Weekly Market Update: Markets fall after record low US GDP data

Weekly Market Update: Markets fall after record low US GDP data

Mon 03 Aug 2020

Read our full Market Update Week 31

Market Update

Major indices closed down for a second week running, with investors reacting to a flood of quarterly earnings reports and some prominent economic data. US corporate earnings were in the spotlight during the week, with tech giants Facebook, Amazon, Apple, and Alphabet reporting mostly healthy gains in revenues despite the pandemic. Energy stocks recorded the largest declines, dragged lower by Chevron and ExxonMobil, following reports of steep second-quarter losses. Global equities fell -1.8% in Sterling terms, with Japanese and EU markets worst hit, down -6.3% and -4.3% respectively. US, UK and Emerging Market equities were also negative, down -0.7%, -3.7% and -0.7% respectively. Record low US GDP data, election worries and an uncertain fiscal backdrop pushed the yield on US 10Y Treasuries to the lowest level since early March, closing the week at 0.528%. The 10Y Gilts yield closed the week at 0.104%, with returns of +0.5%. Gold rallied +3.9% in USD terms and is trading at all-time highs, while Oil fell -4.5% last week.

CIO Analysis

US stocks are back near all-time highs, against a backdrop of a post-war record economic slump of nearly 10% and an earnings drop of over 35%. While this is consistent with our model, that markets mostly care about the amount of near-free cash in circulation, we also feel that investors are maybe disturbingly oblivious to major risk build-ups. For one, a second viral wave is hitting the US and other big economies around the world, with mortalities rising near their previous peaks and no universal vaccine solution until at least the end of the year. Second, liberal economies across Europe and the Americas, long depending on monetary policy to substitute politically difficult budget initiatives, are finding it difficult to agree on the size and manner of desperately needed fiscal stimuli, risking compounding job losses and business closures. Complicating matters, political uncertainty is once again becoming thematic, as US President Donald Trump all but confirmed last week that he has no intention to concede a possible defeat on the night of the election, while Germany is still soul-searching about what the post-Merkel era will look like. Should investors heed these concerns and pro-actively reduce risks? We believe that this is not necessary, as aggressive monetary policy has often proved more potent than short-term risks.  But we can’t see possible fresh highs in global stocks becoming a signal to add risk either, as the course of the pandemic may fundamentally shift economic and financial realities. Instead, risk has to be taken in a measured way, and with investors prepared more than ever to challenge even their long-term asset allocation assumptions.

-David Baker, CIO


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