Economic Data Watch and Market Outlook
Global equity market stayed true to form last week, as risk assets rallied on “what can happen” versus “what is happening” today. Equity prices have been extremely sensitive to any negative news regarding COVID-19 since the pandemic began early this year. The CDC last week reported that sharp spikes in new coronavirus cases were seen in Florida, California, and Texas, sending the 7-day moving average to above 50,000. However, this news was tempered by the CDC also stating that daily testing was now above 600,000 per day, and hospitalizations were below the numbers seen at their heights in late April and May. Of importance, the CDC reported that only 5.0% of all US hospital intensive care capacity was being utilized and the mortality rate continued to decline. Also, positive news was reported that Gilead Science’s drug, remdesivir, lowered the mortality rate in COVID-19 patients, Biontech may have a vaccine ready by year end, and NOVAVAX received $1.6 billion from “operation warp speed” to develop and dispense a COVID-19 drug. Further supporting equity markets was news that the ISM non-manufacturing index saw its largest monthly increase since 1980 and though Weekly Jobless Claims remained above 1million (1.314 million), it has dropped 14 weeks in a row.
As we enter next week’s trading sessions, all eyes will be on corporate earnings as 35 S&P 500 companies will be reporting Q2 earnings and revenues. The initial estimates from FactSet has Q2 earnings falling by -44.6% and revenues by -10.8%, after Q1 results of a drop -15.0% and an increase of +0.9% in earnings and revenues respectively in Q1. The sharpest earnings declines will be seen in Energy (-149.4%), Consumer Discretionary (-118.9%) and Industrials (-88.8%). As all 11 S&P 500 sectors are expected to report earnings declines, the best of the worst are Utilities (-1.7%), Information Technology (-9.4%) and Real Estate (-10.7%). The direction of the equity markets will be anyone’s guess, as recent technical indicators have been poor predictors. The S&P 500 on July 9 experienced the “Golden Cross” with the 50 SMA crossing the 200 SMA, which is traditionally bullish. The market’s negative twin, the “Death Cross” was broached on March 30th, yet the market has rallied 24.0% through Friday. According to Sundial Capital research, the “Golden Cross” has signaled the end of a bear market over the past 70 years. It will be an interesting battle between the bulls and bears over the next few weeks.
In turning to next week’s economic calendar, the key reports will center around June retail sales, industrial production, and consumer sentiment. Starting off on Tuesday, June’s CPI is expected to show an increase of 0.6% taking the average to a muted 0.8% year over year. The rise will be driven by the sharp rebound in energy prices and the continued increase in food prices. However, core inflation will remain modest.
On Wednesday, industrial production for June is projected to show a second straight solid monthly gain in activity, coming in at a 3.0% increase. Activity rates have risen strongly in both May and June, supported by an acceleration in growth for motor vehicle and parts production.
June retail sales to be reported on Thursday, is estimated to have rebounded by 5.6% as sales continue to reverse the steep drops prompted by the spread of COVID-19. The sharp rise is expected to be led by an increase in auto sales and food service sales as stay at home restrictions have been relaxed.
Closing out the week on Friday is the University of Michigan Consumer Sentiment Index which is projected to have fallen 1.1 points to 77.0, caused by the recent increase in new COVID-19 cases.
The Week In Review
U.S. Equities
US equity markets were higher last week, boosted by news that clinical trials of Gilead Sciences antiviral drug remdesivir, helped to reduce the mortality rates in COVID-19 patients by 62.0%.
- Dow Jones +0.98%, MTD +1.08%, YTD -7.44 S&P 500 +1.79%, MTD +2.79%, YTD -0.38%
- Russell 2000 -0.63%, MTD -1.27%, YTD -14.09%
Drivers: I) Gilead Sciences provided findings from an internal study of clinical trial data that showed its drug therapy for COVID-19, remdesivir has been able to reduce mortality in coronavirus patients by 62.0% when compared with standard care. The findings stem from a comparative pre-planned analysis of 312 extremely ill patients in a randomized, Phase 3 trial and a real-world retrospective group of 818 patients with COVID-19 patients who had similar clinical attributes.
II) The ISM nonmanufacturing survey in June, easily beat expectations by rising 11.7 points to 57.1 versus the estimate of 47.0. Leading the surge was strong gains in business activity which rose from 41.0 to 66.0 and the new orders index which soared from 41.9 to 61.6. The sharp jumps in many business surveys are not surprising as they are rising from a low base, thus it will be interesting to see if this rebound rate slows in the coming months.
III) Over the next several months a theme of note will be the slowing of the US recovery. A number of signs are indicating a lower growth rate, led by the Chase consumer card spending tracker which rose sharply from mid-April to mid-June, but has recently moderated. The data suggests that consumer spending is flattening, and the moderate decline is widespread across many states, instead of those recently hit by new COVID-19 cases.
IV) The Weekly Jobless Claims filings have dropped for 14 consecutive weeks since the outsized surge seen in March. One concern is the rate of decline has been approximately 60,000 over the past four weeks, after averaging in excess of 500,000 over the previous ten weeks. This implies the strong labor market surge seen in May and June may be moderating due to renewed concerns over the rise in new COVID-19 cases.
V) Equities Month to Date are higher with Large-Cap, Growth, Con. Discretionary and Com. Services leading equity price performance. The laggards for the period are Small-Cap, Value, Energy, and Industrials.
Capitalization: Large Caps +3.00% (YTD +0.10%), Mid-Caps +0.92% (YTD -8.29%) and Small Caps -1.27% (YTD -14.09%). Style: Value –1.93% (YTD -23.53%) and Growth -0.05% (YTD -7.11%). Industry Groups: Technology +3.35% (YTD +18.74%), Information Technology +3.22% (YTD +17.38%), Consumer Discretionary +4.29% (YTD +7.02%), Communication Services +6.42% (YTD +5.82%), Healthcare +0.55% (YTD -0.27%), Consumer Staples +2.77% (YTD -2.93%), Materials +2.87% (YTD -4.46%), REITs +0.49% (YTD -8.10%), Utilities +2.35% (YTD -8.97%), Industrials -1.07% (YTD -15.52%), Financials +1.28% (YTD -22.57%) and Energy -6.07% (YTD -38.64%).
European Equities
The MSCI Europe Index was higher last week as strong recoveries in euro-zone industrial production and retail sales, offset any negative overtone prompted by the rise in new COVID-19 cases in the US.
Drivers: I) May industrial production from several countries are projecting a euro-zone jump in May of 14.0% month over month. This gain would come after a severe 29.0% cumulative decline during the previous two months, and after euro-zone economies reopened after the COVID-19 lockdown. The rebound in industrial production is being led by Italy and France, surging 42.0% and 19.6% respectively on a m/m basis.
II) Euro-zone retail sales witnessed a sharp rebound in May, after COVID-19 restrictions were lifted. Euro-zone retail sales jumped by 17.8% which partially offset the cumulative 22.7% decline seen in March and April. The resurgence in retail sales were led by countries where restrictions were the most stringent. France, Italy, and Spain retail sales jumped by 25.6%, 25.4% and 18.0% month over month, respectively.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +1.13% for the week (MTD +2.62%, YTD -10.50%).
Asian Equities
Asian equity markets were mostly higher, spurred on by the rise in China’s government supported equity market. Dow Jones Asia Index was higher by +0.07% for the week, (MTD +2.53%, YTD -8.51%).
Drivers: I) June CPI in China rose by 0.3% month over month, versus a drop of -0.6% seen in May, which sent the headline inflation rate of 2.5% annually from 2.4% in May. The increase was led by a tick up in food prices, which rose by 11.1% annually on a 1.4% monthly gain. The sharp gain in food prices was prompted by a 3.6% jump in pork prices which increased by 3.6% m/m due to slowing supply and rising demand, bringing its price increase to 81.6% above their June 2019 level.
II) The Bank of Japan’s Consumption Activity Index increased by 1.3% m/m in May, after seeing sharp declines the previous two months. This report is in line with the jump in retail sales data seen last week, suggesting consumption picked up ahead of the lifting of the state of emergency. The May rebound was helped by the 2.9% rise in non-durable goods consumption. Durable goods remain weak, falling by 0.6% on the month.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei fell by -0.07% (MTD +0.01%, YTD -4.70%), the Hang Seng Index was higher by +1.39% (MTD +5.32%, YTD -8.30%) and the Shanghai Composite advanced by +7.31% (MTD +13.36%, YTD +10.92%).
Fixed Income
Treasury yields declined last week as the rise in new COVID-19 cases in the US sparked fear that another outbreak of coronavirus would halt the nascent economic recovery.
Performance: I) The 10-year Treasury yield was lower last week ending at 0.645% down from 0.673%. The 30-year yield fell last week finishing at 1.334% declining from 1.432%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose +0.42% last week, MTD +0.54% and YTD +6.71%. The Bloomberg Barclays US MBS TR was higher by +0.09% last week, MTD +0.09% and YTD +3.59%. The Bloomberg Barclay’s US Corporate HY Index was higher by +0.33% for the week, MTD +1.07% and YTD -2.77%.
Commodities
The DJ Commodity Index was higher last week by +1.58% and is up month to date +3.31 (YTD -9.72%). The commodity index rose as lumber, iron ore and copper jumped on recoveries seen in global economic data.
Performance: I) The price of oil rose last week by +0.67% to close at $40.59 and is higher month to date by +3.36% (YTD -33.52%). Oil prices rose slightly as OPEC has held to its 9.7-million-barrel daily production cut targets.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was lower by -0.50% ending at 96.66 for the week (MTD -0.75%, YTD +0.28%). The USD declined as prospects for US growth outperformance against the rest of the world has waned, and the Fed’s dovish tone will remain till 2022.
III) Gold rose for a fifth week in a row, as the rise in new COVID-19 cases around the globe raised concerns of a global economic slowdown. Gold was higher by +0.81% last week, climbing to $1801.8 (MTD +0.07%, YTD +18.30%).
Hedge Funds
Hedge fund returns in June are higher with all of the core strategies Equity Hedge, Event Driven, Macro/CTA, Relative Value and Multi-Strategy in positive territory.
Performance:
- The HFRX Global Hedge Fund Index is higher at +0.70% MTD and down -0.39% YTD.
- Equity Hedge has advanced by +0.80% MTD and is lower by -5.50% YTD.
- Event Driven is up MTD +0.67% and is up YTD +2.29%.
- Macro/CTA has risen by +0.56% MTD and is lower by -0.16%
- Relative Value Arbitrage is higher by +0.66% and is up +1.59% YTD.
- Multi-Strategy is up MTD by +0.74% and has risen by +1.84% YTD
Data Source: Haver Economics
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