Insight multi-asset weekly update
Weekly Review: 03 July 2020
- COVID-19 update: US regions see record daily cases while other regions supress a resurgence in case growth
- PMIs continue to point to an economic recovery, while the US payrolls for June exceed market expectations
Market and economic review
This week saw the global COVID-19 case count pass 10m, as problem areas in the US continue to dominate headlines. Despite there being pockets of concern, economic data continue to suggest an ongoing recovery, with both PMI releases and the US payrolls report for June exceeding market expectations. We also saw China’s National People’s Congress pass the new Hong Kong security law, to become effective from 1 July, sparking concerned responses from several countries, including the US, the UK and Australia.
Against the improving economic backdrop, equity markets continued to grind higher, with the MSCI World Index adding 3.27% over the first four days of trading. However, markets were softer on Friday as at the time of writing. In fixed income, US Treasury yields moved slightly higher, but the move was trivial and yields continue to trade in a tight range. German bund yields initially followed suit before bucking the trend as the week progressed. Corporate bond markets traded in line with equities, with spreads moving tighter over the week. Lastly, it was relatively quiet in the FX space, with the US dollar finishing the week almost flat.
COVID-19 update: US regions see record daily cases whilst other regions supress a resurgence in case growth
The global COVID-19 case count this week passed the 10m mark according to Bloomberg, with over 500k fatalities. The main virus focus has remained on developments in the US as we continue to see worrying caseloads. The US is still seeing record daily cases in aggregate, with the ‘Sun Belt’ state culprits of Florida, Arizona and Texas being the primary drivers, where some hospitalisations have reached the highest levels so far in the pandemic. Impacted states are now rolling back or halting reopening plans and imposing stricter measures, such as wearing masks as mandatory. While US infections are being driven by some southern states, infections in other regions aren’t completely flat, with New York also halting reopening in some areas. Although infection rates are ticking upwards in the US, death rates have not risen as much as would be expected - this is likely due to a higher infection rate in younger people who have a much lower expected mortality rate.
Elsewhere, countries previously struggling to contain the virus such as India and Brazil are seeing a slowing in case growth. Meanwhile, some other global regions appear to be successfully supressing a resurgence of cases. While still experiencing pockets of case growth from a low base; China has reinstated regional lockdown measures in Beijing to control a small breakout, and several EU regions continue to open their boarders to tourists.
High frequency data in the US continues to highlight that states seeing case growth are experiencing a corresponding mobility and activity drop-off ahead of any reversals of lockdowns or pausing of lifting measures, indicating sustained ‘self-lockdowns’. Meanwhile, mobility for the three largest countries in the EU, with comparatively lower and more stable case growth, has now increased to levels above the US, and from a lower trough.
PMIs continue to point to an economic recovery, while the US payrolls for June exceed market expectations
Positive news on PMI releases continued, having seen many prints beat market expectations last week. In China, the manufacturing PMI increased to 50.9, from 50.6 last month, while the non-manufacturing PMI printed at 54.4, an improvement from 53.6 last month. This left the composite at 54.2. Delving into the numbers, there was a broad improvement in the manufacturing PMIs with all of output, new orders and new export orders all rising month on month. Later in the week, the China Caixin PMI numbers were also released: manufacturing showed an improvement, rising to 51.2 (vs 50.7 last month), and then the Caixin Services PMI came in at 58.4 (vs 55.0 last month, and its highest print since April 2010).
US June payrolls also significantly beat market expectations. The market was expecting a further 3.2m jobs to be added, however the number came in at 4.8m. Looking through the detail, it was the leisure and hospitality sector which saw major gains, which is not surprising given the lifting of lockdown measures.
Next week markets are likely to continue to focus on the global progression of COVID-19, with particular attention to the development in the US and how case pickup translates to both fatality rates and a slowing of mobility.
One of the main data releases next week will be the ISM non-manufacturing index on Monday, along with the services and composite PMIs, following the upside surprise in the ISM manufacturing release this week. Elsewhere, we will see the release of eurozone retail sales for May, while Germany, France and Italy will all be releasing their industrial production data for May through the week.
We will also see a central bank announcement from the Reserve Bank of Australia on Tuesday.
In the UK, Chancellor Sunak will be announcing new policy measures as the government seeks to boost the economic recovery. Meanwhile, discussions between the UK and EU on their future relationship will continue through next week.
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