Economic Data Watch and Market Outlook
The recent price movement of global equity markets has proven that COVID-19 news drives its direction, overriding the influence of macro, fundamental and geo-political factors. Markets began the week with a positive tone, but quickly reversed as California announced its two largest school districts, Los Angeles and San Diego, would only provide virtual learning in the fall. This announcement came on the back of Governor Gavin Newsome’s call to rollback California’s re-opening measures due to the spike in new COVID-19 cases. Markets shrugged off the solid upside beats we saw in US retail sales, industrial production, and housing data. In fact, the US housing market continues to be a tail wind for an economic recovery, as US mortgage rates fell to record lows last week. The US 30-year mortgage rate fell below the psychological barrier of 3.0% for the first time in history to 2.98%, while 15-year rate dropped to 2.48%. Market’s improved and turned higher after Moderna reported in the New England Journal of Medicine, in Phase 2 trails of 45 patients, their trial vaccine (mRNA-1273) was successful in creating neutralizing COVID-19 antibodies. Moderna also announced they would now enter Phase 3 trials involving 30,000 patients at the end of July, while Pfizer and Biontech stated they were beginning similar trails simultaneously.
As we enter next week’s trading sessions, we will be in the middle of corporate earnings season with 91 S&P 500 companies reporting. Thus far with 9.1% (47 companies) of the S&P 500 having reported, earnings and revenues have declined by -19.6% and -2.8% respectively. The Q2 FactSet estimate earnings for the S&P 500 is a decline of -44.6%. The earnings report next week will show how devastating the economic shutdown has been to business. Leading the earnings parade will be tech giants Microsoft and IBM, as well as chip makers Intel and Texas Instruments. Communication Services will also be highlighted with reports being issued by Twitter and Snap. The standout next week will be Telsa, as a report of a profit for Q2 would meet a requirement for the company to be included in the S&P 500 index. We will see if the inexorable rise in global equity markets will continue next week, as market technicals are positive, but market volatility remains above average levels. COVID-19 remains center stage, as investors will focus on continued progress with treatments and vaccines, and high frequency economic data showing how the recent spike in new cases may be affecting economies.
In turning to next week’s economic calendar, a light week for data will be centered around US housing data. US Existing Home Sales being released on Wednesday for June, is projected to surge by 25.3% to 4.90 million units on a seasonally adjusted annual rate (saar). This is a sharp rebound from the large sales decline seen in the period from March to May after COVID-19 began disrupting activity across the country.
On Friday, the Markit Manufacturing PMI July flash report is estimated to show an increase of 3.2 points to 53.0. The July report for the Markit Services PMI is projected to report an improvement of 3.1 points to 51.0. Both reports are reflecting a recovery from the economic disruption prompted by COVID-19 and follows the positive economic data we have seen from other regional business surveys.
Ending the week on Friday is the report for US New Single-Family Home Sales for June, which is expected to rise by 3.6% to 700,000 units saar. Homes sales like other housing indicators, suffered dramatic declines due to the spread of COVID-19, and sales have partially recovered from the depressed levels seen in April. The June increase follows the sharp 16.6% rise reported in May.
The Week In Review
U.S. Equities
US equity markets rallied last week as investors have called for further US fiscal stimulus as jobless benefits are set to expire, and leaders in the EU were meeting to discuss an agreement for a bailout fund.
- Dow Jones +2.32% MTD +3.42% YTD -5.30 S&P 500 +1.27% MTD +4.10% YTD +0.89%
- Russell 2000 +3.57% MTD +2.26% YTD -11.01%
Drivers: I) US Retail Sales for June jumped by 7.5% easily beating the 5.6% Street estimate. The monthly increase follows the strong 18.2% rise seen in May, bringing the June level of total retail sales to only 1.0% below the level seen in January. Data in the report showed an increase in motor vehicle sales of 8.2%, restaurants and bar sales surged by 20.0% and gasoline station sales rose by 15.3%. The question is whether July’s data will show a slow-down due to the recent increase in COVID-19 cases.
II) June Housing Starts following the sizable 8.2% jump seen in May, increased by 17.3%, and permits rose by 2.1% to 1.24 million units after increasing by 14.1% in May. Similar to other economic indications, the housing data experienced a large decline in March and April, followed by a recovery in May and June. The increase was seen across single family starts, single family permits and multifamily starts.
III) A gauge of sentiment in the housing market, the National Association of Home Builders (NAHB) survey handily beat expectations by surging from 58 in June to 72 in July. The sharp increase in the survey of 42 points, after seeing its low in April, has pushed the sentiment index close to pre-COVID-19 levels. In the coming months, it will of interest to see if the index can continue its surge or will it moderate.
IV) The consumer sentiment index reported by the University of Michigan, fell from 78.1 to 73.2 in July, coming in below the Street estimate of 77.0. The drop in sentiment is a reversal of recent gains, and the fall back brings in index to within 1.4 points above the April level which was the lowest seen in recent years. The sentiment decline was caused by the widespread resurgence of COVID-19 across the US.
V) Equities Month to Date are higher with Large-Cap, Growth, Materials, and Industrials leading equity price performance. The laggards for the period are Small-Cap, Value and Energy.
Capitalization: Large Caps +4.24% (YTD +1.31%), Mid-Caps +3.99% (YTD -5.50%) and Small Caps +2.26% (YTD -11.01%). Style: Value +2.10% (YTD -20.39%) and Growth +3.20% (YTD -4.09%). Sector Groups: Technology +2.16% (YTD +17.37%), Information Technology +2.17 (YTD +16.19%), Consumer Discretionary +4.71% (YTD +7.46%), Communication Services +5.86% (YTD +5.27%), Healthcare +5.73% (YTD +4.86%), Materials +8.46% (YTD +0.73%), Consumer Staples +4.90% (YTD -0.92%), Utilities +6.67% (YTD -5.13%), REITs +0.53% (YTD -8.06%), Industrials +4.69% (YTD -10.61%), Financials +3.35% (YTD -20.99%) and Energy -3.11% (YTD -36.71%).
European Equities
The MSCI Europe Index rose last week on news of positive developments in the fight against COVID-19, and on hopes a sizable bailout package can be agreed upon by EU members.
Drivers: I) Euro-zone industrial production in May rose by 12.4% month over month, continuing a surge from the bottom seen in May. The sharp increase follows the steep 30.0% cumulative decline in the previous two months and came as European economies were beginning to re-open. The recovery was across several sectors, led by textiles and transportation (up 30.0% and 43.0% respectively) after being the hardest hit by the lockdown.
II) The ECB as expected made no changes to policy last week, as monetary policy should remain highly accommodative for the next few years. In short, interest rates are negative and expected to remain exceptionally low for a lengthy period, and the large asset purchase programs (APP and PEPP) will remain active. The one issue to solve is the low inflation outlook, which the ECB projects is still far below target at 0.9% on an annual basis.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +2.56% for the week (MTD +5.25%, YTD -8.20%).
Asian Equities
Asian equity markets rallied last week on hopes that an effective vaccine or treatment for COVID-19 was on the horizon. Dow Jones Asia Index was higher by +1.17% for the week, (MTD +3.73%, YTD -7.44%).
Drivers: I) Second quarter GDP in China beat its Street estimate of a gain of 1.8% on an annual basis, by posting a rise of 3.2%. This is a nice rebound after GDP dropped by 6.8% during the first quarter. The data in June highlights the continued economic recovery, with production activity normalizing, domestic demand recovering led by infrastructure, real estate, and auto sales, along with a moderate rebound in consumer spending.
II) The housing market in China experience a sharp comeback in June, as the 70-city index of new home prices jumped by 0.6% month over month. The rise comes on the back of the 0.5% gain in May, as real estate investment grew at a solid 8.4% annual rate. With housing policy in China focused on stabilizing home and land prices, expectations remain that housing activity should remain solid during the second half of 2020.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +1.82% (MTD +1.83%, YTD -2.96%), the Hang Seng Index was lower by -2.52% (MTD +2.67%, YTD -10.61%) and the Shanghai Composite declined by -5.00% (MTD +7.69%, YTD +5.38%).
Fixed Income
Treasury yields fell last week as investors remain concerned that the recent increase in global COVID-19 cases could hamper the nascent economic recovery.
Performance: I) The 10-year Treasury yield was lower last week ending at 0.634% down from 0.645%. The 30-year yield fell last week finishing at 1.330% declining from 1.334%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose +0.23% last week, MTD +0.78% and YTD +6.96%. The Bloomberg Barclays US MBS TR was lower by -0.03% last week, MTD +0.06% and YTD +3.56%. The Bloomberg Barclay’s US Corporate HY Index was higher by +1.14% for the week, MTD +2.22% and YTD -1.66%.
Commodities
The DJ Commodity Index was lower last week by -0.02% and is up month to date +3.25% (YTD -9.78%). The commodity index was flat as the drop in energy prices offset recent gains in industrial metals.
Performance: I) The price of oil fell last week by -0.05% to close at $40.57 and is higher month to date by +3.31% (YTD -33.56%). Oil prices dropped on the week as the rise in COVID-19 cases globally could hamper the economic recovery and the demand for energy.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was lower by -0.67% ending at 96.01 for the week (MTD -1.41%, YTD -0.39%). The USD resumed its recent downtrend as the US Fed is expected to keep rates lower for longer, and investors are concerned the rise in US COVID-19 cases could derail the current economic rebound.
III) Gold rose for a sixth week in a row, on expectations for another round of stimulus from the US and Europe, and on fears the recent rise in coronavirus cases will slow the economic rebound. Gold was higher by +0.56% last week, climbing to $1812.0 (MTD +0.64%, YTD +18.97%).
Hedge Funds
Hedge fund returns in July 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 +0.86% MTD and down -0.24% YTD.
- Equity Hedge has advanced by +1.06% MTD and is lower by -5.30% YTD.
- Event Driven is up MTD +0.57% and is up YTD +2.20%.
- Macro/CTA has risen by +0.64% MTD and is lower by -0.08%
- Relative Value Arbitrage is higher by +1.06% and is up +1.94% YTD.
- Multi-Strategy is up MTD by +1.01% and has risen by +1.94% YTD
Data Source: Haver Economics
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