Pictet North America Advisors

2020 Weekly Views — July 27

Pictet North America Advisors 2020 Weekly Views — July 27
Pictet North America Advisors

2020 Weekly Views — July 27

Pictet North America Advisors 2020 Weekly Views — July 27

Market update

Earnings season in full swing

The S&P 500 closed the week at 3,215.63, -0.28% lower. The Dow Jones closed at 26,469.89, -0.76%, with the Nasdaq down -1.33%. The volatility index VIX closed the week at 25.84 up from 25.68. The Euro Stoxx 600 slipped -1.45%.

The 10-year UST closed at 0.58% down from 0.63% a week before. The yield curve slightly flattened with the yield spread between the 3-month and 10-year UST at +48bps. Corporate Bond spreads: Investment Grade tightened 8bps at 167bps and High Yield tightened 49bps to 617bps. German 10-year Bunds yield closed at -0.45% unchanged from a week ago. In Europe, Corporate Investment Grade spreads tightened 11bps to 134bps and High Yield tightened 25bps to 488bps.

The US Dollar Index (DXY) depreciated -1.57% during the week and closed at 94.43. The Euro closed at 1.1656 (+2.00% weekly); the Yen appreciated +0.82%, closing at 106.14 and the Swiss Franc appreciated +1.92%, closing at 0.9206. Gold closed at $1,902.02 appreciating +5.06%. Oil was up with Brent closing at $43.34 (+0.46%) and WTI at $41.29 (+1.72%).


Covid-19 update
As per data from Johns Hopkins University, global confirmed cases topped 16.2m with 649k fatalities since the start of the pandemic. To highlight, cases fell in many hard-hit US states, including Florida, Arizona, California and Texas. In Europe, the UK government imposed a 14-day quarantine for all travelers from Spain and other countries, including Belgium, France and Norway, also began advising against visits to certain areas in Spain (tourism represents roughly 12% of the country’s economy). India’s epidemic is growing at the fastest pace in the world, increasing 20% over the last week.

EU recovery plan
European leaders reached an agreement on a €750bn (5.5% of EU GDP) recovery package and the multi-year EU budget. For the first time, the European Commission will be allowed to borrow in the markets on an unprecedented scale to fund EU expenditure. A total of €390bn will be distributed as grants and will therefore not increase recipient governments’ debt burden. Bonds issued by the European Commission will be eligible for the ECB’s asset purchase program. Importantly, 30% of the spending will need to contribute to the green transition. As the fund is part of the EU budget, it needs to be approved by the European Parliament, as well as by national parliaments.

US-China relations
Tensions rose again as the Trump administration demanded the abrupt closure of the Chinese consulate in Houston. As retaliation, the Chinese government ordered the closure of the US consulate in Chengdu, the capital of Sichuan province. These moves are unprecedented, with both countries having established diplomatic relations in 1972. At the same time, Secretary of State Mike Pompeo delivered a hawkish speech against China and in particular the Chinese Communist Party (CCP), saying “if we don’t act now, ultimately the CCP will erode our freedoms and subvert the rules-based order that our societies have worked so hard to build”.

Economic data
In the US, Initial unemployment claims rose to 1.42m in the week ended July 18th, an increase of 109k compared to the previous week. Existing home sales rose +20.7% in June over the prior month. The IHS Markit survey was published with the US Composite PMI coming in at 50.0 in July, up from 47.9 in June. In Europe, the Composite PMI came in at 54.8 in July compared to 48.5 in June.


Q2 earnings season
So far in the US we had 127 companies reporting Q2 earnings and this week we will see another 190 companies announcing results. Companies are beating analysts’ expectations with 68% beating sales forecasts and 85% beating earnings predictions on the back of low expectations for the quarter. Notably, Microsoft reported and beat analyst estimates, reporting a net profit of $11.2bn and revenue that rose 13% to $38bn. The cloud computing segment saw sales growth under 50% for the first time, while transactional license purchasing continued to slow. This week main results include Amazon, Apple and Alphabet (all on Thursday), but also Ecolab, McDonald’s or Pfizer. In Europe, 169 companies from the Euro Stoxx 600 will report with earnings announcements from SAP, Ryanair, LVMH, Nestle, Volkswagen, Shell, Total, Lloyds, Credit Suisse, Kering, Airbus, Danone, BNP Paribas and Vinci among others.

As the US Dollar moved lower last week slipping -1.57% based on the DXY index, commodities and precious metals posted gains. Notably, Gold closed at $1,902.02 on Friday crossing the very significant $1,900 threshold and reaching an 8-year high. Other precious metals also soared higher with Silver ending the week +17.79% higher, marking a 6-year high. Both Platinum (+9.36% weekly) and Palladium (+10.23 weekly) also made gains of around 10% on the week.

What to watch

Monday: US Durable Goods Orders (June); Germany IFO (July)

Tuesday: US Consumer Confidence (July); Richmond Fed Manuf. (July)

Wednesday: US Wholesale Inventories (June); France Consumer Confidence (July)

Thursday: FOMC; Germany and US Q2 GDP; Japan Retail Sales (June); Germany Unemployment Rate (July)

Friday: US Personal Income and spending (June); Euro Zone Q2 GDP;  Japan Unemployment rate (June)

Investment team ― Pictet North America Advisors