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    Weekly multi-asset update: August

    Weekly multi-asset update: August

    28 August 2020 Multi-asset
    Week to 28 August, 2020

    Summary

    • COVID-19 update: diverging virus narratives as vaccine developments progress
    • Dovish Fed announcement as US bipartisan disagreement remains

    Market and economic review

    This week has seen a plethora of headlines as the MCSI global equity index reached all-time highs, led by US equities as a step up in some cyclicals developed. Coronavirus developments have continued to display diverging tendencies, with the US gradually bringing caseloads under control as Europe grapples with a second wave of the virus. Meanwhile, Federal Reserve (Fed) Chair Powell struck a dovish tone as he outlined their longer-run goals and monetary policy strategy at the Jackson Hole summit, with the Fed expected to maintain near-zero interest rates and allow inflation to run above the 2% target.

    On the data front the US labour market continued to struggle with weekly initial jobless claims missing expectations, with focus returning to the stalemate between the Republicans and the Democrats as they continue to negotiate a stimulus deal. On a more positive note and in the face of increasing virus concerns, the Ifo business climate indicator from Germany beat consensus expectations in August with an increase to 92.6 (vs. 92.1 expected). That makes it the 4th consecutive monthly increase since the trough of 74.4 back in April, though it still stands below February levels.

    Meanwhile in the US, Hurricane Laura shook US energy stocks and oil prices this week, with the expected area of impact containing a number of chemical and liquid natural gas producers. Thankfully the storm dissipated substantially, and oil prices came back with the damage not as severe as some had anticipated.

    COVID-19 update: diverging virus narratives as vaccine developments progress

    Global cases reached over 24m this week according to Bloomberg, with figures still being driven by the US, Latin America and India. In Europe we are continuing to see a rise in virus caseloads, with the UK and Italy joining Spain, France and Germany with figures reaching second-wave highs. This was accompanied by diverging containment responses: In France it was announced that masks would become compulsory throughout Paris, whilst the Italian health minister has rejected the idea of another national lockdown, following similar comments from Spain and Germany.

    Meanwhile, caseloads in the US ‘sun-belt’ regions are continuing their steady decline following the imposed containment measures some weeks ago, with death rates also declining. Governor Cuomo of New York announced that 5 states would be removed from the 14-day quarantine requirement, including Arizona. In Asia, India has recorded its highest one-day toll of over 77,000 cases, whilst South Korea is still reporting record second-wave growth and has stepped up social distancing rules.

    In terms of consumer activity, the EU has continued to see a drop off in mobility since early August, whilst in the US mobility and consumer spending appears to be returning at the margin this week following the noted decline in virus cases.

    Against this backdrop, President Trump announced this week that the FDA has issued an emergency use authorisation for convalescent plasma to treat hospitalised patients, which involves using blood plasma from those who’ve recovered from the virus. There were also reports that the Trump administration were considering bypassing normal regulatory standards for the Oxford AstraZeneca vaccine, possibly with another emergency use authorisation. Elsewhere, a phase 1 trial from Moderna showed that the antibody response among those over 55 was comparable to that experienced by younger adults.

    Dovish Fed announcement as US bipartisan disagreement remains

    Meanwhile, the highlight this week was a reveal at the Jackson Hole summit as central bank speakers took the stage: Fed Chair Jerome Powell outlined their longer-run goals and monetary policy strategy. The Fed, he said, will now look to achieve an inflation rate averaging 2% over time, sometimes allowing inflation to run above the target to make up for prior undershoots. The other main change will allow unemployment to run lower than officials had previously tolerated, where the new statement says that policy will now be informed by the FOMC’s “assessments of the shortfalls of employment from its maximum level”.

    The move confirmed to investors that the Fed is likely to keep interest rates at near zero for years to come as it seeks to decisively achieve its inflation goal, adopted in 2012. Powell’s announcement, though not entirely unexpected, marked the completion of a historic shift for a world leading central bank. Instead of a concern that very low unemployment would provoke inflation, they now have moved their focus more solely to low inflation. Fed policy makers meet again in September when they’ll detail how the new strategy will shape their policies, aimed at pulling the U.S. economy out of its worst downturn since the Great Depression.

    Sticking with the US, weekly initial jobless claims remain in the headlights this week, coming in at 1.006m (vs. 1m expected), as the continuing claims number for the week ending 15 August fell to a post-pandemic low of 14.535m. With these figures still well above pre-crisis highs and some existing fiscal support deadlines drawing closer, pressure builds as hope for further fiscal stimulus falters in the background with the Republicans and the Democrats yet to agree on a stimulus deal.

    Outlook

    As we move into September next week, market focus will continue to be on the developments of the coronavirus in the EU and the US, along with the associated impact on high frequency economic activity data. Otherwise, markets will turn their attention to a number of important data releases including the August PMI readings from around the world, as well as the ISM readings from the US, which will give some indication of how the global economy has fared during the month following the flash readings last week. Elsewhere in data releases we will see the US jobs report next Friday, where Bloomberg market consensus is looking for a further c1.5m increase in nonfarm payrolls for August.

    Otherwise, the events calendar is somewhat quieter following Jackson Hole, with the only major central bank announcement coming from Australia on Tuesday.

    Week to 21 August, 2020

    Market and economic review

    The S&P500 closed at an all-time high on Tuesday, surpassing its previous high on 19 February, before the expected economic damage of the pandemic took a hold on financial markets. Markets are backed by unprecedented amounts of both monetary and fiscal support, which appears to be providing investors the security they need to drive asset prices higher. As an example of a continuation of this theme, this week we heard of potential further measures from Germany, which may see the country’s job support scheme extend from one to two years, amounting to additional stimulus of €10bn. Where we haven’t seen such progress is in the US, where bipartisan disagreement remains on the extent to which they should provide more support. On the data front, provisional PMIs for July painted a mixed picture with countries seeing divergent fortunes, whilst the US labour market took a step backwards after the meaningful decrease in weekly claims we saw last week.

    COVID-19 update: US case figures continue to decline as EU second wave impacts mobility

    Global cases reached over 22.5m this week according to Bloomberg, with figures still being driven by the US, Latin America and India. In the EU we are continuing to see a resurgence of virus cases, with the UK, Spain, France and Germany seeing record second-wave caseloads this week. Italy, who were previously appearing to fare relatively well, are now seeing a pickup in cases and have reimposed several containment measures including the mandatory use of facemasks in some outdoor spaces.

    Caseloads in the US ‘sun-belt’ regions are continuing their steady decline following the imposed containment measures some weeks ago, with death rates also declining. Whilst this downward trend continues it is important to note that the decline is from a high base, with roughly 40-50,000 people per day being diagnosed with the virus, compared to c.1.5k daily cases recorded in Germany this week. In Asia we are seeing a divergence of success in virus developments: whilst citizens of Beijing are no longer required to wear masks in public places as cases continue to decline in the capital, South Korea’s outbreak appears to be spreading nationwide as 324 cases were reported on Friday.

    In terms of consumer activity, the EU has seen a drop off in mobility since early August, whilst in the US mobility and consumer spending appears to be tentatively returning following the noted drop in virus cases.

    On the vaccine front, Pfizer and its partner BioNTech has said that a vaccine could be ready for regulatory review by October. Meanwhile, Johnson & Johnson confirmed on Thursday that it plans to test its vaccine on as many as 60k people and is set to begin to do so in late September.

    July PMIs show divergent fortunes, whilst the recovery in the US labour market takes a step backwards

    On Friday provisional PMIs for August were released, providing an indication of how the global economy has performed through the month so far. The composite PMI from the Eurozone fell to 51.6 from a 54.9 print in July, which missed the consensus of 55 by some way. The headline figure can be explained by a fall in the services component to 50.1 from 54.7 in July, which doesn’t come as too much of a surprise given the slowdown we have seen in mobility, retail footfall and restaurant bookings in both France and Germany. The manufacturing component remained stable at 51.7 (down from 51.8 last month).

    Looking elsewhere, Australia’s services PMI dropped significantly on the back of localised lockdowns, falling to 48.1 from 58.2 in July, and the prints from Japan showed little change month on month. The tone in the UK was somewhat more upbeat with both services (60.1) and manufacturing (55.3) beating expectations, resulting in a composite print of 60.3, up from 57 last month.

    It was a similar story of continued recovery in the US, where the manufacturing print came in at 53.6 and the services print at 54.8, both beating consensus expectations and marking a significant increase from last month. The composite printed at 54.7, up from 50.3 in July. Whilst in the US, the weekly initial jobless claims came in higher than expected at 1.11m for the week ending 15th August. This fell short of the consensus forecast of a 920,000, and somewhat undoes the progress made last week when the reading dropped under 1 million for the first time since the start of the pandemic. 

    Outlook

    As we move into next week market focus will continue to be on the developments of COVID-19 in the EU and the US, along with the associated impact on high frequency economic activity data. The main event for markets next week will likely be the Jackson Hole summit on Thursday and Friday, where an array of central bank speakers are expected. In terms of the highlights, we’ll hear from Fed Chair Powell on the subject of the monetary policy framework review, and from Bank of England Governor Bailey.

    Elsewhere, it looks to be a fairly quiet calendar for markets. In politics, next week will see the Republican convention in the US with just over 10 weeks to go until the US presidential election. Meanwhile on the data front, the weekly initial jobless claims in the US will continue to get attention, particularly after this week we saw the biggest increase in claims since the start of the pandemic. Otherwise, earnings season draws to a close next week with the few remaining reports from the S&P 500 and STOXX 600.

    Week to 14 August, 2020

    Summary

    • COVID-19 update: EU virus resurgence continues, impacting mobility
    • China’s July activity data disappoints, whilst the UK sees a Q2 GDP contraction of -20.4%

    Market and economic review

    Global cases reached over 20m this week, as developments in the COVID situation remain at the forefront for markets. Whilst the trend in the number of cases recorded in the US are starting to see a marginal improvement, there is a stalemate between the Democrats and Republicans on the terms of any further fiscal support being offered.

    Aside from that, July activity data for China was released towards the end of the week, which was slightly disappointing. In other data releases the UK saw a large contraction in GDP, and the recovery in the US labour market continued with an impressive weekly decrease in initial jobless claims. 

    COVID-19 update: EU virus resurgence continues, impacting mobility

    Global cases reached over 20m this week according to Bloomberg, with figures still being driven by India, Latin America and the US.  In the US, we are seeing a continuation of the marginal improvement of caseloads in the ‘sun-belt’ states, whilst hospitalisations in some of these regions continue a downward trend.

    Elsewhere, in the EU there is a resurgence in cases, particularly in Germany, France and Spain which have seen their highest new daily cases since the first wave. Further containment measures continue to be announced with Paris mandating face masks to be worn outdoors in the busiest streets, whilst the has UK imposed a mandatory 14-day quarantine on travellers from France, Malta, Netherlands, Monaco, and a number of other countries. Elsewhere, Australia has seen a significant improvement in cases from the Victoria outbreak as containment measures continue to take effect.

    Meanwhile on the vaccine front, Russia has become the first country that has granted regulatory approval for a vaccine, whilst US biotechnology company Moderna reached a deal with the US to manufacture and distribute 100m doses of its experimental vaccine. Turning to economic mobility, and we continue to observe a correlation with changes in case growth, seemingly irrespective of official lockdown measures. In the US mobility continues to rise with the declining caseloads, whilst EU mobility has faltered with the virus resurgence. 

    China’s July activity data disappoints, whilst the UK sees a Q2 GDP contraction of -20.4%

    As China was the first country to suffer the effects of the pandemic, and the first country to go into and move out of lockdown, close attention is paid to economic data releases given what this may mean for other areas of the world. With that in mind, China’s July activity data released on Friday was a disappointment. Industrial output missed expectations rising by 4.8% yoy (vs an expected 5.2%), and retail sales also undershot, printing at -1.1% yoy (vs 0.1% expected). Fixed asset investments came in line with expectations at -1.6% yoy.

    Lagging China in the COVID-timeline is the UK, where the economic impact of the pandemic was made clear with its Q2 GDP release. This showed a contraction of -20.4%, which is considerably worse than the contraction seen in other countries such as the US and Germany. On a more positive note, there may be a strong recovery in Q3, following what has been a significant pick up in high frequency data across many industries.

    From the US, there was a significant fall in the weekly initial jobless claims, a number we have reported since the beginning of the pandemic. They came in at 963,000 vs an expected 1.1m for the week ending 8 August, which is a big step in the right direction for the recovery in the US labour market. Continuing claims were on a similar track, with the reading coming in at 15.5m vs an expected 15.8m.

    Outlook

    It’s a light calendar for markets next week as we move through the summer, but the flash PMIs on Friday will be a key highlight in terms of how the global economy has performed into August. These will follow a July PMI reading of above 50 for all the countries, except Japan. Elsewhere in data releases, markets will continue to follow the US weekly initial jobless claims on Thursday following last week’s drop below one million claims for the first time since the pandemic began.

    Turning to politics and with less than three months until the US presidential election, former Vice President Joe Biden will formally accept his party’s nomination for president next week at the Democratic convention. Meanwhile across the Atlantic, another round of negotiations between the UK and the EU will take place following a more positive tone from the UK’s chief negotiator this week.

    From central banks, next week sees the Federal Reserve and the European Central Bank release minutes from recent meetings, along with emerging market monetary policy decisions from both Indonesia and Turkey/

    Week to 7 August, 2020

    Summary

    • COVID-19 update: US case figures continue to decline as the second wave picks up in the EU
    • PMIs point to a continued recovery, US weekly initial jobless claims bounce back and political tensions simmer

    Market and economic review

    Market sentiment has been driven by a number of factors this week with virus figures pitted against economic data releases. COVID-19 developments have been varied with the US continuing to bring caseloads under control, whilst Europe showed some signs of a second wave.

    Meanwhile, with the majority of S&P 500 companies having already reported earnings and ‘big tech’ still very much driving performance in the US, data releases this week continued to frame the investment backdrop; final July PMIs struck an expansionary note and US employment figures also improved. Meanwhile, political tensions between the US and China continued to flare up as hope of further fiscal stimulus faltered in the background with the Republicans and the Democrats yet to agree on a deal.

    Covid-19 update: US case figures continue to decline as the second wave picks up in the EU

    Global cases reached over 19m this week according to Bloomberg, with figures being driven by India, Latin America and the US. In the US, caseloads are still being led by the ‘sun-belt’ states, although there is a downward trend in cases at an aggregate level, whilst deaths appear to have peaked.

    Elsewhere, in the EU there is a resurgence of the virus with Germany, France and particularly Spain grappling with a flare-up in caseloads. Whilst the pickup in cases is far from first wave rates, it does highlight the difficulties of supressing the virus without a vaccine. On that front, positive news releases continue to buoy markets, with Novavax announcing that their experimental vaccine generated antibody responses four times higher than those seen in people who had recovered from the disease. Meanwhile, further containment measures continue to be announced with the UK imposing localised lockdown measures and Amsterdam enforcing masks in crowded areas.

    PMIs point to a continued recovery, US weekly initial jobless claims bounce back and political tensions simmer

    As we moved through the week, economic data releases continued to paint a balanced picture, with some backwards-looking indicators further revealing the improvement in the state of the global economy. Following the preliminary PMI prints hitting expansionary territory last week, finalised PMI data this week in both the euro area and the US tracked closely to the flash readings. Meanwhile in the US, the ISM services reading was much stronger at 58.1 versus the 55.0 estimate, perhaps providing some indication of a return to activity as the rate of infection shows some signs of decline.

    Staying with the US, initial weekly jobless claims fell more than expected last week to the lowest level since the pandemic started in a broad decline across nearly all states, suggesting that the labour market is improving. The print came in at 1.19m versus an expected 1.4m and follows two consecutive weeks of increasing figures. These prints were followed by the much-anticipated US payroll figures for July which showed a 1.8m increase versus consensus estimates of +1.6m after last month’s blowout 4.8m increase, reducing July’s unemployment rate to 10.2% from 11.1% in June.

    In other US developments, US-China tensions continue to boil ahead of Phase 1 trade deal talks in mid-August as President Trump imposes further sanctions on Chinese state-owned companies, following the reciprocated closure of the US Consulate in Chengdu, China.

    Outlook

    The calendar next week looks to be a lighter one as market sentiment continues to be driven by virus developments across the globe, along with the associated impact on economic activity shown in the high frequency data. Whilst we are in the tail end of the earnings season, a small number of company prints will be released next week.

    In terms of data, Tuesday will see employment-related prints for the UK and Europe, along with the closely watched US weekly initial jobless claims on Thursday. Next week will also offer further insight into the extent of the economic contraction in the UK, with June’s monthly GDP reading as well as a preliminary Q2 GDP reading. We will also see the preliminary Q2 GDP release from the Euro area.

    Turning to US politics, Democratic presidential nominee, Joe Biden, is expected to announce his choice for the vice presidency next week. Meanwhile negotiations for a new US fiscal bill will continue, after significant differences remained this week between the Democrat and Republican proposals.

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