Kristal Weekly Feed | 03 August 2020

These are tough times and it can get difficult to understand and analyze major events around the globe and how they affect your investments. In our weekly market update, we help you slice and dice the latest news updates to make informed investment decisions.

Headlines this week:

• U.S. stocks end the week on a higher note as large-cap and growth stocks outperformed expectations
• U.S. new coronavirus cases record new highs and daily deaths have recently increased as well
• U.S. jobless claims rose for the second consecutive week, indicating that employment remains sluggish as the economy has yet to weather the pandemic crisis
• China’s equity markets rallied despite growing U.S. China trade tensions and flooding of the Yangtze river basin

Tracking Covid-19

Covid-19 totaled 17,793,057 confirmed cases around the globe and the current death toll stands at 683,779.

• Currently, the United States continues to record the highest amount of Covid-19 cases. According to data from Johns Hopkins University, new coronavirus cases rose above 70,000 and daily deaths increased to the highest level in more than a month
• India and Brazil are trailing closely behind the United States as they have been recording increasingly high numbers of new cases and deaths
• The second wave of coronavirus infections in Europe is beginning to look increasingly possible as there is a recent rise in infection rates in the United Kingdom, Belgium, Germany, Spain, and other regions. However, the impact might not be as severe as governments are promptly imposing stricter prevention measures upon recognizing the potential impact it will have on the economy
• In Japan, we observed a rise in infections in Tokyo with 463 new coronavirus cases on July 31, 2020, much higher than the previous day’s record of 367 infections. Tokyo’s governor mentioned that issuing a state of emergency for the city will be considered if the pandemic situation worsens. Other areas such as Tokushima, Fukuoka, Okinawa, Kanagawa, and Hyogo also reported record infection levels last Thursday

Market Update

1. United States

Strong quarterly earnings data from large-cap and growth stocks caused most of the major indexes to erase their weekly losses and close higher for the week. The S&P 500 rose 0.8% last week and closed with a 5.5% gain for July. The Dow Jones Industrial Average clocked a four consecutive monthly gain as it closed 0.4% higher on Friday. The Nasdaq Composite also recorded a 1.5% gain as technology stocks rallied this week. However, energy and material stocks continue to perform poorly with the former recording largest declines this week as major players such as Chevron reported huge losses for the second quarter.

The boosters
The rally was mainly a result of outperformance in earnings from technology powerhouses such as Apple, Amazon.com, and Facebook. These giants reported strong earnings data which caused their shares to gain by 10.5%, 3.7%, and 8.2% respectively. Such data is likely explained by the rise in consumer spending by 5.6% in June as governments gradually ease lockdown restrictions.

Additionally, the housing market in the United States seems to provide a contradictory response to the pandemic. Pending home sales have risen for the second consecutive month in June, increasing by 16.6% as compared to May. However, analysts are expecting that such growth might not continue for the months ahead as Covid-19 cases begin to surge.

Lastly, the manufacturing industry is seen to be making a steady recovery as orders for durable goods, items that range from toasters to aircraft that lasts three years or more, beat expectations slightly, growing by 7.3% in June.

The dampeners
Despite the rise in the month of June, consumer spending is observed to be weakening in recent weeks. This is likely attributed to the continued lack of employment, evident from the second consecutive week of rising U.S. jobless claims totaling 1.43 million. As such, a decline in consumption is highly possible as households will have to work with tight finances and limit their future expenditure. As consumer spending constitutes a significant portion of GDP for the United States, falling consumption implies that the country’s recovery from the pandemic would be slower than expected. Furthermore, inconclusive negotiations on further coronavirus relief on Thursday night last week raises concerns about the health of the U.S. economy especially when the current employment benefits have expired last Friday.
As for U.S. Treasuries, the 10-year U.S. Treasury yield was down last Friday by approximately half a basis point, indicating that investors are still bearish on the economy.

Europe

European equities closed lower last week amidst concerns over a re-emergence of Covid-19 infections and generally poor company earnings. The pan-European STOXX Europe 600 closed approximately 2.7% lower by the end of the week. The United Kingdom’s FTSE 100 Index dropped by 3.4%, Germany’s DAX Index declined by 4% and France’s CAC 40 fell by 3.3%.

The boosters
To provide support to banks amidst the economic fallout caused by the pandemic, the European Central Bank (ECB) announced that banks will be allowed to breach their capital requirements and liquidity buffers for a longer period of time.

Despite weak company earnings for many corporates, energy giants such as Royal Dutch Shell and Total managed to report earnings that beat expectations for the second quarter due to their strong oil trading revenues. The trading revenues were essential for offsetting the falling energy demand triggered by the coronavirus pandemic.

The dampeners
Corporate earnings in Europe were relatively poor for the second quarter. As expected, airlines and travel-related shares were amongst the hardest hit by the pandemic. EasyJet shares fell by 22% and International Airlines Group (IAG) declined 20% in July. The French bank BNP Paribas reported a 7% fall in net income in the second quarter as compared to the same period in 2019.

The ECB extended a ban on dividend distribution and share buybacks to banks in the Eurozone until Jan 1, 2021. This demonstrates the extent of damage the pandemic has caused for banks in the Eurozone, implying that it would take a substantial amount of time for banks to make a comeback.

Asia Pacific

In mainland China, equity markets rallied as many investors bought into the market after it dipped in the earlier weeks despite the escalating U.S.-China trade tensions and the potential economic impact of the Yangtze river basin floods. China’s Shanghai Shenzhen CSI 300 Index recorded a 4.2% increase by the end of the week. Additionally, China’s official manufacturing PMI for July was above expectations at 51.1.

South Korea’s KOSPI Index also recorded gains at the end of last week, closing 1.5% higher, primarily lifted by Samsung Electronics due to increasing expectations that the company will benefit from Intel Corp’s plan to outsource more manufacturing. Hong Kong’s Hang Seng Index experienced some volatility throughout the week but ended slightly lower by only 0.03%.

Japan’s Nikkei 225 Index ended the week on a much less positive note, recording a 4.4% decline. This is possibly attributed to the recent surge in coronavirus infections and Japan’s announcement of a lowered GDP forecast for this fiscal year. The government is now expecting a 4.5% contraction in GDP, which is significantly lower as compared to the 1.4% growth forecast in January 2020. The dull outlook for Japan is also justified by the country’s massive amount of public debt and USD 2.2 trillion stimulus that the government has already spent, both of which might constrain the government from providing further fiscal spending to support the economy.