Economic Data Watch and Market Outlook
Global equity markets declined last week as continued improvements in economic data were overcome by the large spike in new COVID-19 cases in the US. A sharp rise in new coronavirus cases were seen in 10 southern and southwestern states in the US that had re-opened, including Florida, Texas, and Arizona. The rapid ascent in cases prompted Texas governor, Greg Abbott, to pause further re-opening by placing restrictions on elective surgeries, limit restaurant capacity to a maximum of 50.0% and close bars at noon except for takeout and deliveries. Disneyland in California delayed its re-opening and the number of US COVID-19 cases have risen to 2.4 million according to Johns Hopkins University. Adding to the negative market sentiment was the Federal Reserve prohibiting US banks from raising dividends or buying back stock until September at the earliest. Over shadowed was the sharp rise in US New Home Sales (+16.6% highest in 12 months), Personal Spending (+8.2% highest on record dating back to 1959) and Durable Goods Orders (+15.8% largest increase in over six years).
As we enter next week’s trading sessions, we can expect the tug of war on equity price direction will continue between COVID-19 and positively trending economic data. Global equity markets were getting back on their feet after the sell-off seen two weeks ago, however the uncertainty around a resurgence of the coronavirus particularly in the US and its potential to derail an economic recovery put markets on the defensive. What is needed to reduce market uncertainty and propel markets higher, is stable and improving consumer confidence. The economic engine, especially for US GDP, need to feel secure that COVID-19 is getting under control and that jobs will be coming back. After experiencing the deepest recession since the Great Depression, we need US consumers to buy homes, furniture, go to restaurants and on vacations to foster a revival of growth. It is hopeful that progress on a COVID-19 vaccine and treatment, and further monetary/fiscal stimulus will help improve consumer sentiment. We expect markets will remain volatile and are in a consolidation phase, which is healthy after the sharp 40.0% plus rise we have seen in the S&P 500 since hitting bottom on March 23rd.
In turning to next week’s economic calendar, a July 4th shortened week will be dominated by the data regarding the US non-farm payroll report out on Thursday. We start off on Monday with the Pending New Home Sales report for May, which is expected to rise 24.5%. The sharp increase comes after seeing declines of 20.8% and 21.8% respectively in March and April.
The Consumer Conference Board report on consumer confidence out on Tuesday, is projected to show a rise of 11.4 points to 98.0 for June. Improvements in the report have been boosted by the re-opening of economies across the country.
On Wednesday, the reading for the ISM Manufacturing Index for June is estimated to have risen from 43.1 in May to 50.0. The manufacturing surveys throughout US regions have been bouncing back from their May lows.
The all-important US Non-Farm payroll data release on Thursday is expected to report an increase of 3 million jobs for June, as the recovery from the COVID-19 shutdown continues. Expectations are calling for a rebound in the labor force participation rate to 61.4%, bringing the unemployment rate to 12.0%.
The Week In Review
U.S. Equities
US equity markets dropped last week as the spike of COVID-19 cases in the US, coupled with Fed restrictions placed on banks and sponsors halting their relationship with Facebook cast a negative pall on investors.
- Dow Jones -3.31%, MTD -1.33%, YTD -11.26 B. S&P 500 -2.86%, MTD -1.03%, YTD -5.95%
- Russell 2000 -2.80%, MTD -1.00%, YTD -16.79%
Drivers: I) The Fed released the traditional bank stress test that were conducted pre-COVID-19 in February, and an analysis of bank capital post coronavirus considering a V, U or W shaped recovery. The traditional stress test showed all large banks were well capitalized, however some banks could come under stress under the worse COVID-19 scenario. Thus, banks are halting stock repurchases and are to cap dividend payments into Q3.
II) US Durable Goods Orders in May increased by 15.8%, easily exceeding expectations. Supporting the sharp increase was the outsized gain in defense orders that rose by 20.4%. The orders and shipments of core capital goods, which is a key component of corporate capital expenditures, increased by 2.3% and shipments were higher by 1.8%. The increase was welcome relief that two straight months of decline.
III) Consumer Spending in May increased by a record 8.2%, the first increase since the onset of the COVID-19 pandemic. The re-opening of business activity across several states in the US, unleashed a great deal of pent-up demand as Americans were able to go out and shop for the first time in many months. The sharp increase was also in part fueled by the generous unemployment benefits and stimulus checks.
IV) The University of Michigan Consumer Sentiment Index was down slightly to 78.1 from 78.9 as reported in the preliminary data release. Though the June report shows a nice rebound from the levels seen in April and May, the downside trend is paradoxical to the upward trends seen across the majority of business and consumer sentiment surveys. Is the recent rise in new COVID-19 cases negatively impacting sentiment?
V) Equities Month to Date are lower with Large-Cap, Growth, Technology, and Info Technology leading equity price performance. The laggards for the period are Small-Cap, Value, Utilities and Health Care.
Capitalization: Large Caps -0.80% (YTD -5.68%), Mid-Caps -1.25% (YTD -11.85%) and Small Caps -1.00% (YTD -16.79%). Style: Value –2.78% (YTD -25.59%) and Growth -1.73% (YTD -10.52%). Industry Groups: Technology +3.95% (YTD +11.50%), Information Technology +3.73% (YTD +10.34%), Consumer Discretionary -0.25% (YTD -0.62%), Healthcare -4.94% (YTD -3.41%), Communication Services -3.32% (YTD -3.84%), Consumer Staples -2.87% (YTD -8.05%), Materials -1.28% (YTD -10.23%), REITs -1.90% (YTD -11.58%), Utilities -6.79% (YTD -13.04%), Industrials -1.83% (YTD -17.81%), Financials -2.85% (YTD -25.48%) and Energy -4.76% (YTD -37.03%).
European Equities
The MSCI Europe Index fell last week as the rise of new COVID-19 cases in the US and ECB President Christine Lagarde’s statement that the road to recovery would be arduous, put a damper on equities.
Drivers: I) ECB President Christine Lagarde stated last week, “We probably have passed the lowest point and I say that with some trepidation because of course there could be a second wave.” The ECB is estimating Euro-zone GDP for Q1 and Q2 dropped by -16.0%. Growth is expected to improve in 2H 2020, bringing the annual contraction to -8.7%. Rebounds of 5.2% and 3.3% are projected for 2021 and 2022 respectively.
II) Euro-zone composite PMI survey increased by 15.6 points to 47.5 in June. This is a significant increase from May’s reading of 31.9, and the March and April nadir of 13.6. The loosening of social restrictions has helped fuel the rebound, as the employment index rose 5.3 points to 43.1 and the future output index (measure of confidence) rose by 8.9 points to 55.7. The report shows the recovery differential between services and manufacturing sectors are closing at a rapid rate.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was lower by -1.75% for the week (MTD +3.24%, YTD -13.48%).
Asian Equities
Asian equity markets dropped on the week as COVID-19 cases spiked higher across parts of the US, Asia and Latin America, dampening hopes for a V-shaped economic recovery. The Dow Jones Asia Index was lower by -0.30% for the week, (MTD +5.89%, YTD -9.99%).
Drivers: I) Last week, the China’s government in Beijing raised the COVID-19 emergency level from 3 to 2 for a number of districts that saw an increased in infections. The restrictions imposed by the government included the limiting of public transportation and the suspension of school re-openings. Though the number of new confirmed cases in Beijing have decreased, mobility in the city such as traffic has dropped over the past two weeks.
II) Japan’s Composite PMI surged by 10.1 points to 37.9 in June, lifted primarily by the rebound in the service activity index. The June report shows the lifting of the country’s state of emergency in May, helped output. The manufacturing sector is lagging the services sector, as it dropped by 1.4 points in June. The services PMI report showed growth in all sectors, led by the 15.8-point increase in business activity and 13.7-point jump in the new business index. The improvements highlight the restart of business after the state of emergency was imposed.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +0.14% (MTD +2.89%, YTD -3.89%), the Hang Seng Index was lower by -0.38% (MTD +6.96%, YTD -12.49%) and the Shanghai Composite advanced by +0.40% (MTD +4.46%, YTD -2.31%).
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 0.647% down from 0.699%. The 30-year yield declined last week finishing at 1.373% dropping from 1.461%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose +0.21% last week, MTD +0.63% and YTD +6.14%. The Bloomberg Barclays US MBS TR was higher by +0.03% last week, MTD -0.14% and YTD +3.45%. The Bloomberg Barclay’s US Corporate HY Index was lower by -1.15% for the week, MTD +1.37% and YTD -3.43%.
Commodities
The DJ Commodity Index was lower last week by -2.47% and is up month to date +2.90% (YTD -12.76%). The commodity index declined as oil reserves in the US hit a new all-time high, and a rise in new COVID-19 cases could soften demand for industrial metals and agricultural products.
Performance: I) The price of oil fell last week by -3.22% to close at $38.16 and is higher month to date by +8.04% (YTD -37.50%). Oil prices declined as a new spread of the coronavirus could slow an 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 -0.16% ending at 97.50 for the week (MTD -0.81%, YTD +1.15%). The USD fell back slightly, as the spike in new COVID-19 cases in the US could hamper any economic recovery.
III) Gold rose for a third week in a row, as the rise in new COVID-19 cases in the US led to fears that another economic lock-down could ensue. Gold was higher by +1.61% last week, climbing to $1784.8 (MTD +2.40%, YTD +17.18%).
Hedge Funds
Hedge fund returns in June are higher with the core strategies Equity Hedge, Relative Value and Multi-Strategy in positive territory, while Macro/CTA is lower on the month.
Performance:
- The HFRX Global Hedge Fund Index is higher at +1.87% MTD and down -0.98% YTD.
- Equity Hedge has advanced by +2.36% MTD and is lower by -6.17% YTD.
- Event Driven is up MTD +2.95% and is up YTD +1.90%.
- Macro/CTA has fallen by -0.36% MTD and is lower by -0.79%
- Relative Value Arbitrage is higher by +1.79% and is up +1.12% YTD.
- Multi-Strategy is up MTD by +1.73% and has risen by +0.95% YTD
Data Source: Haver Economics
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