Global equity markets continued to recover from recent lows in March as markets focused on economies reopening in the developed world. The value of the Australian Dollar increased against all major currencies, somewhat dampening the returns of overseas investments when measured in Australian dollar terms. Global investment grade credit spreads contracted significantly over the month (i.e. the market’s perceived riskiness of lending to high quality companies decreased).

The Treasurer of Australia, Josh Frydenberg, announced that Australia is in an economic recession. This is the first time Australia has been in this position in 29 years. The typical definition of a recession is a shrinking GDP for two consecutive quarters. The March 2020 quarter saw the Australian economy shrink 0.3% on the back of bushfires and the early stages of the coronavirus lockdowns. Mr. Frydenberg publicly stated that the June 2020 quarter will be “far more severe”. The Australian Government has received confirmation from the Australian Tax Office (ATO) that the JobKeeper stimulus program is likely to cost $60bn less than anticipated. Initially approved for $130bn, although now expected to cost $70bn due to unintentional overreporting, the JobKeeper program provides $1,500 per fortnight for employees who worked for businesses that met certain criteria and who had their revenue streams reduced due to the coronavirus.

Unemployment numbers in the United States continue to grow with the total new unemployment claims now exceeding 40 million people [1]. The Chairman of the Federal Reserve (Fed) Jerome Powell warned that the pandemic outbreak could leave the U.S. with longer-term economic damage and urged Congress to provide additional fiscal support along with reiterating that the Fed is set to provide whatever stimulus is needed to support markets and the economy. However, somewhat mitigating this upside potential, President Trump said he’s in “no rush” for Congress to pass more fiscal stimulus packages. The Democrats have passed the HEROES Act through the House of Representatives which as tabled will provide up to $3trn of additional spending, although it’s believed the bill will not pass the Republican held Senate without a number of revisions.

COVID-19

Reported coronavirus case numbers surpassed 6 million on a worldwide basis at the end of May with a total of over 350,000 fatalities [2]. The virus started in China, moved to Europe, then the United States, and at the time of writing the World Health Organisation (WHO) announced the epicenter has now moved to Latin America. While new cases in the United States and Europe are continuing to be reported, significant testing regimes are now in place and new case numbers are down from their peak in most places, however, the opposite is true for Latin America. Brazil is seeing a spike in fatalities with over 1,000 per day reported [2]. President Jair Bolsonaro joined anti-lockdown protests in May as the country moved to second overall in terms of total reported cases, behind the United States.

President Trump froze funding to the WHO while his administration reviewed their membership. A letter was sent to the head of the WHO, Director-General Tedros Ghebreyesus from President Trump requesting “substantive changes” in the next 30 days. 11 days later President Trump claimed reforms had not been made and that the United States would withdraw membership. The United States is the largest contributor to the WHO comprising approximately $400m per year in contributions constituting around 8% of the WHO’s annual budget [3].Some countries began to ease lockdown restrictions in May including Australia and New Zealand. Towards the end of May the Australian Government announced a “3-step plan” to easing lockdown measures and to open up sectors of the economy.

Step 1 focuses on giving Australians opportunities to return to work and social activities, including gatherings of up to 10 people, up to 5 visitors in the family home and some local and regional travel. Step 2 builds on this with gatherings of up to 20, and more businesses reopening, including gyms, beauty services and entertainment venues like galleries and cinemas. Finally, Step 3 will define the ‘new normal’ while the virus remains a threat, allowing gatherings of up to 100 people. International travel and mass gatherings over 100 people will remain restricted. Each state and territory will manage the timing of moving between each step. In addition, an agreement between Australia and New Zealand is progressing that may see travelling between the two countries permitted from July.

Equities 

All major foreign equity markets posted strong positive returns in May. Developed markets (excluding Australia) returned 4.7% on a currency-hedged basis (and 3.4% in Australian dollar terms), significantly outperforming emerging markets which returned 0.6% in local currency terms. The best international performer was Japan’s Nikkei 225 Index which returned 8.3% for the month.

The Australian stock market generated a return of 4.4% during May, with 9 out of 11 sectors contributing positively. Information Technology, Communication Services and Materials were the best performing sectors returning 14.5%, 8.4% and 8.0% respectively. Health Care and Consumer Staples contracted by 5.3% and 0.4% respectively.From a developed market sectoral perspective all sectors produced strong positive returns. Information Technology, Materials and Industrials were the best performing sectors, returning 7.6%, 6.3% and 6.2% respectively in local currency terms. Energy and Consumer Staples were the worst performing sectors, increasing 1.3% and 1.9% respectively.

Bonds

The Australian government bond yield curve flattened marginally over May as two-year yields increased by 0.05% and ten-year yields decreased by 0.01% as the Reserve Bank of Australia slowed its rate of shorter-term bond purchases throughout May.

Major global government bonds largely saw increasing yields across the two- and ten-year durations in May. Chinese government bond yields at the shorter duration of two years rose the most, increasing by 0.49%, whilst the United Kingdom’s government bonds yields reduced the most over the ten-year timeframe, by 0.05%. 

Currencies

With domestic interest rate expectations rapidly falling compared to global peers, the Australian Dollar came under pressure late in the month. The Australian currency fell against most global peers over the month, with falls of almost 0.7% registered against the US Dollar, Euro and British Pound. However, the AUD did manage to rise against both the New Zealand Dollar and the Swiss Franc.

The Australian Dollar finished the month at 0.7048 US Dollars.

Commodities

The price of oil rose significantly throughout May from depressed levels. WTI rose 88.4% and the price of Brent crude oil increased 39.8% due to reduced global output, particularly from Saudi Arabia and Russia. Industrial metal prices increased 3.3% on average, with iron ore being the standout performer increasing 14.5%. In precious metals, the price of gold increased 2.6% and silver significantly outperformed gold returning 19.3% for the month.

Performance of key markets

Asset class	Index	Month (% change)	FYTD (% change)	1 year (% change)
Australian Shares	S&P/ASX 200 Acc. Index	4.4%	-10.0%	-7.3%
International Shares	MSCI World Ex Aust Unhedged A$	3.4%%	6.4%	10.7%
International Shares	MSCI World Ex Aust Hedged A$	4.7.%	-1.0%	3.9%
US Shares	S&P 500 Index	4.8%	5.4%	11.6%
UK Shares	FTSE 100 Index	3.3%	-15.2%	-12.1%
Japanese Shares	Nikkei 225 Index	8.3%	4.9%	6.5%
Australian Listed Property	S&P/ASX 200 A-REIT Index	7.0%	-20.2%	-18.0%
Australian Fixed Interest	Bloomberg AusBond Composite Index	0.3%	3.9%	5.0%
Australian Cash	Bloomberg AusBond Bank Bill Index	0.0%	0.8%	1.0%
Currency	AUD/USD	2.4%	-5.0%	-3.6%

Returns are for periods to 31 May 2020. Past performance is not an indication of future performance.

[1] https://fortune.com/2020/05/28/us-unemployment-rate-numbers-claims-this-week-total-job-losses-may-28-2020-benefits-claims-job-losses/ 
[2] https://www.worldometers.info/coronavirus/ sourced on 1 June 2020
[3] https://apps.who.int/gb/ebwha/pdf_files/WHA72/A72_35-en.pdf