Market in a Minute June 22-26, 2020
by Sheila and Rich Jamison
It was a ‘Tale of Two Weeks’ – but all happening within one. The week started out positive, NASDAQ even setting a new record high on Tuesday. Mid-week, re-acceleration of COVID cases took center stage and equities sold off from there. Energy, the worst performing sector, lost 6.5% and both financials and communication services lost over 5%. Information technology was the week’s winner at plus 0.5%.
Trading in stocks for bonds took the benchmark US 10-year Treasury yield to 0.64% from 0.70% a week ago. Fear of slowing economy took WTI crude oil down by 3% to $38.49/barrel. Volatility, as per the CBOE Volatility Index (VIX), rose to 34.4 from 33.8 last Friday. Though a smaller rise than you might have expected given the selloff, it had to absorb an early week dip that is hidden when you look from week’s close to previous week’s close.
COVID & the Economy
Last week the optimistic “reopening” sentiment that led to the gains a week earlier again had some supporting data.
May’s consumer spending – 2/3 of our GDP – jumped by a record 8.2%. The last estimate of our Q1 GDP was left unrevised (at -5%). Market worry is that a very deep Q2 contraction is expected.
May’s PMI composite index rose to 46.8 from 37.0, the highest in four months. Manufacturing rose to 49.6 from 39.8 while services grew to 46.7 from 37.5.
New home sales rebounded 16.6% in May.
Durable goods orders rose 15.8 in May after dropping 18.1% in April.
The optimistic support from good numbers was choked off by a slew of negative developments.
The US as a whole and many individual states reported daily highs in new coronavirus cases.
The number of younger people infected was accelerating.
The CDC believes that as many as 20 million Americans may have contracted COVID-19, ten times more than official case numbers. People may have been (more important, may be) infected without exhibiting symptoms – yet still able to infect others.
Texas and Florida were the most noted state “reopening” scale backs. Disney postponed reopening Disneyland. Apple re-closed stores in Houston and Florida. However, 15 other states are scaling back also, which could slow the economic data that spur the market.
The NY/NJ/CT area is imposing a 14-day quarantine on travelers coming from coronavirus hotspots.
Consumer activity (e.g., mobility indices, ride sharing and online restaurant reservation data) already shows a slowdown as COVID case totals increase.
The latest initial jobless claims were 1,480,000, higher than the 1.25 million anticipated and only 60,000 lower than the prior week.
Personal income fell 4.2% on the month as massive government relief measures began to wane.
The Federal Reserve announced results of its annual stress test on the banking system. It found that while the country's biggest banks are healthy, a prolonged downturn could see their capital buffers eroded. It capped bank dividend payments for Q3 at Q2 levels and banned Q3 share buybacks.
Fed lending programs have seen limited use so far. Recent figures show only between 4-6% of the funds pledged by the Fed to support businesses and municipalities has been used. This suggests the Fed has plenty of firepower if the economy were to sustain a sharper downturn.
Earlier in the day, The FDIC relaxed a Volcker Rule restriction imposed after the financial crisis that limited banks' proprietary investments. This allows banks to increase their investments in a broad set of venture capital funds, and should free up capital for the nation's largest banks.
Flash PMIs (purchasing managers' indices) showed that the rate of output contraction slowed globally as economies began to reopen. In the Eurozone, the composite expanded to 47.5 from 31.9 while the UK composite went up to 47.6 from 30.0 and the Japan composite climbed to 37.9 from 27.8.
Germany's Ifo business climate index rose to 86.2 in June from 79.7 in May, suggesting companies are seeing light at the end of the tunnel.
The EU was reportedly considering its own restrictions on US travelers, banning them from entering when it relaxes its border restrictions on July 1.
France, the UK, Italy and Spain have offered to limit the scope of their proposed global digital services tax in a concession to the US after we threatened to impose tariffs if they moved ahead with planned levies.
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