Kristal Weekly Feed | 24 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. IHS Purchasing Managers Indexes beat expectations especially for the manufacturing and services sectors
• Federal Open Market Committee’s minutes for the July 28-29 meeting weighed in negatively on markets, causing mid-week volatility in equity markets
• United Kingdom’s composite PMI beat expectations and rose significantly, putting the economy on track for a speedy recovery
• U.S. tightened restrictions on China’s Huawei Technologies, further limiting the company’s access to U.S. technology and straining relations

Tracking Covid-19

Covid-19 totaled 23,383,472 confirmed cases around the globe and the current death toll stands at 808,715.

• In the U.S., there are some positive developments in efforts to contain the spread of the coronavirus. The daily number of new cases have continuously been falling especially because heavily impacted areas in the South have been recording significant declines.
• Several economies in the Eurozone have recently experienced a surge in coronavirus cases. Italy recently broke a new daily record number of cases and Spain currently records the largest infection count in western Europe at 370,000 infections. Both countries have responded swiftly in containing the further spread of the virus by tightening regulations on face masks and closed several densely populated areas such as nightclubs and dancing venues in hotels and beach resorts.
• China has seen some success in containing the spread of the coronavirus. The National Health Commission recently reported no recorded cases of the virus being locally transmitted. Furthermore, there has been a sharp recovery in domestic travel, evident from the 352,000 tourists that visited Wuhan in the recent weekend, according to a Chinese state-run media.

Market Update

1. United States

The S&P 500 ended the week 0.48% higher and currently records a YTD change of 4.3%. The gains were largely fueled by tech stocks which offset concerns about the economy. According to Barron’s and Dow Jones market data, the index currently records its fastest bear market recovery in history as it only took 10 times less time to reach its February peak, before the onset of the pandemic. The Dow Jones Industrial Average (DJIA) closed 0.15% lower last Friday while the Nasdaq Composite recorded a 2% increase. The DJIA could have declined much lower but bullish sentiments on Apple allowed the index to recover much of its losses from the week. The Nasdaq Composite recorded a net gain at the end of the week, primarily supported by Nvidia, which recorded new highs with its stock rising over 4% at the end of the week on strong earnings data.

The boosters
Markets rose sharply towards the end of the week as more economic data surprised on the upside. For August, the U.S. IHS Purchasing Managers Indexes were better than expected especially for the manufacturing and services sectors. The manufacturing index recorded 53.6 for the month, up from 50.9 in July and has hit its highest level in 19 months. Meanwhile, the services index read 54.8, which is significantly higher than the July reading of 50. These numbers indicate improving economic conditions.

Additionally, U.S. home sales for the month of July recorded a 24.7% rise month-over-month. Relatively low mortgage rates and continued strong demand supports the large rise in home sales. However, economists are foreseeing that such gains will likely not be sustained as mortgage purchase applications stalled in July and August.

The dampeners
Similarly, there seems to be a continued lack of progress on the negotiations on a new coronavirus aid package. Although major indexes generally recorded slight gains for the week, the stalemate on the pandemic financial aid plan coupled with the cautious tone of the Federal Open Market Committee’s minutes for the July 28-29 meeting weighed negatively on economic sentiments and caused some mid-week volatility. The minutes signaled a relatively uncertain and less robust economic recovery for the second half of 2020 as staff reduced their growth forecast and highlighted that continued fiscal stimulus is necessary to support the economy and vulnerable households for the remaining portion of the year. Furthermore, lack of forward guidance on the interest rate target range reinforces the level of uncertainty on the outlook of the economy.

Despite strong manufacturing and services PMI data, concerns over the speed of the economy’s recovery remains as weekly unemployment data recorded a rise in initial claims to 1.1 million, indicating that the labor market is still weak.

Europe

European equities generally recorded losses last week due to worsening US-China relations concerns over a resurgence in coronavirus infections and disappointing economic data. The pan-European STOXX Europe 600 closed approximately 0.8% lower by the end of the week. The United Kingdom’s FTSE 100 Index fell by 1.5%, Germany’s DAX Index declined 1% and France’s CAC 40 slipped by 1.3%.

The boosters
United Kingdom’s composite PMI beat expectations and rose significantly over 60 to an 82-month high for the month of August, suggesting that the U.K. is on track for a V-shaped recovery from the pandemic crisis. The data was a result of the resumption of business activity and consumption. In June, online shopping played a significant role in helping retail spending to return to pre-pandemic levels. Although overall economic activity still remains below pre-pandemic levels, the Bank of England Deputy Governor Andy Haldane mentioned that the economy has already recovered half of its lost Gross Domestic Product.

The dampeners
Despite the positive economic data for the U.K., preliminary readings from the Flash PMI surveys suggests that the Eurozone’s recovery is slowing in August as a result of a reduction in growth in the services sector. The index fell to 51.6, approximately 3 points lower from July demonstrating a significant reduction in output expansion. Although output and new orders in the manufacturing industry rose, it was insufficient to offset the reduction in services activity which was the result of increasing pandemic infections and renewed travel restrictions.

According to Reuters, anonymous European Union (EU) officials disclosed that the latest round of talks between the EU and the U.K. with regards to their post-Brexit arrangements made no progress on the major issues of fishing rights and competition. This could have further dampened market sentiments towards the Eurozone, possibly explaining the poor performance of major indexes in the past week.

Asia Pacific

In mainland China, equity markets closed modestly higher on expectations of a faster economic recovery and the postponement of the trade review by President Donald Trump, which alleviated concerns of worsening US-China relations for the time being. Some believe that it is a move by the U.S. to provide China with more time to increase purchases of U.S. farm and other exports. However, US-China relations remain strained, evident from the announcement of more restrictions on Huawei Technologies which hinders the company’s production beyond September without adequate supply of advanced chips. The restriction of access to U.S. semiconductor technology will likely continue in the long haul, forcing China to develop its own domestic technology. In the credit markets, the 10-year sovereign bond yield rose 0.03% upon China’s relatively successful containment of the pandemic, which formed the basis of expectations that the country might experience a faster recovery. China’s Loan Prime Rate (LPR) was also in line with expectations, remaining unchanged for the fourth consecutive month.

South Korea’s KOSPI Index closed approximately 4.2% lower last week, recording a continued decline throughout the week. The fall is likely attributed to the cautious tone of the Fed’s minutes and a surge in coronavirus cases which forced the economy back into a lockdown. Seoul recently experienced a new outbreak, recording 324 cases as of last Thursday, forcing the country to close nightclubs and churches and cancel large social gatherings and professional sports events.

Japanese stocks also recorded declines for the week. The Nikkei 225 Index ended the week 1.58% lower, likely due to concerns over a resurgence of the pandemic and US-China trade tensions. However, the economy is expected to improve in the coming months. Japan Center for Economic Research has polled forecasts from economists and the consensus estimates a 13% economic growth in the third quarter of 2020, due to an uptrend in personal spending in June and support from the one-time JPY 100,000 special government relief payment. In the subsequent months, the manufacturing sector is expected to continue improving but the same bullish sentiment does not hold for the services sector, with the exception of businesses in the communications and retail area.