Markets Weekly

10 July 2020

4 minute read

Week ahead

As financial markets look for continuing signs of economic recovery, second-quarter gross domestic product (GDP) data from China and the UK’s May GDP release will further hint at the state of the recovery. This is especially so in the UK, with some containment measures being lifted. China removed containment measures in the first quarter (Q1), with signs that an economic rebound appears to be on the cards for Q2.

Investors will also have their eyes peeled for the European Central Bank (ECB) meeting on Thursday. While the deposit rate is unlikely to be reduced further into negative territory, ECB President Christine Lagarde will probably reiterate the need to provide continued support through asset purchases. She may also hint at the need for fiscal cooperation across the bloc.

The two superpowers rely heavily on their consumers. Retail sales data in recent months show slight signs of recovery for both China and the US, and June’s retail sales will be a noteworthy data point. The numbers will flag the effect that the US moving firmly out of lockdown measures had on sales, despite the noticeable rise in cases in states such as Florida and Arizona in recent weeks.

Unlike the US, furloughed employees are not termed unemployed in the UK. This helps to explain why the latter’s unemployment rate remains close to record lows despite the pandemic and quarantining measures. While May’s employment data is likely to present a similar story, it will also likely show a continued fall in workers being employed and in vacancies.

Thursday’s US initial jobless numbers will continue to be a focal point in determining the health of the recovery. Prior weeks have seen falls in the number of jobless claims from March’s unprecedented high, though they remain extremely elevated.

Chart of the week

Can earnings optimism be sustained?

When writing about an upcoming earnings season, we have grown accustomed to discuss how low the bar is for companies to surprise positively. This time around though the set-up is different: the bar does not really exist.

Consensus expects a year-over-year earnings decline of 43% in the April to June period for the S&P 500 (see chart) and -55% for Europe’s Stoxx 600 in Europe. But whether earnings plunge by 50% or 40% shouldn’t affect financial markets much. Indeed, although the surprise factor (the difference between expected and actual earnings) is likely to be significantly higher than the usual +4%, second-quarter (Q2) earnings look set to be very low.

This earnings season may be most relevant for investors in trying to gauge whether the optimism reflected in equity markets is justified. With consensus expecting next year’s earnings to bounce back to 2019 levels, any mention that the recovery may take longer than expected could hit sentiment.

Unfortunately, given the current uncertainty, chief executive officers will be in a difficult position to give accurate guidance. Instead, investors may have to be content with short-term trends. On that front, exit rates should be encouraging as the base effects caused by the shutdown of many economies in the first half of the quarter gave way to a strong rebound in June.

At the same time, the resurgence of new cases in specific parts of the US in particular are too recent to have significantly compromised the rebound.

Second-quarter earnings appear set to contract at the fastest pace since the last quarter of 2008, during the global financial crisis. But with markets primed for a strong recovery, it would not be a surprise if investors continue to see the glass half full.

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