Bassanese Bites: RBA to cut to 0.1%? – August 03 2020

Global markets

Global equities saw fit to focus on the positives last week, taking heart in the Fed’s renewed pledge to support growth and in the awe-inspiring ongoing strength in tech sector earnings.

Indeed, in another case of “bad news is good news” the Fed last week again provided a sobering outlook for the economy, while at the same time pledging to provide as much stimulus as needed. That was enough for the market, which pushed equities up and 10-year bond yields down to a new historic low of 0.53%.

Also helping last week, America’s tech giants stepped up to the plate and delivered all that could have been hoped – with Alphabet, Apple and FaceBook all handily beating Q2 market earnings expectations. Overall the Q2 earnings season remains impressive with an above average 80% of companies beating (beaten down) estimates.

Against this, of course, U.S. weekly jobless claims rose for the second week in a row – suggesting the U.S. economy is slowing again – while the country is still battling to contain the virus and Washington is dithering on providing a new round of fiscal stimulus. U.S. Q2 GDP was also a shocker, though no worse than expected, with the economy shrinking at an annualised rate of 33%.

Where does this leave us? The S&P 500 appears to be consolidating just above its recent break-out level, though strength remains heavily dependent on the tech/FAANG stocks. In terms of the week ahead, Friday’s U.S. payrolls loom large, with an expected 1.6 million jobs expected to have been returned in July (after a whopping 4.8 million were added back in June) – though a potentially even more important leading indicator will be whether weekly jobless claims (released one day earlier) rise for a third week in a row.

Otherwise, the market will be hoping that Washington will settle on a new stimulus package, particularly given that the temporary $US600 per week Federal boost to State unemployment benefits ended last Friday. Also critical will be whether America’s COVID battle gets better or worse – while new cases appear to be peaking in recently hard hit states such as Texas and Florida, fear remains that it will now spread to a swag of other states.

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