It was another eventful week for world markets with brewing US-China tensions remaining the elements of caution, taking stocks on a wild swing. Investors also kept a close eye on corporate earnings, as the quarterly reporting season got underway and looked ahead to the outcome of the EU Summit, where leaders as of writing, continue to struggle to agree on a 750-billion-euro recovery fund for the bloc. The summit is set to continue for a fourth consecutive day on Monday (July 20).
Major indices ended a week which marked the unofficial start of the earnings season mixed. The S&P 500 marked its third consecutive week of gains and briefly erased its year-to-date losses, before coming under pressure from profit-taking in most of the tech and Internet giants. The Dow Jones also rose for third week in a row as industrial stocks rallied. The tech-heavy NASDAQ slipped, with some of that index’s technology stocks enduring a rough week.
In economic news, manufacturing data were generally positive. June housing construction activity improved but at a slightly slower pace than expected, June retail sales beat expectations but July consumer sentiment unexpectedly deteriorated. Weekly jobless claims also surprised on the downside, falling only slightly from the previous week. The number of U.S. workers applying for jobless benefits is still elevated at over a million claims each week, indicating that the labour market faces a long road back before it can return to normal.
On the earnings front, JP Morgan, Goldman Sachs and Morgan Stanley reported earnings exceeding expectations and made substantial provisions for loan losses. Meanwhile, Federal Reserve officials warned on "thick fog" ahead for U.S. economy as recovery concerns deepen.
Japanese equities posted gains for the week as the Bank of Japan (BoJ) left interest rates unchanged in line with expectations. The central bank believes that the economy will contract 4.7% in fiscal 2020, which ends March 31, 2021. However, BoJ Governor Haruhiko Kuroda told reporters that "there is no doubt that the economy is bottoming out and is on a recovery phase.” He added that the bank is ready to ease further policy measures, including cutting interest rates. On the data front, Japan's industrial production was down 8.9% in May
In China, stocks slumped in a volatile week as traders kept a watchful eye on rising tensions between Washington and Beijing. Economic news was mixed. China said its economy returned to growth, growing 3.2% in the second quarter this year, compared to a year ago. Industrial output also expanded by 4.8% in June. However, retail sales dropped 1.8% on-year, sending the Shanghai Composite Index significantly lower.
Liu Aihua, the spokesperson for the National Bureau of Statistics (NBS) stated on Thursday that the economy will keep recovering in the second half of 2020. Yi Gang, China’s central bank chief urged the IMF to issue hundreds of billions of dollars of liquidity to its 189 member countries through a general allocation of Special Drawing Rights (SDRs).
Markets in Australia moved higher for the week despite extension of border restrictions in two states. The local sharemarket rallied on Wednesday. Iron ore price jump fuelled the rally as the commodity soared to nearly $US110 per tonne on Tuesday, a level not seen since August 2019. On Thursday, ASX gave up its early gains closing 0.7% lower after jobless rate rose to a 22-year high 7.4% in June. Australian shares rose into the weekend as investors shrugged off the weak cues overnight from Wall Street.
European shares rose over the week with eurozone industrial production bouncing higher in May and dismal ZEW surveys. The mood was cautious as European Union leaders were deadlocked over the terms of a proposed 750 billion euro stimulus package heading into a special weekend summit meeting. The size of the fund, distribution criteria, and the proportion of grants to loans are the main areas of disagreement. The EU leaders failed to reach a deal on Sunday for the third day in a row.
As widely expected, the European Central Bank (ECB) kept the interest rate and the emergency coronavirus stimulus program unchanged. ECB President Christine Lagarde said on Thursday that the bank's monetary policy is "in a good place" and there is "no reason" to revise it at the moment. In her introductory statement, she noted that incoming data showed economic activity resuming from a depressed level and amid a ‘highly uncertain’ outlook. Speaking to the press, she also said that the ECB assumes the EU will adopt the proposed coronavirus economic relief plan and commented that the central bank expects most of the funds to come in the forms of grants, rather than loans.
In the UK, GDP dropped 19.1% in three months to May, while is set to drop between 20% and 25% in the second quarter, the National Institute of Economic and Social Research (NIESR) said in a report on Tuesday. The Office for Budget Responsibility (OBR) warned on the economy will not return to its pre-crisis level before 2022. Industrial production rose 6% MoM in May while trade deficit was down to £1.7B in quarter to May. The unemployment rate rose 3.9% in May, producer prices dropped 0.8% YoY in June and inflation climbed 0.6%. Meanwhile, the country seeks to raise record £385 billion from debt markets.
Talks continue as companies file for bankruptcy, millions of people are still applying for unemployment benefits, conflicts around the world are multiplying as well as misunderstandings, one nation against the other. We have entered a dangerous path and we have to be very careful to get out of it.
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The content of this review is for informational purposes only and should not be interpreted as specific investment advice.