceptional environment, the yen was extraordinarily volatile through this period but, if anything, has probably remained slightly weaker than one might otherwise expect.

Market dynamics were fairly chaotic, especially during the mid-March rebound, with some days marked by a strong recovery of those stocks and sectors seen as most heavily oversold, while other days seem to represent a more genuine willingness by investors to take on risk in larger cap cyclical sectors (i.e. those that are most sensitive to the economic cycle). Smaller companies have been significantly weaker than the main indices across the quarter, despite some relative recovery in the second half of March. Style influences were also prevalent, as value stocks underperformed across the quarter, with particular weakness in the first half of March. Value stocks are those that tend to trade at a lower price relative to their fundamentals, such as dividends, earnings and sales.

The initial estimate of Q4 GDP growth released on 17 February was much weaker than consensus expectations. Even allowing for the consumption tax increase and the major typhoon, which hit Japan in October, this was a poor data point.

In terms of the actual virus spread, Japan has so far been on a very different trajectory to most other developed nations with a slower spread and lower mortality rate. This has resulted in a slightly less stringent response from the authorities so far. From late March, however, there have been more forceful requests from both central and local governments to curtail social activities and it is possible that more severe restrictions on movements will be imposed on Tokyo in the near future.

The highest profile impact for Japan has been the postponement of the Tokyo Olympics for one year to July 2021. Although this is not particularly significant in economic terms, with maybe 0.2% of GDP shifted from this year to next, there could be political implications as the Games are now planned just before the end of Mr Abe’s term as Prime Minister in October 2021.

Asia (ex Japan)

Asia ex Japan equities declined sharply in the first quarter, as Covid-19 became a pandemic and the prospect of a global recession loomed. US dollar strength was a drag on returns. The MSCI Asia ex Japan Index decreased in value but outperformed the MSCI World Index.

ASEAN (Association of Southeast Asian Nations) markets were notably weak and all underperformed the MSCI Asia ex Japan Index. India also finished behind the index as the number of Covid-19 cases began to increase, and the government announced a national lockdown for at least three weeks. South Korea also lagged behind. Although the country’s response to the crisis appeared to be progressing, the weaker outlook for global trade and growth weighed on the market. 

China and Hong Kong were the only markets to outperform the index. China, seen as ahead of the curve as it was the first country to record cases of Covid-19, took measures to lock down the city of Wuhan. Its measures to contain the spread were deemed a success as the number of active cases of Covid-19 in mainland China appeared to peak in February, and subsequently fell sharply. Meanwhile, the spread of the virus appeared to be relatively contained in Hong Kong.

Emerging markets

Emerging market (EM) equities fell heavily in Q1, negatively impacted by the Covid-19 pandemic. The spread of the virus beyond China led to lockdowns globally and resulted in sharp falls in economic activity. A global recession is now expected this year. Against this backdrop, a stronger US dollar was a further headwind for EM. The MSCI Emerging Markets Index decreased in value and underperformed the MSCI World Index.

Brazil was the weakest market in the index, with currency weakness amplifying negative returns. The central bank cut its headline interest rate by a total of 75bps to 3.75%. It announced measures including reserve requirement reductions for banks and agreed a foreign exchange swap line with the Fed. The government also took fiscal measures to help households and businesses. Colombia was another underperformer as it was additionally impacted by the fall in crude oil prices following the failure of talks to limit oil production. Greece, South Africa and Pakistan all underperformed.

By contrast, China recorded a negative return but outperformed the MSCI Emerging Markets Index as the number of Covid-19 cases declined, and economic activity began to resume. The initial response to the virus outbreak led the authorities to effectively quarantine the city of Wuhan, and the wider province of Hubei. These measures only began to be eased at the end of the quarter. A mixture of interest rate cuts and fiscal (tax and spending) measures were also announced during the quarter.

Global bonds

Government bond yields declined over the quarter, meaning bond prices rose, as higher risk assets such as shares saw heavy declines amid rising fears over the Covid-19 pandemic. Investors favoured the perceived safety of government bonds due to the growing likelihood of a deep global recession. The moves largely occurred in late-February and March as numerous countries went into lockdown in response to the pandemic, seriously depressing economic activity. This resulted in severe declines and extreme daily swings in assets prices on a scale comparable to the crises of 2008 and 2011.

Markets saw extreme declines and volatility in March. US stock market trading was temporarily suspended on a number of occasions due to the size of daily moves and, for several days, companies were unable to issue bonds. Government bond yields and prices were volatile, first reaching extreme lows on heightened fear, but then rising, as panicked investors sold liquid assets indiscriminately in order to raise cash.

As the crisis unfolded, governments and central banks announced unprecedented support programmes for businesses, households and the financial system, helping to stabilise markets later in the month.

The US 10-year yield dropped from 1.92% to 0.63% over the quarter, while the two-year yield dropped from 1.57% to 0.23%. The German 10-year yield fell from -0.19% to -0.49%, France’s from 0.12% to 0%. The Italian 10-year yield rose from 1.41% to 1.57%. Spain’s increased from 0.47% to 0.71%. The UK 10-year yield fell from 0.82% to 0.32%.

Corporate bonds, and emerging market debt and currencies declined significantly, mainly in March, and underperformed government bonds, with moves exacerbated by a sharp tightening in liquidity. For several days, companies were unable to issue bonds although this improved later in the month. US investment grade bonds ultimately saw a record month of issuance in March, as the Federal Reserve announced it would buy corporate bonds. Investment grade bonds are the highest quality bonds, as determined by a credit ratings agency, while high yield bonds are more speculative, with a credit rating below investment grade.

High yield credit was hit hard given the heightened risk aversion. The sell-off was sharper in more vulnerable sectors related to travel and retailing, as well as in energy as the oil price plummeted.

In emerging markets, local currency bonds saw the heaviest falls. Currencies more sensitive to growth and oil prices, and also those with more liquidity, saw double-digit declines, in some cases of around 20%. 

The overall MSCI World Index lost -21.1% in Q1. Convertible bonds, as measured by the Thomson Reuters Global Focus Index, effectively protected investors from losses and finished the quarter with a loss of -8.6% in US dollar terms. In any equity market sell-off (and especially in a vicious sell-off with the speed and extent witnessed in March) the valuation of convertibles comes under pressure. Convertibles have become cheaper in all regions but the traditionally rather efficient US market has seen a sharp 4% drop in valuations.

Commodities

The S&P GSCI Spot Index experienced a major fall over the quarter. US dollar strength weighed negatively, so too the energy component. Crude oil prices fell heavily as talks between OPEC and other oil producers including Russia failed to agree on extensions to production cuts. This impact was exacerbated by a weaker demand outlook for oil stemming from the impact of Covid-19. Industrial metals also fell, led by copper, as the demand outlook deteriorated. The agriculture component posted a negative return with cotton and sugar prices falling heavily. Conversely, precious metals generated a small gain, aided by an increase in gold prices.

Monthly Markets Review – February 2020

Monthly Markets Review – February 2020

A review of markets in February when stock markets fell sharply amid worries over the spread of coronavirus.


  • Concerns over the spread of coronavirus and its potential impact on global growth dominated financial markets in February. Equity markets fell sharply and government bond yields were broadly lower (meaning prices rose).
  • US shares fell with the energy and financials sectors leading the decline. Earlier in the month, the S&P 500 had set a new record high on robust jobs data.
  • Eurozone equities also experienced a sharp fall amid concerns that the impact of coronavirus could send the fragile eurozone economy into recession. Data showed that German GDP saw zero growth in Q4 2019.
  • UK and Japanese equities also declined. Japanese Q4 GDP growth disappointed, while UK data showed an improvement in economic growth in December.
  • Emerging market (EM) equities also lost value but outperformed developed markets. Chinese shares saw a small gain for the month as coronavirus infection rates in the mainland appeared to stabilise and some activity indicators started to improve.
  • Government bonds performed well as investors sought out assets perceived to be lower risk. Government bond yields declined markedly (meaning prices rose), with US 10- and 30-year Treasury yields hitting record lows.

Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

US

US equities actually began the month strongly. Indeed, the S&P 500 Index set a new record high on robust economic data and President Trump’s acquittal in the final impeachment vote. However, a rising number of coronavirus cases – including in the US itself – prompted one of the sharpest US stock market sell-offs in history later in the month.

Employment data in particular was strong. Non-farm payrolls, which measure job creation outside the farming sector, showed that 225K jobs were created in January and wages edged up 0.1% (year-on-year) to 3.1%. US unemployment did tick up from 3.5% to 3.6%, but remained near a 50-year low. The increase was due in part to a pick-up in the labour participation rate from 63.2% to 63.4%.

Even so, concern over supply chain disruption and economic growth sent shares lower by month end. Amid a broad market sell-off, all areas of the market were lower, with energy and financials among the hardest hit. Utilities – traditionally more defensive – also struggled. Real estate and healthcare suffered less dramatic declines but still fell.

Eurozone

Eurozone equities experienced a sharp fall in February with coronavirus worries weighing on shares. The MSCI EMU Index of large eurozone companies returned -7.9%. There were concerns that the coronavirus and its impact on travel and business activity could send the fragile eurozone economy into recession. Data showed the eurozone economy grew by just 0.1% in Q4 2019 with zero growth in Germany.

Sectors that are most reliant on economic growth, such as materials and industrials, were the weakest. Less economically-sensitive sectors such as utilities and healthcare proved more resilient. With companies releasing their annual results, coronavirus worries began to dominate outlook statements. Brewer AB InBev stated that the outbreak of coronavirus has led to a significant decline in demand in China in the first two months of 2020.

In response to the coronavirus worries, European Central Bank President Christine Lagarde said the central bank is monitoring the situation. She added that the crisis is not so far having a lasting impact on inflation and so does not require a central bank response as yet. In early March, the Italian government announced a €3.6 billion stimulus package to mitigate the impact of the outbreak.

UK

UK equities fell over the period. In line with the wider trend, economically sensitive areas of the market underperformed, most notably the commodity sectors of oil & gas and basic materials. However, all areas – internationally and domestically exposed – sold off sharply.

The latest round of economic data and indicators of future UK economic activity pointed to ongoing recovery following the decisive general election result in December 2019. The latest monthly GDP data revealed the economy grew by 0.3% in December, suggesting a recovery in activity post the election, up from -0.3% month-on-month in November. The Office for National Statistics (ONS) also reported that UK retail sale volumes had increased by 0.9% in January, bouncing back from falls in the previous two months.

The preliminary estimate of the IHS Markit/CIPS composite purchasing managers’ index (PMI) for February was unchanged from January’s reading of 53.3, holding above the 50 mark. The PMI is a survey of companies in the manufacturing and services sectors; a reading above 50 indicates expansion. A number of other forward looking surveys also pointed to further improvement in business and consumer confidence as well as better sentiment in the UK residential housing market. It is worth noting that these forward looking indicators published in February were based on surveys conducted before the global coronavirus crisis escalated.

Japan

The Japanese market fell 10.2% in February. Almost all of the decline occurred in the last four days of the month amid an increase in perceived risk surrounding the spread of coronavirus. During those four days, the Japanese yen appreciated sharply, fulfilling its traditional role as a safe haven at times of uncertainty. Immediately prior to this, however, the yen had actually weakened almost as sharply, with no obvious driver.

The initial Q4 GDP estimate released on 17 February was much weaker than consensus expectations. Even allowing for the consumption tax increase and the major typhoon, which hit Japan in October, this was a poor data point. There has also been some milder disappointment on recent inflation statistics and there is, so far, little sign of any upwards pressure on overall wages in the official statistics. . The spring wage negotiations with major companies are currently being led by relatively low demands from unions.

In the short term, the improving trend in earnings revisions, which had been playing out as expected in January, reversed abruptly in February. In economic terms, the disruption from coronavirus is likely to be transitory. As we approach the end of the fiscal year for most Japanese companies, however, there are multiple reasons for companies to be extremely cautious in their forecasts for 2020.

Asia (ex Japan)

Asia ex Japan equities were down in February as the spread of the coronavirus outside China increased concerns over the impact on regional and global growth. US dollar strength also acted as a headwind to returns.

Within the MSCI Asia ex Japan index, Thailand and Indonesia were the weakest markets. In Indonesia in particular, currency weakness amplified negative returns. During the month the central bank cut its headline interest rate by 25 basis points (bps) to 4.75% in an effort to mitigate the potential impacts from the coronavirus. The South Korean market also saw a sharp decline as the number of COVID-19 cases accelerated rapidly in the second half of the month; Korea now has the largest number of cases outside China. India and Malaysia also lost value and underperformed. In Malaysia, the unexpected resignation of Prime Minister Mahathir Mohamad also contributed to uncertainty.

By contrast, China recorded a positive return. Taiwan and Hong Kong finished in negative territory but outperformed the Asia ex Japan index.

Emerging markets

Emerging market equities fell in February as coronavirus concerns put shares under pressure. US dollar strength was also a headwind to returns. The MSCI Emerging Markets (EM) Index decreased in value but outperformed the MSCI World.

Within the MSCI EM Index, Turkey was among the weakest markets as tensions with neighbouring Syria increased. An airstrike in Syria killed more than 33 Turkish troops in February. Russia lagged behind the index as crude oil prices fell sharply, weighing on the rouble. South Africa and Brazil, where currency weakness also amplified negative returns, both underperformed. India, where the Union Budget disappointed, and Malaysia also lost value and underperformed. In Malaysia, the unexpected resignation of Prime Minister Mahathir Mohamad added to uncertainty.

By contrast, China recorded a modest gain as coronavirus infection rates in the mainland appeared to stabilise and some activity indicators started to improve. Taiwan, where the spread of the new coronavirus has so far been more limited, and Egypt were the only other countries to outperform.

Global bonds

The spread of the coronavirus resulted in large declines in riskier assets such as shares in February, as fears of a global recession mounted, while government bonds performed well. The final week of the month proved particularly painful for riskier assets; for some it was the worst week since 2008. Government bond yields declined markedly (meaning prices rose), with US 10- and 30-year Treasury yields hitting record lows.

The vast majority of coronavirus cases have occurred in China, where significant areas remain effectively in lockdown. While the number of new cases in China showed signs of peaking, the virus began to spread across borders. There were outbreaks in South Korea, Italy and Iran, and confirmed cases in every western European country as well as in the US, raising concerns of a possible global pandemic.

The US 10-year bond yield dropped to 1.15%, down from 1.51%, while the 30-year yield dropped from just over 2% to 1.67%. The 10-year German government bond yield fell to -0.61%, from -0.44%, and the UK’s 10-year bond yield fell to 0.44% from 0.52%. Meanwhile, the Italian 10-year yield increased from 0.92% to 1.13% and Spain’s rose from 0.23% to 0.28%, selling off in the final week of the month. 

Investment grade corporate bonds were to some extent cushioned by falling global yields, but substantially underperformed government bonds. High yield corporate bonds were weak, with US energy hit particularly hard, given the sharp fall in oil prices. Investment grade bonds are the highest quality bonds, as determined by a credit ratings agency, while high yield bonds are more speculative, with a credit rating below investment grade.

Emerging market bonds declined, with currencies falling sharply against the US dollar, although hard currency investment grade government and corporate bonds produced positive total returns. Higher yielding government bonds fell markedly, while the Russian rouble, Brazilian real and Indonesian rupiah were among the weaker EM currencies.

With shares under pressure, convertible bonds provided investors with effective protection from losses in February. Convertible bonds, as measured by the Thomson Reuters Global Focus index, finished the month with a loss of -1.4% in US dollar terms. In line with the market sell-off, convertible bond valuations cheapened, most significantly in US names.

Commodities

Commodities were firmly lower as concerns over global economic growth continued to mount. The energy component was the main contributor to negative returns. Brent crude oil posted a double digit decline as the demand outlook further deteriorated. In agricultural commodities, cotton recorded the largest decline. Precious metals also lost value, with gold and silver both moving lower. Industrial metals posted a more modest decline. Zinc and nickel were notably weak but copper recorded a small gain, following a sharp sell-off in January.

The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

Monthly Markets Review – January 2020

A look back at markets in January when the spread of coronavirus saw investors favour “safe haven” assets like government bonds.


  • Global equities, as measured by the MSCI World index, declined in January as the spread of coronavirus reduced investors’ appetite for risk. Assets perceived as safe havens, such as government bonds, performed well.
  • US shares were flat overall. They carried strong momentum into the new year but mounting fears over the spread of the coronavirus erased the early gains. Energy stocks were especially hard-hit.
  • Coronavirus concerns led to a lower start to the year for eurozone equities. The weakest sectors included energy, materials and consumer discretionary. Companies with significant exposure to China underperformed.
  • UK equities fell in January. The end of the month marked the UK’s official departure from the EU and its entry into a transition period. Sterling was volatile, gaining sharply after the Bank of England kept interest rates unchanged.
  • Japanese shares fell as news coverage emphasised the spread of coronavirus. The yen was slightly more volatile against the US dollar than in recent months although the actual yen/dollar rate ended January almost unchanged.
  • Emerging markets (EM) equities also lost value. Commodity price falls weighed on sentiment towards a number of countries, notably Brazil, Chile, Colombia and South Africa.
  • Government bond yields fell significantly over the month (meaning prices rose) amid investor caution and central banks reaffirming accommodative stances.
  • Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

US

US equities rallied strongly in the first half of January before giving up the gains to end the month flat. Strong momentum from the end of 2019 continued into January, with the S&P 500 hitting a new record high in the middle of the month. Trade tensions that dogged markets for much of 2019 eased with the phase one US-China trade deal, signed as expected on 15 January.

US economic data remained broadly stable. The unemployment rate remains at a 50-year low of 3.5%, but muted wage growth has kept inflation under control. This gave the Federal Reserve the flexibility to leave monetary policy unchanged, although it adjusted its description of household spending growth to “moderate” rather than “strong”. Q4 GDP was in line with expectations, growing at 2.1% quarter-on-quarter (annualised).

In the second half of the month, however, mounting fears over the spread of coronavirus, in China and beyond, erased the early stock market progress. The Trump administration has imposed a temporary travel ban upon non-US citizens travelling to the US from China. Investor concerns over disrupted supply chains and weakened demand led to fears that growth could slow.

Energy stocks were especially hard-hit. The oil price fell steeply as the virus outbreak led to expectations of lower Chinese demand, adding to already cautious guidance from major oil producers. More defensive areas such as utilities performed better, with IT also holding up well in light of the trade war ceasefire.

Eurozone

Eurozone equities had a weak start to the year amid fears over the potential impact of the coronavirus on global economic activity. The MSCI EMU, an index of large eurozone companies, returned -1.7% in January. The weakest sectors during the month included energy, materials and consumer discretionary. Industries with significant exposure to China – such as luxury goods – underperformed.

The top performing sector during the month was utilities. Utilities is seen as a safe haven sector that tends to perform well in times of uncertainty. Additionally, the sector drew support from news that the German government will pay €2.6 billion compensation to RWE as part of the country’s move to switch from coal to renewable energy sources. Meanwhile, EDF benefited from reports that the French government may introduce new price regulation for the wholesale nuclear power market.

The flash GDP estimate for Q4 2019 showed growth of just 0.1% quarter-on-quarter in the eurozone, down from 0.3% growth in the previous quarter. Annual inflation ticked up to 1.4% in January from 1.3% in December – still well below the European Central Bank’s target. Jobs data remained encouraging with the unemployment rate down to 7.4% in December, the lowest rate since May 2008.

Forward-looking data showed stabilisation at low levels, with the flash composite purchasing managers’ index (PMI) for January steady at 50.9. (50 is the level that separates expansion from contraction. The PMI surveys are based on responses from companies in the manufacturing and services sectors).

UK

UK equities fell over the period. The end of January marked the UK’s official departure from the EU and its entry into a transition period. Sterling was volatile, recovering sharply towards month-end after the Bank of England (BoE) kept interest rates unchanged, confounding market expectations which had predicted a cut. The Monetary Policy Committee voted to hold rates steady as indicators of future activity started to recover following the decisive general election outcome in December.

Data released in January covering the end of 2019 was mixed. Latest growth numbers from the Office for National Statistics (ONS) showed that UK GDP rose 0.1% in the three months to the end of November, but shrank by 0.3% in November itself. Meanwhile, the ONS also reported that retail sales volumes fell 0.6% in December month-on-month. The data prompted speculation the BoE would cut rates, pressuring sterling, which initially gave back some the strong gains it had made at the end of 2019.

However, forward-looking indicators suggested there has been a sharp recovery in the confidence of the UK consumers and corporates since the election. IHS Markit/CIPS confirmed that its composite purchasing managers’ index (PMI) had recovered above the 50 mark which separates expansion from contraction. Meanwhile, the CBI’s quarterly industrial trends survey found that the proportion of manufacturers expecting business conditions to improve was 23% larger than the share predicting them to worsen.

Japan

The Japanese market fell 2.1% in January as news coverage emphasised the spread of coronavirus. Sentiment in early January was also hit by the sudden escalation of tension over Iran. The yen was slightly more volatile against the US dollar than in recent months as a generally weaker trend was punctuated by the buying of yen as a perceived safe haven. Nevertheless, the actual yen/dollar rate ended January almost unchanged.

Japanese consumer confidence has picked up in the last two months, following the consumption tax increase on 1 October. However, the recovery appears somewhat muted compared to previous tax rises. Some of this may be the result of one-off impacts from warm winter weather and natural disasters, but the data completes the picture of a greater-than-expected economic impact from the tax rise.

The reporting season for the October to December period has started, but the overall picture will not emerge until early February when the bulk of companies report. The potential for the current heightened global uncertainty to be transmitted through a stronger yen may lead to continued caution in companies‘ outlooks.

At the individual stock level, there were further examples of ground breaking Japanese corporate activity in January. The battle for control of components of the Toshiba Group, which began with Nuflare Technology in December, escalated in January. An activist investor launched a tender offer for Toshiba Machine. Later in the month, a seemingly straightforward move by Maeda Construction to acquire 100% of Maeda Road was rebuffed by the subsidiary company. Maeda Road is now looking at a potential third-party or “white knight” to help it escape from its parent company.

Asia (ex Japan)

Asia ex Japan equities declined in January amid concerns over the impact of the coronavirus outbreak in China on economic growth. This was despite an initial improvement in sentiment mid-month, as the US and China signed a phase one trade deal as expected.

Thailand and the Philippines were the weakest markets in the MSCI Asia ex Japan index, with tourism expected to be impacted by reduced visitors from China. South Korea lagged as the prospect of weaker global growth, and the risk of component shortages from China weighed on the outlook. China and Taiwan underperformed by a more modest margin. In Taiwan, President Tsai-Ing-Wen was re-elected for a second term.

By contrast, Pakistan posted a small gain and was the only index market to finish in positive territory. India recorded a small negative return but outperformed the index. The economy is less open than other regional markets and less exposed to global growth. Hong Kong performed broadly in line with the index.

Emerging markets

Emerging market (EM) equities lost value in January, as the outbreak of the coronavirus in China increased concerns over global growth. The Chinese authorities responded by imposing travel restrictions and cancelling Lunar New Year events. As the outbreak escalated, the re-opening of factories after the new year holiday was delayed.

Given the negative implications for Chinese economic growth, global commodity prices came under pressure. Against this backdrop, Brazil, Chile, Colombia and South Africa all underperformed, with currency weakness amplifying negative returns. In South Africa, the central bank unexpectedly cut its headline interest rate by 25bps, amid ongoing weakness in economic growth.

China slightly underperformed the broader EM index, although the mainland markets were closed for the new year holiday from 24 January to month end. A number of Asian EM, including South Korea, Thailand and the Philippines, also underperformed.

By contrast, Turkey recorded a positive return and outperformed as the central bank cut its headline interest rate by 75bps, more than expected, to 11.25%. Egypt was the best-performing market in the index, supported in part by currency strength. The central bank left its key interest rate unchanged, against expectations for a 50bps cut. Mexico posted a small gain, as trade-related uncertainty eased following President Trump’s signing of the US-Mexico-Canada-Agreement (USMCA).

Global bonds

Government yields declined in January (meaning prices rose) as investors sought lower risk assets amid an outbreak of coronavirus in China and uncertainty as to the potential economic impact. The Federal Reserve (Fed) and Bank of England (BoE) left policy rates unchanged.

The Fed changed its description of household spending growth to “moderate” from “strong”. The BoE dropped forward guidance for “limited and gradual tightening”, cut growth forecasts and said it expects inflation to remain below target until the end of 2021.

The US 10-year Treasury yield fell from 1.92% to 1.51%, while the two-year yield fell from 1.57% to 1.31%. As expected, developments in impeachment proceedings against President Trump indicated the case would most likely be thrown out by the Senate. US economic data remained healthy overall.

In Europe, the German 10-year yield fell from -0.19% to -0.43% with France’s falling from 0.12% to -0.18% and Spain’s from 0.47% to 0.24%. Italian bonds outperformed as the populist Lega party lost a regional election. The country’s 10-year yield fell 47 basis points (bps) to 0.94%. The UK 10-year yield declined from 0.82% to 0.52%. The eurozone economy showed further stabilisation at low levels, with the flash composite purchasing managers’ index for January at 50.9.

Corporate bonds produced positive overall returns (in local currency), led by investment grade, as global yields declined, but underperformed government bonds. US energy lagged after strong performance the previous month. UK investment grade corporate bonds proved an exception, outperforming government bonds, led by capital goods. Investment grade bonds are the highest quality bonds as determined by a credit ratings agency; high yield bonds are more speculative, with a credit rating below investment grade. In high yield, certain sectors in the UK and Europe performed well.

Emerging market hard currency government and corporate bonds produced positive total returns, although EM currencies fell overall. Latin American currencies broadly weakened given the renewed uncertainty around Chinese growth.

While the overall MSCI World equity index lost 0.6% in January, convertible bonds as measured by the Thomson Reuters Global Focus index gained 1.8% in US dollar terms. Convertibles in the US and Europe became cheaper in January while Asian and Japanese convertibles continue to trade below our estimate of fair value.

Commodities

The S&P GSCI Spot Index saw a double digit fall in January, as global growth concerns weighed on the demand outlook for commodities. Energy was the weakest index component. Crude oil prices fell sharply on expectations of weaker demand, especially from China given the likelihood that the spread of coronavirus and measures to contain it will weigh on economic activity. Industrial metals also fell on weaker demand expectations. Agricultural commodities recorded a small negative return, led lower by coffee and soybeans. Conversely, precious metals generated a positive return, with gold and silver both moving higher.

The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.