Markets Weekly

03 July 2020

4 minute read

Week ahead

Pandemic developments and data on its economic impact remain the focus of investors’ attention, especially as fears of a second wave of COVID-19 grow. As economies around the world reopen, the focus shifts from dealing with the emergency to aiding recovery. Any containment measures introduced to counter the virus are likely to hurt the potential recovery.

In the US, the economic effects of quarantining measures being lifted should be reflected in June’s IHS Markit final purchasing managers’ indexes. The June initial readings showed signs of recovery, with the index zipping up to 46.8 from 36.4 (where a figure below 50 indicates economic contraction). The services sector component rose by 9.8 points to 46.7. Manufacturing somewhat recovered too, with the data rising by 9.8 points to 49.6.

After the American economy recovered 2.5m jobs in May, investors are looking for further gains this month and will look to the next US June nonfarm payrolls to confirm this. US initial jobless claims have started to fall from their unprecedented record highs. As the economy moves out of lockdown, it is likely this will continue to trend downwards. That said, the reintroduction of restrictions in some states may slow the momentum somewhat.

In China, June’s consumer price index is expected to rise to 2.7% (year on year) from 2.4% in May, with consensus at 2.7%, indicating subdued inflationary pressures.

Chart of the week

Bullish equity markets, cautious investors

Despite the strong recovery in equities and the early sign of an improving economy, investors’ sentiment remains cautious. The American Association of Individual Investors (AAII) runs a weekly survey of its members, asking them about the direction of the stock market over the next six months. The current reading suggests a majority of the respondents are negative when it comes to the short-term path of equity markets.

The chart shows the historical pattern between equity market monthly return and the aforementioned AAII sentiment survey. Not surprisingly, investors tend to be momentum driven. Usually, optimism increases with a rising market while pessimism sets in with markets falling. But the most recent development contradicts this historical relationship. While US equities have recovered strongly, with the Nasdaq notably printing several all-time highs in the past week, the sentiment among investors has recently fallen further, close to its five-year low.

While the latest economic indicators show that the worst is over in terms of economic impact, the very elevated number of daily new COVID-19 cases worldwide suggests that normalisation will be extremely difficult without a vaccine or a drug. Signs of localised second waves in several countries highlight the challenge to get back to normal once lockdown measures have been lifted.

In that context, while equity markets can stay elevated thanks to supportive liquidity and fiscal measures, investors might find it difficult to get positive on the market. The latest volume data also confirms that activity has been slowing down in the equity space.

The tug-of-war between sentiment and liquidity support is likely to continue to drive markets in the short term. We continue to see selective opportunities in equities, preferring “quality” companies with robust balance sheets and a strong business model.

Previous editions of Markets Weekly

Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.

This communication:

Has been prepared by Barclays Private Bank and is provided for information purposes only
Is not research nor a product of the Barclays Research department. Any views expressed in this communication may differ from those of the Barclays Research department
All opinions and estimates are given as of the date of this communication and are subject to change. Barclays Private Bank is not obliged to inform recipients of this communication of any change to such opinions or estimates
Is general in nature and does not take into account any specific investment objectives, financial situation or particular needs of any particular person
Does not constitute an offer, an invitation or a recommendation to enter into any product or service and does not constitute investment advice, solicitation to buy or sell securities and/or a personal recommendation. Any entry into any product or service requires Barclays’ subsequent formal agreement which will be subject to internal approvals and execution of binding documents
Is confidential and is for the benefit of the recipient. No part of it may be reproduced, distributed or transmitted without the prior written permission of Barclays Private Bank
Has not been reviewed or approved by any regulatory authority.

Any past or simulated past performance including back-testing, modelling or scenario analysis, or future projections contained in this communication is no indication as to future performance. No representation is made as to the accuracy of the assumptions made in this communication, or completeness of, any modelling, scenario analysis or back-testing. The value of any investment may also fluctuate as a result of market changes.

Barclays is a full service bank. In the normal course of offering products and services, Barclays may act in several capacities and simultaneously, giving rise to potential conflicts of interest which may impact the performance of the products.

Where information in this communication has been obtained from third party sources, we believe those sources to be reliable but we do not guarantee the information’s accuracy and you should note that it may be incomplete or condensed.

Neither Barclays nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation. Law or regulation in certain countries may restrict the manner of distribution of this communication and the availability of the products and services, and persons who come into possession of this publication are required to inform themselves of and observe such restrictions.

You have sole responsibility for the management of your tax and legal affairs including making any applicable filings and payments and complying with any applicable laws and regulations. We have not and will not provide you with tax or legal advice and recommend that you obtain independent tax and legal advice tailored to your individual circumstances.

THIS COMMUNICATION IS PROVIDED FOR INFORMATION PURPOSES ONLY AND IS SUBJECT TO CHANGE. IT IS INDICATIVE ONLY AND IS NOT BINDING.