Market Overview – 03/08/2020

The end of July provided a useful time to look back on market performance. Stock markets were mostly up over the month, with US shares putting in another reasonable month and European shares largely flat. Chinese shares were the standout performer though, up by just under 13%. One wonders whether it is worth quoting the action in fixed income markets, with 10 year yields in both the US and UK continuing their descent into almost irrelevant levels of return.

Away from stocks and bonds, however, one of the major news stories in July concerned the US dollar, which had its worst month since 2010. As fear around the global economic impact of Covid-19 recedes, investors have generally felt better about exchanging their favourite safe haven currency (dollars) for the money of riskier countries. Combine that with falling US interest rates and doubts around American success in suppressing the virus, and you have a recipe for a falling dollar.

Some commentators even went so far as to say that the US dollar could lose its preeminent status amongst the world’s currencies. We think this is overdone. To begin with, the US has one of the strongest, most dynamic economies in the world. You can easily move your money in and out of the country, and once your money is there, you know it will largely be treated the same as that of a US citizen. There is no such reassurance if you invest in China. Even currencies such as the euro which are more internationally traded are less attractive; a break-up of the euro is exceptionally unlikely but far more conceivable than a break-up of the dollar zone.

Investors ultimately like narratives and a story on the fall of the mighty dollar is sure to get some traction when the greenback weakens. For the more prosaic amongst us, the focus remains on the coronavirus, in particular whether rising cases in Spain will trigger further economic weakness, and whether the US’s failure to get a handle on the pandemic also starts to translate into poorer economic performance stateside.