Bassanese Bites: Double dip? – July 27 2020

Global markets

Global equities tried hard to break higher early last week on the back of more hopeful vaccine news and Europe’s long-awaited stimulus package, though ended the week on the back foot due to renewed U.S.-China tensions and higher than expected U.S. weekly jobless claims.

America’s ongoing COVID-19 battle and Congressional wrangling over the next U.S. stimulus bill also kept markets on edge. Somewhat surprisingly, however, America’s long feared Q2 earnings reporting season is so far proving better than expected, with an above average 80% of the 128 companies that have so far reported beating (heavily reduced) estimates. Key indices of U.S. service and manufacturing activity also both pushed higher in July, though by slightly less than expected.

Despite a largely ‘risk off’ week, the $US fell – not helped by some optimism in Europe. In turn, that saw gold prices rise even further. All up, it appears the good news with regard to economic re-opening is now priced into markets, with the flow-on risk of renewed infections and potential stalling in the recovery now starting to trouble markets. Trump’s decision to renew his attacks on China – justified or not – are yet another risk factor.

In terms of the week ahead, U.S.-China tensions will remain in the spotlight as will progress on the next U.S. stimulus bill. The U.S. earnings season rolls on, with another 192 S&P 500 companies reporting, including tech titans Amazon, Alphabet and Apple on Thursday. Also on Thursday is the first estimate of Q2 U.S. GDP, which is expected to show a shocking 35% annualised decline in growth. But perhaps even more important than this ‘old’ economic news will be the direction in weekly jobless claims.

The Fed also meets this week, with growing speculation that it could soon announce a promise to leave official interest rates untouched until such time as inflation hits its 2% target. To my mind that seems a ludicrous move considering core U.S. inflation has only reached this level around 25% of the time in the past 20 odd years! And ironically such a commitment might actually cause longer-term bond yields to rise rather than fall – though it will likely keep gold prices trending higher.

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