The number of coronavirus cases in the US surpassed 4 million on Thursday 23 July, after more than 70,000 new infections were registered for the second straight day and deaths topped 1,0001. The US could soon pass another troubling milestone as the number of people in hospital nears its April record high, although hospitalisations at that point were concentrated in north east states.
The virus continues to weigh on economic data in the US, with jobless claims rising to 1.42 million last week – the first time since early on in the crisis that weekly applications for benefits have risen2. Meanwhile, the US composite number came in exactly on 50 – the magic point that separates expansion from contraction. This is behind that of the EU and UK3, suggesting a weaker recovery from the pandemic-linked downturn.
In better news, as of end of the day on Thursday 23 July, almost four-fifths of the S&P 500 companies that have provided Q2 updates posted earnings per share above analysts’ expectations4 and, in aggregate, were reporting earnings 13% above those estimates.
The US was also looking to put forward a new US$1 trillion stimulus package5, although the senate was forced to delay the announcement as the Trump administration requested additional time to review the finer details.
Tensions were running high between the US and China6 after Beijing ordered the closure of the US consulate in Chengdu, after a presence of 25 years, in retaliation for Washington shutting down China’s Houston embassy earlier in the week. Meanwhile, Mike Pompeo, the US Secretary of State, also urged more countries to take a tougher stance on Beijing.
Things looked slightly better in the UK with retail sales up 13.9% in June compared with the previous month7. The UK posted stronger-than-expected purchasing managers’ index (PMI) data3, released on 24 July, as it strengthened to 53.6 from 50.1, which was above the 52.0 market expectations. The UK PMI flash services sector reading for July rose to 56.6 from 47.1 previously, and above consensus forecasts of 51.5. The composite index strengthened to 57.1 from 47.7, easily beating the 51.1 market consensus and pointing to the steepest month of expansion in the private sector since June 2015.
Eurozone flash PMIs3 also surprised to the upside with the composite number coming in at 54.8.
Meanwhile, after weeks of wrangling, European leaders agreed a landmark stimulus package8 that will see the bloc issue €750 billion to help struggling EU member states, which will consist of €390 billion of grants. The rest is made up of loans.
On the Brexit front, the negotiators continue to struggle to move forward8, seeing a trade agreement unlikely at this point according to EU offcials, despite Michel Barnier’s statement that the latest talks were “constructive and respectful”. The two sides remain far apart on two key topics: how the two will ensure a ‘level playing field’ between EU and UK businesses; and what access the EU will have to British fishing waters.
In markets, up to the close of play on Thursday 23 July, equity markets were comparatively quiet by recent standards, starting relatively strongly at the outset of the week, before fading on worries about the economy and a second wave of infections. In US Dollar terms, the MSCI World All Countries Index was up 0.82% – this was mostly about US Dollar weakness – while in Sterling terms the same index was down -0.67%.
Emerging Markets (+0.67%), Asia ex Japan (+0.39%) and Europe ex UK (0.51%) were the best performers – which is also true for the month of July to date – while COVID-19-blighted US (-1.16%) and Brexit-challenged UK (-1.15%) were relatively weak. Japan’s performance was poorer still (-1.36%).
Sector-wise, materials (+0.36%), energy (+0.30%) and consumer staples (+0.11%) were the only sectors to achieve positive performance. Year-to-date, there continues to be strong performances by IT (+21.25%), healthcare (+12.40%), consumer discretionary (+14.07%) and communication services (+10.33%), while the weakness of financials (-15.82%) and energy (-29.18%) go a long way to explaining the huge difference between the styles of growth (+16.28%) and value (-9.81%).
Small capitalisation stocks (+0.41%) did marginally better than their large peers (-0.76%), narrowing the year-to-date gap slightly (-4.43% versus +3.85% respectively).
The trends apparent in sectors and styles clearly flow through to our portfolios. Meanwhile, being underweight the US and overweight global Emerging Markets has been helpful so far this month.
Fixed income was an asset class that delivered something for everybody for the week of 20 July. Bearish investors enjoyed the benefit of government bond yields going even lower on the back of worries about a stalling US recovery and a second wave of COVID-19, while owners of corporate bonds also saw gains from credit spread tightening. So, for us, our short duration continued to detract, and our long credit position added value.
For our alternative investments, the new Hipgnosis Songs Fund C Class issue that we subscribed to for clients last week started trading. As the ﬁfth biggest earner in the FTSE 250 and with US$1 billion pipeline of deals at advanced stages, we expect the new capital raised to be invested quite quickly, and the fund should continue to benefit from the long-term trends of music streaming.
The US weekly jobless claims will be closely watched again this week alongside Q2 GDP numbers out from the US and the Eurozone. The Eurozone will also be releasing its consumer price index for June and we’ll get PMIs published for China.
The Federal Reserve’s (Fed) latest monetary decision is on 29 July, and we then hear from its chair, Jerome Powell, in his subsequent press conference. Recent communications from the Fed have made it clear that the central bank’s monetary committee will soon pivot away from stabilisation towards accommodation.
The S&P 500 earnings season continues this week, with 190 of the index’s companies due to report, including a number of big names such as Amazon, Apple, Alphabet (Google) and Facebook.
Finally, on the political front, informal Brexit talks between the UK and the EU continue in London this week, with formal negotiations due to restart on 17 August.
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All data is for the four days ending 23 July. Sources: Nedbank Private Wealth and (1) John Hopkins University (2) US Department of Labor; (3) Markit Economics; (4) Bloomberg; (5) US Treasury; (6) Ministry of Foreign Affairs of the People’s Republic of China and US Department of State; (7) Office for National Statistics; and (8) Bloomberg.
Investments can go down, as well as up, to the extent that you might get back less than the total you originally invested. Exchange rates also impact the value of your investments. Past performance is no guide to future returns. Any individual investment or security mentioned may be included in clients’ portfolios. They are referred to for information only and are not intended as a recommendation, not least as they may not be suitable. You should always seek professional advice before making any investment decisions.
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