Share price rises defy an uncertain outlook

14th September, 2020

Global share prices generally rose during August as investors took heart from ongoing fiscal and monetary support alongside some encouraging economic data. Nevertheless, the global economic outlook remains “highly uncertain”, according to the World Trade Organisation (WTO), which expects the recovery to follow “an L-shaped, rather than V-shaped, trajectory” against a deteriorating trade backdrop. Meanwhile, the price of gold breached US$2,000 per ounce for the first time in response to speculation over the economic impact of the Covid-19 pandemic and continued uncertainty over the worsening relationship between the US and China.

In a bid to provide more flexibility for policymakers, the Federal Reserve (Fed) announced a “robust” update to its inflation targeting policy. Instead of aiming for a fixed target of 2%, the Fed will now aim for an average inflation rate of 2%, allowing it to run “moderately above 2% for some time”. The Fed believes that the pandemic is likely to continue to “weigh heavily” on the economy in the near term, whilst presenting “considerable risks” in the medium term. The Dow Jones Industrial Average Index rose by 7.6% over the month.

The UK economy went into recession for the first time since 2009: having shrunk by 2.2% over the first three months of 2020, the economy contracted by a record 20.4% during the second quarter. The Organisation for Economic Cooperation & Development (OECD) reported that the UK had been the worst-affected of the G7 economies over the three months to June. Brexit negotiations showed little progress during the month, and the EU’s Brexit negotiator, Michel Barnier, said that a deal “seems unlikely”. The FTSE 100 Index rose by 1.1% in August.

Around Europe, fresh outbreaks of infection forced countries to reimpose restrictions in a bid to stem the spread of the virus. Nevertheless, business sentiment in the eurozone improved in August – particularly in the services sector – and companies became more optimistic about the economic outlook although, according to the European Commission, sentiment continues to run below the long-term average. The Dax Index rose by 5.1% during August.

Japan’s economy contracted at an annualised rate of 27.8% during the three months to June, posting its third consecutive quarter of negative growth. Elsewhere, Prime Minister Shinzo Abe announced his resignation on the grounds of ill health. Nevertheless, over August, the Nikkei 225 Index rose by 6.6%.

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