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.

Chart of the week

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.


Financing the COVID-19 response

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