Markets have been on the defensive recently, as economic doubts and political tension have led to a risk-off backdrop. In the US, the US$2trn in funding for workers, companies and industries approved by Congress is due to run out in the coming weeks and months. The next stimulus package is expected at US$1.2-1.5trn but there is a lot of politics going on before its approval. The extension of the unemployment support could not be agreed over the past week, which is weighing on market sentiment. This comes at a crucial time, given that jobless claims have risen in the US together with increasing COVID-19 infections in the majority of states. China retaliated as expected to the closure of its Houston Consulate by closing the US Consulate in Chengdu. Further speeches by Trump administration members point in the direction of more US-China tension ahead, although heavy-handed steps are unlikely in the pre-election period. Soaring eurozone PMIs, however, in particular the services component, helped the euro exceed US$1.17 this morning, with sterling improving in tow. The cyclical recovery in Europe seems to be in place now as virus infections are under control in most countries. Corporate earnings are helping markets. So far 20% of large US companies have reported earnings with 83% of companies beating estimates, although top-line growth is negative. Over the week, equities were down, with Hong Kong faring worst and the FTSE 250 being the most resilient. A correction in the growth and quality sectors (information technology, communications) in favour of value and cyclical sectors (materials, utilities, consumer staples) was apparent, although it is not clear whether it has legs. The standout investment during the week was gold, soaring above US$1,900 shortly after having topped US$1,800. |
The week ahead |
Wednesday: The US Federal Reserve (Fed) monetary policy meeting Our thoughts: the Fed is clearly in ‘whatever-it-takes’ mode, as policymakers look to use all tools in their arsenal to stimulate growth. With US interest rates near to zero, and to what was considered historically – the lower bound – policymakers are likely to introduce forward guidance or yield curve control as new policies to stimulate activity. Forward guidance involves committing to keeping rates low until certain economic conditions are reached, while yield curve control involves capping the borrowing rate on US government debt so that household and corporate borrowing rates (which are priced off government debt) remain low too. While the effectiveness of either policy is likely to be brought into question given the already low yield environment, the introduction – or talk of potential introduction – at this week’s meeting is likely to be well-received as it will act as a reinforcement of the Fed’s commitment to doing ‘whatever-it-takes’ to getting the economy back on track. Wednesday: UK mortgage approvals, June Our thoughts: one of the best ways to judge the health of the consumer is by looking at the strength of the housing market. House purchases are often individuals’ largest investment and the number of mortgage approvals can provide a good gauge into how consumers are feeling about their income and job prospects. In May, mortgage approvals declined to a record low as the coronavirus brought an abrupt halt to the housing market, but most housing indicators suggest a strong rebound is likely in June. Given the mixed messages with regards to the state of the economy from other economic indicators, a strong recovery in mortgage approvals would be a welcome sign that households are feeling confident about their prospects and a positive signal for the UK economy’s outlook over the coming months. Friday: Chinese PMI Surveys Our thoughts: Chinese economic data continues to show signs that the economy is gradually recovering from the coronavirus slowdown. However, PMI confidence surveys have shown a divergence in the pace of the recovery, with the more domestic focused, non-manufacturing firms seeing a much sharper recovery in activity than the more global-orientated manufacturing firms. The recent easing of lockdown restrictions could provide a boost to manufacturers’ confidence this month and imply a more balanced recovery ahead. In any case, the PMI surveys always act as a good guide to the likely pace of growth over the coming months and will be closely watched to see if the recent pick-up in momentum in the Chinese economy is likely to be sustained. |
The numbers for the week |
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Central banks/fiscal policy |
Landmark EU deal boosts European markets EU leaders agreed on a landmark stimulus package that will see the bloc issue €750bn of joint debt. The emergency fund will give out €390bn of grants and €360bn of low-interest loans. Almost a third of the funds are earmarked for fighting climate change and, together with the bloc’s next €1trn, 7-year budget, will constitute the biggest green stimulus package in history. Italy will likely be the biggest beneficiary from the plan and expects to receive about €82bn euros in grants and about €127bn euros in loans. One important number to note is that since the beginning of the year the total assets of the US Federal Reserve, the European Central Bank and the Bank of Japan are up a massive US$5.8trn. |
United States |
Disappointing surveys and employment offset buoyant housing Surveys: the Chicago Fed National Activity Index rose from 3.50 (revised upwards from 2.61) to 4.11. The leading index eased from 3.2% to 2.0% and the Kansas City Fed Manufacturing Activity index rose only from 1 to 3, below the estimate of 5. The Markit PMIs were less buoyant than in Europe and the UK, with manufacturing rising from 49.8 to 51.3 and services from 47.9 to 49.6, both below market estimates. Housing: the housing market is still doing well: existing home sales rose 20.7% in June, almost in line with bullish estimates and MBA mortgage applications rose 4.1% for the week. New home sales beat expectations, rising 13.8% in June after a 19.4% jump in May. Employment: initial jobless claims disappointed, rising 116,000 from the unrevised number last month, but the continuing claims fell by almost a similar amount 107,000 to 16.2 million. It seems that the drop in employment has stalled. |
United Kingdom |
Soaring PMIs Housing: according to Rightmove, UK house prices are rising again, 3.7% year-on-year in July and up 2.4% from March when the lockdown started, in part thanks to the cut in stamp duty. Public Finances: the UK budget deficit swelled to £130bn for the first three months of the fiscal year, bringing national debt to almost exactly 100% of GDP. The public sector net borrowing requirement, though, fell from £44.7bn to £34.8bn in June. Surveys: CBI Trends total orders rose from -58 to -46, below expectations and CBI business optimism was almost in the black, at -1, from -87 previously, the GfK consumer confidence barely improved at -27, but retail sales soared in June, up 13.5% ex auto fuel and up 13.9% including auto fuel. The Markit PMIs were quite buoyant, with the manufacturing PMI up from 50.1 to 53.6 and the services PMI surging from 47.1 to 56.6, both above the 50 threshold between contraction and expansion. |
Europe |
Soaring services PMIs The German PPI (producer price index) improved marginally from -2.2% to -1.8% in June, a sign that the manufacturing recovery is still slow. For the eurozone, the Markit PMIs rose above estimates, with manufacturing up from 47.4 to 51.1 and services up from 48.3 to 55.1. In France the services PMI surged to 57.8 and in Germany up to 56.7, both way above estimates, with the German manufacturing PMI back at 50.0. |
China/India/Japan/Asia |
Japan: the Jibun Bank manufacturing PMI rose somewhat from 40.1 to 42.6 with the services PMI edging up from 45.0 to 45.2, both still indicating economic contraction. The CPI (consumer price index) was unchanged at 0.1% year-on-year for the headline number and 0.4% for the core reading ex fresh food and energy. Machine tool orders fell 32.1% year-on-year in June, almost unchanged from the previous month. |
Oil/Commodities/Emerging Markets |
After going through US$1,800, gold topped the US$1,900 level for the first time since 2011, as the US dollar continued its fall, with the DXY index of the US dollar vs. developed currencies falling to below 95 from an average of 100 in April-May. |
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