by Harbour Asset Management (Edited by Milestone)

Key points


  • Equities continued to bounce back with the S&P/NZX 50 Index returning 5.3%, S&P/ASX 200 Index (in AUD) up 2.6% and the MSCI ACWI Index up 3.0%.
  • US employment growth has continued to surprise on the upside, with the improving economic data providing a stark contrast to the worsening COVID case numbers.
  • Global COVID-19 containment measures eased in aggregate, allowing a partial recovery in economic activity. The average lockdown stringency for the worlds 10 largest economies, based on the Oxford University measure, reduced to 60 from 70 in May (where 100 is equivalent to Alert Level 4 and 0 is no restrictions).
  • In New Zealand, higher frequency economic indicators are showing a sharp recovery in many sectors.

Key developments

Equity markets responded positively to ongoing financial stimulus, the earlier than expected re-opening of economies, and generally better than feared economic and corporate news. Performance was in direct contrast to the news on the global spread of COVID-19, highlighting the preparedness of equity investors to look through the crisis and anticipate recovery. New Zealand bond yields drifted lower over the quarter, though were flat throughout June.

Global policy makers continue to provide stimulus, with a focus on providing household and business support to bridge the crisis. Most developed economy central banks are continuing to do so via; policy rates being set at their effective lower bound, forward guidance that interest rates will stay low for the foreseeable future, large Quantitative Easing (QE) programmes and bank lending facilities. Separately, the amount of fiscal stimulus announced by governments is equivalent to 3.8% of global GDP, and more than double than during the GFC. US Federal Reserve Chair, Jerome Powell, recently underscored the central banks commitment to low interest rates saying we're not even thinking about thinking about raising rates. This was followed by news of further Fed support to the corporate debt market by purchasing corporate bonds directly (in addition to corporate bond ETFs).

The stimulus has been sufficient to offset fears raised by climbing COVID-19 infection rates in the US, and news of a second outbreak in Beijing. COVID-19 is still not under control in many countries, including the US and Emerging Markets, and global mobility remains restricted to varying degrees as a result. These control measures continue to hurt labour-intensive service sectors the most, and have a significant economic impact given the large size of the service sectors (60-80% of GDP for most developed countries). The high labour component within the sector has translated into job losses, reduced household income and lower consumer confidence. Global economic output will likely remain below potential for 1-2 years, creating a long period of disinflationary force that, when combined with large QE payments, will limit the ability for interest rates to rise.

The New Zealand economy returned to Alert level 1 sooner than many had expected, allowing for a sharp, rebound in economic activity, job ads and workplace visits according to Google mobility data, have returned to pre-covid levels. Electricity demand is just slightly below pre-covid levels, along with traffic at 5-10% below. Business confidence, while still consistent with a recession, has materially improved with a net 26% of businesses surveyed in June expecting their own activity to worsen, versus 55% in April. Consumer confidence has recovered to about 12% below its long-term average, from about 30% below in April.