17 Jul 2020
Markets higher on vaccine optimism
Markets
- Local and global equity markets moved higher this week buoyed by optimism regarding promising results for both treatments and vaccines for the virus.
- Consensus expectations have earnings falling by more than 40% in the 2nd quarter for the 500 largest US companies, which would be the biggest quarterly profit decline since the GFC. Consensus data has the European share market equivalent reporting a 54% drop in 2nd quarter profits, which would be the worst ever reading for the region. Interestingly, the US market is up more than 40% from its March lows.
- Chinese stocks took a breather this week following a very strong rally over the last couple of weeks which was engineered by a government edict calling for more retail stock buying. The move was a show of support and strength for the local market in light of the economic and foreign policy predicament the country now finds itself in.
- In local stock news, iron ore miners rose strongly this week, with Fortescue hitting all-time highs, on continued optimism relating to the sky-high ore price given ongoing supply issues in Brazil and expectations of further Chinese stimulus.
- It was take your medicine season in the Australian oil and gas sector, with Woodside, Oil Search, and Origin all taking write-downs and impairments on the carrying values of their assets. Woodside also reported weak quarterly output.
- OPEC countries agreed to taper oil production cuts over the next couple of months which will increase global supply. The tapering might be short-lived given the slowing of re-opening in some parts of the world, which should see a fall in demand.
Economics
- Victoria’s 2nd lockdown puts Australia’s economic recovery on hold considering the state contributes 20% to the national economy. This, along with any other state lockdowns, would likely push Australia’s economic recovery out to 2023/24.
- Australian consumer sentiment fell by more than 6% in July after two consecutive monthly gains, with the biggest falls reported in Victoria. Those surveyed were most concerned about the economic outlook whilst job security fears also rose.
- PM Scott Morrison announced details of a new $2 billion JobTrainer plan aimed at reskilling and upskilling Australians. The scheme will help Australians train for areas where skills are needed, including those forced to change industries. Long overdue (ie. was already needed pre-virus) but great to see it come into effect in this time of need. The government also announced an extension to the apprentice support package.
- Australia’s unemployment rate rose to 7.4% in June, with the number of unemployed people rising by more than 69,000 to sit just below 1 million people unemployed, according to the Australian Bureau of Statistics. There was a big increase in part-time employment in the month showing some positive signs which also included a rise in the participation rate and hours worked. However, absent JobKeeper, the unemployment rate would be closer to 13% and the underemployment is markedly higher.
- CBA household card spending data eased last week but is still 7.2% higher than a year ago. Goes to show the effect of locking consumers up at home (boredom) with JobKeeper and large JobSeeker payments continuing to flow.
- US manufacturing and services sectors have bounced back into expansionary territory in June, the 2nd straight month of improvement, after dropping to an 11 year low in April. This follows on from 2.7 million jobs added in May and 4.8 million June, but comes off the 22 million jobs lost in March and April.
- China’s economy saw an upturn in the 2nd quarter following re-openings and expansion in the manufacturing sector, reporting a 3.2% growth which beat forecasts for a 2.1% print and well above the 6.8% contraction in the previous quarter. China retail sales were weaker than expected, whilst industrial output and fixed asset investment both came in better than expected.
Politics
- US-China tensions escalated with the US sanctioning more top Chinese officials, approving an upgrade to Taiwan’s air defences, and formally rejecting most of China’s sovereignty claims in the South China Sea whilst vowing to strengthen US policy in the maritime region in accordance with international law. The US recently sent two navy aircraft carriers to the area. The Italians surprisingly also spoke out against the Chinese, pledging their support to the residents of Hong Kong and calling for support from others.
- Virus cases continued to rise in the US this week, recording back to back largest single-day increases, with some states re-imposing restrictions on re-opening (California went particular hard on this front), whilst Hong Kong closed its schools. At this stage, it’s looking increasingly likely that US schools will remain closed through much of this year. It’s unfortunate on the schools front, as the scientific data is pretty clear here. Balancing that negativity was more positive news on the drug treatment and vaccine front, with promising results in vaccine trials.
- Expectations are high that European leaders will agree on a recovery fund of $1.2 billion for virus hit economies in the region.
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