Pictet North America Advisors

2020 Weekly Views — June 29

Pictet North America Advisors 2020 Weekly Views — June 29
Pictet North America Advisors

2020 Weekly Views — June 29

Pictet North America Advisors 2020 Weekly Views — June 29

Market update

10 million cases

The S&P 500 closed the week at 3’009.05, -2.86% lower. The Dow Jones closed at 25,015.55, -3.31%, with the Nasdaq slipping -1.90%. The volatility index VIX closed the week at 34.73 down from 35.12. The Euro Stoxx 600 lost -1.95%.

The 10-year UST closed at 0.64% down from 0.69% a week before. The yield curve flattened with the yield spread between the 3-month and 10-year UST down at +49bps. Corporate Bond spreads: Investment Grade tightened 2bps at 186bps and High Yield widened 29bps to 701bps. German 10-year Bunds yield closed at -0.48% down from -0.41% a week ago. In Europe, Corporate Investment Grade spreads widened 6bps to 155bps and High Yield widened 23bps to 542bps.

The US Dollar Index (DXY) depreciated -0.19% during the week and closed at 97.43. The Euro closed at 1.1219 (+0.37% weekly); the Yen depreciated -0.33%, closing at 107.22 and the Swiss Franc appreciated +0.48%, closing at 0.9477. Gold closed at $1,771.29 appreciating +1.57%. Oil ended lower: Brent closed at $41.02 (-2.8%) and WTI at $38.49 (-3.2%).

Macroeconomy

Covid-19 update
The weekly average number of US Covid-19 cases surpassed the heights of the spring with 45,400 new cases on Saturday, a new record. Considering the recent increase in cases, Florida, Arizona and Texas slowed down their plans of reopening and easing lockdown measures. In terms of the effective transmission rates (Rt), 33 US states now have Rt values over 1.0. The daily increase in net cases (total cases, less fatalities and less recovered) remains at a 1.4% d-o-d national average. However, the trends in some states are still worrying: California 2.8%, Florida 4.1%, Louisiana 3.7% and Texas 6.9%, all in acceleration compared to 5-days ago. In Europe, Germany saw the daily increase in net cases easing at 0.3%, while Italy is at -2.8%, Spain at 0.4%, France at 0.2% and Switzerland at 2.3%. In emerging economies, with a few exceptions, net cases are tending to increase. So far, the surge in new cases in different parts of the world did not translate into an acceleration in fatalities. At a world level, the daily death rate eased slightly from 1.2% d-o-d (5-day average) to 1.0%. World daily flights continue to be depressed at -61% compared to pre-crisis levels. Only Chinese domestic flights are close to normal (-20%), although the number declined recently.

US-China relations
On Monday, White House Director of Trade and Manufacturing Policy Peter Navarro declared that the US-China trade deal was "over," to later clarify that his remark had referred to the "lack of trust" in the Chinese administration. President Trump later confirmed the trade deal was "fully intact". Additionally, it was reported that China’s imports of US goods through May reached roughly 19% of the total target for 2020 set in the phase 1 trade deal. China purchased 22.1% of targeted manufactured products, 20.8% of targeted agricultural products and 3.1% of targeted energy products.

PMI data
The euro area Flash Composite PMI rose from 31.9 in May to 47.5 in June with the contraction in manufacturing and services slowing for the second consecutive month. Signs of supply chain disruption remained apparent in June as delivery times continued to normalize at a very slow pace. Markit noted “marked” factory headcount reduction in June as producers scaled-back operating capacity.

Economic data
Consumer spending in the US rose +8.2% in May, according to the US Commerce Department, the largest monthly increase on record. This followed the largest fall on record in April (-12.6%). At the same time, personal income fell -4.2%, the most since January 2013. This drop followed a record +10.8% increase in April, which coincided with extraordinary fiscal measures to cushion against covid-19 hardship. Last week initial jobless claims came in at +1.48m with weekly ongoing claims for unemployment declining modestly -767k to +19.5m.

IMF forecast
The IMF’s World Economic Outlook is projecting global growth at -4.9% in 2020, 1.9 percentage points down from its April 2020 forecast. This was attributed to the more negative impact on activity of the covid-19 pandemic and a more gradual recovery than previously anticipated. For 2021, the IMF projects global growth at +5.4%, compared to the +5.8% projection laid out during the April update.

Highlights

Banks stress test
On Thursday, the Federal Reserve published the 2020 stress test results. Big banks will be required to suspend share buybacks for the third quarter (most of them already paused repurchases in Q2) and limit dividend payments at their current levels. The Fed found that several institutions could get close to minimum capital levels in scenarios tied to the coronavirus pandemic and is requiring banks to resubmit updated capital plans later this year.

Wirecard
A week after auditors found a €1.9bn hole in its balance sheet, German payments company Wirecard filed for insolvency proceedings on Wednesday. The company processes tens of billions of euros in credit and debit transactions every year. After the admission by the company that the money may have never existed, shares fell nearly 90% wiping out almost $12bn of market value. CEO Markus Braun was arrested on suspicion of falsifying accounts at the company.

Chesapeak bankruptcy
On Sunday, Chesapeake Energy Corp. filed for Chapter 11. After months of negotiations with creditors, the company listed assets and liabilities in the range of $10bn and $50bn respectively, and more than 100,000 creditors. The company also entered into an agreement to eliminate about $7bn in debt and secure $925m in debtor-in-possession financing.

What to watch

Monday: EurozoneConsumer Confidence (June); Germany CPI (June); US Pending Home Sales (May)

Tuesday: Japan Industrial Production (May); Japan Jobless Rate (May); UK GDP (1Q); CPI Eurozone, France and Italy (June)

Wednesday: Markit Manufacturing PMI Eurozone, Germany, France, Italy, UK, US (June Final); Germany Unemployment Rate (June); US ADP Employment Change (June); US ISM Manufacturing (June)

Thursday: Eurozone Unemployment Rate (May); US Unemployment and Non-Farm Payrolls (June); US Initial Jobless Claims (June 27th); US Factory and Durable Goods Orders (May)

Friday: Markit Services and Composite PMI Eurozone, Germany, France, Italy, UK (June)


Investment team ― Pictet North America Advisors