3rd August 2020

Most stock markets sold off last week save for the US which got a boost from some strong earnings amongst the big technology companies. Most other markets were dragged lower by concerns around a second wave of the virus and some poor economic data. This back-drop saw bonds make decent ground and gold push up to a new record high. This week there’s a lot to keep markets busy before things quieten down in August: a raft of corporate earnings, the Bank of England meeting this Thursday and US jobs data on Friday to name but three.

Last Week

  • Stock markets fell last week, with the US being the outlier.
  • Corporate earnings got a big boost from the mega-cap “stay-at-home” stocks.
  • The pound had a decent week as the dollar fell.
  • Gold continued to climb higher.
  • Bond markets held up well.
  • US spending packages went into log-jam.
  • Economic data was very poor.

This Week

  • The Bank of England meet on Thursday (expected to keep rates at 0.1%) but Governor Bailey’s comments will be instructive.
  • Big week for corporate earnings with 133 of the S&P 500 Index and 95 companies from the Eurostoxx 600 Index reporting.
  • Global survey data (PMIs) are released today and Wednesday.
  • Key US jobs data (monthly payrolls) is released on Friday: market expectations are for close to 1.6m jobs to have been created in the US in July.

Last Week’s Highlights​

Stock markets sold off last week, with global share markets falling by 1.8%. This fall was exacerbated for UK investors by the strength in the pound which meant there was no cushion for overseas’ losses. The Japanese market was the hardest hit amongst the majors, with European and UK markets not far behind. US markets performed the best and were actually up close to 2% for the week in US dollar terms. Much of this rise for US shares was due to some strong earnings from the technology sector which was comfortably the best performer and now takes gains for the year (for the tech sector) to over 20%.

Corporate earnings season in the US was very much to the fore last week, with 189 of the companies in the S&P 500 Index reporting. 60% of all companies have reported now and although companies have done a good job of beating expectations (84% of companies have beaten estimates), the bar was set very very low and we’re still expecting to see the worst quarter of earnings growth (at around -40%) since December 2008. The market did however get a big boost from the “stay-at-home” stocks’ numbers which came out on Thursday, with Apple, Amazon, Facebook and Google (which account for circa 16% of the S&P) collectively report over $200bn in Q2 revenue and nearly $30bn in net income. This gave a big boost to markets following all four companies’ CEOs having to testify on Wednesday in front of a congressional antitrust subcommittee.

The UK market fell by just over 3% last week and is now down over 20% for the year. Big index weightings to energy and banks hurt the index last week, with both sectors down over 8%. Airlines were also hard hit as fears rose of travel bans amidst a growing second wave of the virus: IAG was down over 17% and Easyjet was down over 16%. Lloyds was the worst performer amongst the banks, down almost 11.5% on the week, with results showing the bank made a pre-tax loss in the first half of 2020, after setting aside a bigger than expected £2.4bn second-quarter provision to cover a potential hike in bad loans due to the coronavirus. This provision was 60% more than analysts had been expecting and saw the shares drop to eight-year lows.

The pound had another good week and has now risen by over 13% vs the US dollar since the lows in March to take it to a level of 1.3. It is worth noting that this is more dollar weakness than it is a vote of confidence in the UK economy; the pound remains at around 1.1 versus the euro, but it has a decent impact on overseas’ investments given the big weighting (in global markets) to the US stock market.

Gold continued to climb higher and continued to be the asset of choice in the face of rising uncertainty. Bullion rose by 1.4% on the week which took gains for the year to 31.9%. Gold closed out the week at a new record high of $1975/oz.

Bond markets held up well as uncertainty rose, with UK 10-year government yields falling to a new low of 0.086% before closing the week out at 0.1%. This saw UK gilts rise by 0.5% on the week. Returns across other parts of the bond market were more muted but generally positive; credit spreads held in fairly well helping for positive returns to be generated across these investments due to the interest rate sensitivity of the bonds.

There was a lot of focus last week on negotiations in the US Congress about a new stimulus package as the $600/ week payments to unemployed in the US expired last week. Negotiations have stalled for the time being with the Democrats generally pushing for more generous measures to continue and the Republicans generally favouring reduced benefits and something similar to the furlough scheme that we have in the UK. Democrats are looking for a package totalling about $3trn in additional spending, while Republicans are aiming for one closer to $1trn.

Economic data was pretty poor last week. The US economy was seen to contract at an annualised rate of 32.9% (the largest retrenchment in modern history) and the number of Americans seeking unemployment benefits ticked up for the second straight week.

Asset Returns

Equities & Oil: returns are all in base currency, save for Global and Emerging which are in GBP. Bond returns are all shown in GBP. Gold in GBP. Source: Bloomberg.

Gold surged to a new all-time-high last week: closing at $1975/oz

Source: Bloomberg

Rory McPherson
Head of Investment Strategy