Weekly Market Update: Technology stocks push equity markets higher

Mon 06 Jul 2020

Please read our full Market Update

Market Update

Stock markets closed up last week, with the technology-heavy NASDAQ 100 even reaching an all-time high. Cyclical sectors such as Oil and Financials lagged as economic conditions remain weak and second wave fears continue to build, with increased use of local lockdowns. The rally in risk assets was fuelled by a few pieces of strong economic data, such as US pending home sales figures significantly exceeding expectations and non-farm pay rolls posting a record gain of 4.8mn jobs in June. UK stocks have lagged developed market peers, driven by a cyclical sector bias and Brexit fears hurting sentiment. Major UK employers such as Royal Mail, Accenture and Airbus also announced job cuts, indicating that furlough measures may have reached their limit. US stocks led the rally, up +3.1%, while UK stocks were flat over the week. UK sovereign bond yields increased over the week, as did the yield on the US 10Y Treasury which closed at 0.67%. Gold was flat in US dollar terms, while Oil rallied +5.6%.

CIO Analysis

Another week of positive economic surprises passed, while global equities remained near their recent high levels they have been trading at for almost a month. A casual read of the situation could be that the markets had previously run ahead of themselves, and since the economy is now repairing stocks are taking their customary summer breather in anticipation of better data. However, we believe the situation is a bit different. Global stocks peaked in the second week of June and have been trading at roughly those levels for a month. Not incidentally, in the same week we observed that Fed balance sheet assets had peaked. Thereafter, the Fed, which had been buying mostly short-term securities it can easily let expire, has reduced its $7.16tn balance sheet by about $160bn. Thus, as new money stopped flowing, stocks stopped climbing, in line with our longer-term view that asset reflation, not fundamentals, are driving this market. Meanwhile, we observed another bad week for UK risk assets, with UK large caps now 18% below the MSCI World since the beginning of the year in same currency terms. UK stocks have underperformed their global counterparts in every week but seven this year. We believe that now investors are faced with three key questions that need answering:

1)      Will the economic recovery happen faster than we previously expected?

 2)      Have stocks peaked or will the Fed press on with purchases?

 3)      Why are UK stocks underperforming so much?

The jury is still out on all three questions. We believe that, while data is encouraging, we would need to see persistent evidence of a demand resurgence before our economic outlook is improved. Given that, we expect the Fed to remain very accommodative for the next few months at least. As for UK equity indices, we think that the confluence of a sharp economic slowdown and heavy weighting to troubled industries (oil, banks) is the cause for the downward trend. In part, it is cyclically reversible but investors need to think carefully about the long term implications of COVID-19 and a potential hard Brexit on the economy and risk assets. 

David Baker, CIO