The S&P 500 closed at a record high on Tuesday 18 August, before falling back, while all other major markets finished flat or in the red.
The gains in markets have held despite COVID-19 continuing to dominate the news flow. The US saw new infections fall by 17% ‒ the fifth weekly fall – but concerns remain around the authorities handling of the pandemic1. Meanwhile, France reported its biggest increase in new cases since early May. But it was Spain that remerged as the epicentre of the virus in Europe, reporting the highest number of daily cases per million people over the course of the week².
It might be interesting to examine the economic backdrop to these rises. To do so, let’s first take a look at unemployment levels in the world’s leading economy. In the US, the initial jobless claims came in 1.1 million on Thursday 20 August³, which was both an increase on the previous week and higher than forecasted by economists. The monthly figures for US unemployed people had been decreasing down to 16.3 million in July, from a high of 23.1 million in April at the start of the pandemic.
Should the economy not begin to come back more strongly, the Federal Reserve’s (Fed) July meeting minutes revealed that several officials suggested that “additional accommodation would be required to promote economic recovery and return inflation to the committee’s 2% objective”¹, indicating that the Fed has no intention of tightening policy any time soon and may even do more.
One of the most reliable indicators for assessing the state of an economy is the purchasing managers’ index (PMI), which our regular readers will already be familiar with. The index is based on a monthly survey of supply chain mangers across 19 primary industries. Here, the US, UK and Eurozone have all reported flash composite PMI numbers4 above the magic 50 mark ‒ with numbers of 54.7, 60.3 and 51.6 respectively ‒ which represent an expansion in the economies compared to the previous month.
On the political front, in the US, Joe Biden was formally nominated as the Democratic presidential candidate for the November 2020 elections and, at present, is around 9% ahead in the US election polls5. President Donald Trump, meanwhile, called off US-China trade deal negotiations early in the week and dealt another blow to Huawei (and US-China relations generally) by announcing strict new limits on the sale of any US-made chips to Huawei6. It is important to highlight the importance of Huawei in the Chinese mind set: the company is seen as a national emblem, whereas measures against TikTok, for instance, will by comparison be less politically charged, as the company is entirely privately owned and does not enjoy the same perceived status.
Trump’s busy week continued elsewhere, as he also announced that he intends to restore virtually all of the previously suspended UN sanctions on Iran7. Although this is unlikely to have any immediate economic implications on world markets, it might further weaken US leadership in the UN, or create tensions with its European allies. The remaining UN permanent signatories with veto power (France, China, the UK and Russia) could ignore the US, given it is no longer party to the nuclear arms agreement.
Meanwhile, on Friday 21 August, the EU’s chief Brexit negotiator, Michel Barnier, expressed his disappointment with the progress of negotiations. He stated that talks felt like they were moving backwards, rather than forwards, and he accused the UK of showing no willingness to compromise. He said there had been “no progress whatsoever” on access to UK and EU fishing waters, and the EU’s insistence on a level-playing field was “a non-negotiable pre-condition to grant access to our market of 450 million citizens”8.
This came as UK debt rise above £2 trillion for the first time ‒ over 100% of its gross domestic product (GDP)9 – and ahead of a time when a no-deal Brexit may require additional support from the government for the UK economy. Meanwhile, the latest inflation data in the UK showed that the consumer price index (CPI) rose 1% year-on-year in June, led primarily by an increase in petrol and clothing prices9.
Finally, on the data front, the week of 17 August saw highly uneven performance, with the MSCI AC World at -0.59% in Sterling terms and +0.07% in US Dollar terms. All regions were in negative territory, with Emerging Markets (-1.79%), Japan (-1.67%) and Asia (x Japan) (-1.65%) showing the poorest performance, while the UK (-1.59%) and Europe (-1.05%) were not far behind. Economic activity in the US (-0.03%) appears to be picking up faster than the rest of the world.
Growth stocks (+0.69%) reasserted their dominance over value shares (-2.00%), and large-capitalisation stocks (-0.42%) outperformed small-capitalisations (-1.44%). The biggest gains were seen in consumer discretionary (+1.23%), communication services (+0.59%) and, most notably, information technology (+0.77%) that was boosted by a jump in Apple’s share price, which made it the first US-listed company to have a market capitalisation over US$2 trillion⁶. Meanwhile, energy (-4.23%) suffered declines as OPEC predicted a slow recovery in global oil demand. Financial services (-2.73%), another prominent value sector, also underperformed.
As we move towards the end of August, central banks will move back into the spotlight as senior officials gather virtually for the Jackson Hole Economic Policy Symposium on Thursday 27 and Friday 28 August. Investors are likely to be attuned to any signals on future policy.
In terms of the economic data, the weekly initial jobless claims in the US on Thursday 27 August will continue to get attention, particularly after we saw the biggest weekly increase in claims since the start of the pandemic, as they moved back above 1 million again.
In the political sphere, the main highlight will be the Republican National Convention, with just over 10 weeks to go until the presidential election in November.
Finally, there’ll be a limited number of earnings releases as the season draws to a close with 16 S&P 500 companies reporting.
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Sources: Nedbank Private Wealth and (1) Reuters; (2) European Centre for Disease Prevention and Control (ECDC) Data; (3) US Department of Labor; (4) Markit Economics; (5) Wall Street Journal; (6) Business Insider; (7) Financial Times; (8) BBC News; and (9) Office for National Statistics.
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