Week Ended July 31 and the Week Ahead
The S&P 500 had gains for the last week of July, sealed in the last couple of hours of trading on Friday following unexpectedly strong 2Q earnings from Apple, Amazon and Facebook the evening before. The S&P 500 surged to its fourth consecutive month of gains, although the other indices I track – the FTSE 100, the STOXX 600 and the Nikkei 225 – all recorded losses for the month.
Gold was up 3.9% last week, closing July up 11% for the month as this “store of value” increasingly finds favour with a broadening investor base.
The U.S. Dollar lost further ground last week (-1.0%), as the world’s ultimate safe-haven currency is falling out of favour due to a combination of on-going issues with CV19 in the States, political uncertainty with an election on the horizon, and expiry of certain features of the CARES Act this past Friday (with no new fiscal plan confirmed).
U.S. Treasuries rallied across the board last week, and credit also improved. High yield spreads continued to tighten in the U.S. but widened slightly in Europe, as new concerns about CV19 hotspots emerged in Europe and 2Q GDP growth for the region was dismal.
S&P 500 earnings have generally been better than expected, and as a result, the consensus analysts’ expectations regarding 2Q2020 earnings vs 2Q2019 earnings has improved slightly.
U.S. economic data continues to be poor, with 2Q2020 GDP down 9.5% in the quarter compared to 1Q2020. First time unemployment claims also showed no improvement.
CV19 is well covered by the mainstream media, but in summary, new cases and deaths continue to mount globally at a pace similar to that of prior weeks.
Global Equity Markets
Although 189 S&P 500 companies released earnings this past week (more on this below), market sentiment on Friday in the U.S. - important because it was the last day of the week and of July - was driven almost exclusively by 2Q2020 results of several FAANG stocks which were announced Thursday after the market closed. Earnings for Apple, Amazon and Facebook far exceeded consensus analysts’ expectations. As a result, whilst the Dow delivered lacklustre results for the week (-0.2 % WoW, -7.4% YtD return), the tech- and healthcare-heavy NASDAQ powered ahead to close at 10,745.27, up 3.7% WoW (+19.8% YtD). The broader S&P 500 index eked out a gain for the week thanks to a rally in the last two hours of trading on Friday, delivering a gain of 1.7% for the week. For the month, the S&P 500 closed up 5.5%, its fourth straight month of gains, and is now above the level that is closed 2019 (+1.2% YtD).
In Europe and Japan, the story was different as the STOXX 600, FTSE 100 and Nikkei 225 all recorded losses for the week, topping off a month of losses for all three indices. The table below summarises the performance of the four indices I track:
I must admit that it strikes me as somewhat bizarre that the S&P 500 is continuing to power forward in spite of a litany of sobering economic and pandemic-related news in the U.S. It would seem that the U.S. owns the leader board amongst developed countries for its mis-management of CV19 and has just had federal unemployment benefits expire without a phase 4 “replacement” plan agreed. The E.U. has not only handled getting CV19 under control much better than the U.S. but also recently served up a viable and ground-breaking fiscal plan. Having said this, the growth rate of new cases of CV19 are increasing in some European countries, so perhaps we are just in a race to the bottom, with most governments around the world unable to yet find the right balance between controlling the spread of CV19 and maintaining some semblance of an economic recovery. At the end of the day, equity investors are placing their bets on the countries and markets they believe have the best chance of recovering the fastest, and this remains the U.S. - in spite of the issues I highlighted above – because it is the most flexible, diverse and dynamic economy in the world.
312 of the S&P 500 companies have now reported earnings for the most recent quarter. According to Refinitiv (see here), earnings expectations generally for 2Q20 vs 2Q19 have been revised upwards, based on those companies that have reported so far, to -33.8% (from -40.3% last week). There is little doubt that the four FAANG stocks that reported earnings on Thursday, wildly exceeding analysts’ expectations, contributed to this upward revision in consensus earnings for the index. Interestingly, just before these companies released their earnings, the CEO’s of each of these four companies – Apple, Amazon, Google and Facebook – testified before the Antitrust Committee of the House of Representatives, which is investing issues regarding competition. In spite of the grilling, the share prices of AAPL, AMZN and FB all popped in after-market trading following their earnings announcements on Thursday evening. These three stocks held onto to their gains for the day, closing up 10.5%, 3.7% and 8.2%, respectively, on Friday. Alphabet (Google) fared less well as revenues were down 2% even though earnings slightly beat expectations. For the first time in its history, advertising revenues fell at Google, and investors took note pushing the shares down 3.2% on Friday. AAPL also announced a 4-for-1 share split, adding fuel to the fire of strong earnings and pushing the stock price solidly above $400/share for the first time, closing at $425.04/share.
Although these stocks grabbed the market’s attention as far as earnings last week, many other S&P 500 companies also reported earnings, which were mixed. Ford and GM both had huge losses, but beat analysts’ consensus expectations, whilst ExxonMobil and Chevron both also had losses which were worse than analysts’ consensus expectations. Comcast beat revenue and earnings expectations, and also signed up 10 million customers on its new streaming service Peacock (watch out Netflix!). Boeing’s results were horrible (no other way to describe them), whilst Qualcomm, P&G, UPS and Eli Lilly all had good results and better-than-expected outlooks. One other bright star of the week was Canadian e-commerce company Shopify, which saw its revenues and earnings far exceed analysts’ expectations as the company benefitted in the second quarter from the pandemic, similar to the performance enjoyed by many of the FAANG and other “stay at home” companies.
This week another 132 S&P 500 companies will report earnings.
In Europe, earnings season is also underway. Although I don’t track these companies as closely, one announcement that did affect European bank shares this week was the “strong recommendation” by the ECB that European banks extend the period of no payouts (i.e. no dividends and no stock repurchases) to January 2021 (from October 2020) and be “cautious with variable remuneration to bankers”, a proclamation that would cause me – were I still a banker - considerable anxiety. I just discovered that Refinitiv covers earnings (in aggregate) for the STOXX 600 companies too, and you can find their recent update here. So far, 109 STOXX 600 companies have reported 2Q earnings, with another 55 expected to report earnings this week.
The directional performance of the U.S. corporate bond market was similar to that of the prior two weeks, albeit not as severe. BBB corporate credit spreads were about flat, whilst high yield spreads (BB, B and CCC) in the U.S. were tighter across the board an average of 12bps. However, European high yield spreads widened about 13bps on the week, moving in the opposite direction of U.S. high yield spreads. Perhaps this was caused by the on-going presence of the Fed as a buyer in the U.S. primary and secondary corporate bond markets (including certain segments of the high yield markets), and the lack of similar involvement by the ECB in Europe, at least in the high yield arena. Or perhaps it just reflects the differing fate of the equity markets on each side of the Atlantic last week, since sentiment in the high yield bond market is often closely tied to sentiment in the related equity market.
Safe Haven Assets & Oil
Having closed above $1,900/ounce Friday before last (July 24th), gold continued its march upwards last week, increasing 3.9% W-o-W and +11% for July, closing Friday at $1,975.90/ounce. The higher and faster that the gold price rises, the more and more that it is written about, with pundits stressing this precious metal’s virtues in a world of negative real interest rates with central bank-fuelled inflation potentially on the horizon. However, some are writing that gold could be becoming too fashionable too quickly all of a sudden, getting ahead of itself for several reasons. John Authers (Bloomberg Opinion) writes that gold is potentially setting itself up for an inevitable short squeeze as owners of futures contracts increasingly demand the delivery of physical gold for portfolio diversification (“A Mighty Short Squeeze May be Building in Gold”). Seeking Alpha had an article entitled “Robinhood.com – A Potential Game Changer for Gold and Silver Investment” by Lawrence Williams, which as the title suggests, talks about gold and precious metals (and gold ETFs) becoming increasingly active on platforms like Robinhood, potentially raising questions about gold behaving like well-known momentum stocks. Of course, gold is a very different investment vehicle than equities, so enough said on this for now. The point is that the increase in the price of gold is gaining momentum as the price marches steadily upwards towards $2,000/ounce.
Investors bought U.S. Treasuries last week as yields fell across the maturity curve, largely reflecting increasing concerns about the U.S. economy recovery, discussed further below. The U.S. Dollar also continued its slide, down 1% on the week and ending July down 4%. The weakness in the U.S. Dollar is an ongoing reflection of the perception of the way that (foreign) investors perceive the risk in the U.S. at the moment, which I have already highlighted in this update.
If you track the US Dollar against foreign currencies, you might not be surprised to learn that as the Dollar has sold off, Euro and Sterling have strengthened. The Euro has strengthened to $1.18/€1.00 and Sterling has strengthened to $1.311/£1.00, both as of Friday's close (July 31st).
These two graphs illustrate how both the Euro and Sterling have strengthened against the US Dollar in July.
WTI Oil closed down 2.2% on the week, ending Friday at $40.43/barrel. The weakness was in line with other economic indicators that signalled an increasing bias in the U.S. towards a more uneven and lethargic recovery.
Economics & Politics
The major economic news last week was the release of GDP data in the U.S. and the E.U. (including the Eurozone). The results were far from encouraging. Let’s discuss Europe first. In the Eurozone, GDP fell 12.1% in 2Q2020 (vs 1Q2020), its largest decline ever, whilst the larger European Union economy contracted 11.9%.
The table the the right shows the results of several Eurozone countries as far as 2Q20 vs 1Q20 GDP. You can see that GDP performance varied from country to country, with southern European countries generally suffering the worst.
GDP in the U.S. fell 9.5% in 2Q2020 compared to 1Q2020, an annualised rate of 32.9%. Although the economy contracted slightly less than the European economy last quarter, it still represented the worst quarterly GDP decline in the U.S. since the 1940s. The figure was slightly better than consensus expectations, but it matters little because the contraction lays bare the severe cost to the global economy caused by the pandemic. And with CV19 far from under control, it of course raises further questions about the on-going recovery in the third quarter as July is now already behind us.
First time jobless claims in the U.S. were 1.43 million for the week ended July 25th, about flat vis-à-vis the week before but showing no improvement for the second week running as the U.S. economy continues to move sideways at best. Underlying some of this data is personal consumption expenditures, which were lower than expected, further undermining the engine (i.e. consumer spending) that drives the U.S. economy.
In Europe, consumer spending was better than expected in Germany and France, the two largest E.U. economies, and consumer sentiment was better than expected in the Eurozone overall.
This week, we will have a slew of releases in the U.S. and E.U. regarding activity in manufacturing and services for July, key economic metrics, but the highlight of the week might be the Bank of England monetary policy report and presentation by Governor Andrew Bailey on Thursday.
Whilst some states in the U.S. have taken aggressive measures to get CV19 under control, concerns are now shifting back to Europe, where cases in Spain, France and Italy have been rising. The U.K. has (re)imposed restrictions on travel to and from Spain, where cases have recently increased in Cataluyna, and has locked down some northern areas in England
where CV19 cases have been increasing in an attempt to nip the resurgence of the growth of the virus in the bud. India seems to be experiencing the most growth in new cases, which now stand at 1.7 million. Only Brazil (2.7 million) and the U.S. (4.6 million) have had more cases of CV19. The table to the right summarises the weekly progression (or lack thereof) of the global management of slowing new cases and deaths from CV19.
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