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Weekly World Markets Review (20-24/07/2020)

Indecisiveness and doubt dominate markets
posted onJuly 25, 2020
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Major world stock markets  fell this week on concerns over escalating diplomatic  Chinese/American tensions. A slew of upbeat economic data in Europe and out of the U.S. as well EU's agreement on a recovery fund were not enough to brighten investors' mood. The latest developments on the political front have the markets looking confused and divided. 

AMERICA
After a bright start to the week that saw the S&P 500 get back to positive territory for the year and  risk sentiment remaining buoyant, the rally began to lose steam. The major indices ended mixed for the week after the US and China exchanged orders to close consulates in each respective country,  generating anxiety among investors.

The serious escalation in bilateral tensions was followed by the first US weekly jobless claims increase since March, raising worries that the economic recovery is beginning to stall. Initial unemployment claims from the previous week rose from 1.31 million to 1.41 million.

On the positive side, existing home sales jumped at a record pace and new home sales notched a 13-year high, while the Leading Index indicated continued recovery in economic activity.

The US economy is still on a "self-sustaining" path to a V-shape recovery, Director of the National Economic Council Larry Kudlow claimed on Thursday.

In Canada,  the TSX slipped lower this week and is still down more than 6% year-to-date. 

world markets Nasdaq

ASIA/PACIFIC

Most Asian markets declined. Japanese stocks were relatively unchanged in the holiday-shortened trading week as markets in Japan were closed Thursday and Friday for national holidays. In economic news, consumer prices in the country were up 0.1% YoY in June while the trade deficit stood at ¥269B last month.

The au Jibun Bank Flash Japan Manufacturing Purchasing Managers’ Index (PMI) rose to a seasonally adjusted 42.6 from a final 40.1 in June, staying below the 50.0 threshold that separates contraction from expansion. Bank of Japan minutes revealed that some members pointed to the signs that economy may be "bottoming out," also noting the volatility in stock markets remains at a high level. 

Mainland Chinese stocks declined for the week as the US ordered China to close its consulate in Houston, Texas and Beijing blasted Washington over the move. In central bank related news, the People's Bank of China (PBoC) announced on Monday that its one-year Loan Prime Rate remained unchanged at 3.85%.

No major economic readings were released during the week but China's car output and sales fell in first half of 2020 while Chinese state-owned firms' H1 profit  was down 38.8% YoY. Meanwhile, President Xi Jinping promised on Tuesday to continue supporting the economy.

In Australia, the  ASX had its best close in more than four months on Tuesday but fell for the week as worries about rising U.S.-China tensions weighed on the markets. Australia's budget deficit was A$85.8 billion in 2019-20, with the deficit  projected to grow further to A$184.5 billion in 2020-21.

Credit rating agency S&P said Australia's 'AAA' rating can absorb the growing deficit. Reserve Bank of Australia governor said that the government can borrow more to aid the economic recovery of the country. Minutes of RBA showed there is no need to adjust package of virus measures. On the data front, Australian June retail sales rose 2.4% m/m, extending rebound. 

SSE Composite Index

EUROPE
European shares fell as positive news on an agreement on the EU recovery fund was countered by rising US-China tensions. After almost five days of a marathon summit- one of the longest in EU history- EU leaders agreed to a deal on a €750 bn stimulus plan.

The deal centres on a €390bn programme of grants (instead of the proposed €500 billion) and a further €360bn in low-interest loans. The "frugal four", Sweden, Denmark, Austria and the Netherlands, fought fiercely to reduce the portion of grants in favour of loans and also secured sizable budget rebates to lower their annual net contributions.

The new agreement means the European Commission can now raise billions of euros in global financial markets on behalf of all 27 states.  Supporters of the plan say it is a hugely symbolic demonstration of solidarity in response to the pandemic while opponents say the final outcome is a messy bundle of compromises. 

DAX index

Beyond a debate about the size of the recovery fund for countries hit hardest by the coronavirus pandemic, leaders had to haggle over the EU’s next budget. They finally agreed a new EU budget of nearly €1.1trillion for 2021-2027, creating combined spending power of about €1.8 trillion.

In the forex market, the euro jumped on Wednesday, achieving its highest level against the US dollar since October 2018. The Eurozone's single currency reached its intraday high of $1.15845, marking its third consecutive day of rising, lifted mainly by the recovery package deal and budget agreed by the EU leaders.

In the UK, where  retail sales were much stronger than expected in June, growing 13.9% sequentially, Bank of England's (BoE) Haldane said he doesn't exclude negative rates while BoE's Tenreyro warned that the economic outlook is still uncertain. Meanwhile  BoE's Brazier said the UK should encourage long-term investing.

On the Brexit front, Jonathan Hall, appointee to the Bank of England’s Financial Policy Committee, said Brexit will make markets less efficient but it won’t be disastrous for Britain’s economy. UK and EU officials told The Times that a comprehensive Brexit deal could be finalized in September. 

A lot of data came out this week but investors are not convinced. They are afraid that behind the data that may reassure some, there may be even more data which will come out to disappoint others. We are afraid that until the date of Nov.3 when US elections will take place, things will be up and down. And if China-Russia-US relations are not sorted out, things will continue to be dark. 

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The content of this review is for informational purposes only and should not be interpreted as specific investment advice.