Duncan Donald

Fri, Jul 17

Tentative risk on theme

A more cautious, but still “risk on” theme across global financial markets over the past week, with asset classes reacting to the conflict between positive macroeconomic and earnings data combined with hopes of a COVID-19 vaccine on the one hand, and on the other hand the ongoing concerns regarding the growing number of cases, hospitalizations and deaths in many of the southern and western states in the US.


The underlying risk on theme has seen some global equity averages hitting new multi-month highs, pushing above June peaks in the case of the S&P 500 and the German DAX, and though the tech sector has continued its charge higher, there has also been some hesitancy highlighted by the recent NASDAQ setback. The NASDAQ strength, however, has been replaced by a rotation into value stocks, seeing the Dow Jones Industrial Average and the S&P 500 taking some upside directional leadership amongst the US stock indices.


One of the main drivers of the more recent push higher in the first half of July has been positive soundings from Gilead Sciences with respect to the remdesivir treatment for the novel coronavirus, plus the potential for a COVID-19, again from encouraging tests from both Moderna and Oxford University.


In addition, broadly speaking macroeconomic data has continued to improve in July after the month kicked off with an extremely positive US employment report. Positive economic data from the US, China and Europe over the past week has been accompanied by the positive start to the US earning season.


Netflix did disappoint towards the end of this week, but many of the US banks have this past week posted very strong results for the second quarter, and although forward guidance is somewhat cautious, this has boosted the broader US equity indices, alongside global stock averages. The S&P 500 and DAX now have their respective all-time highs in the cross hairs for late July into early August .


On the flipside, the significant rise in coronavirus cases, hospitalizations and deaths in the US has failed to have any significant impact on financial markets. Pockets of outbreaks in Tokyo, Shanghai, Australia, Germany and the UK seem to have been dealt with by the authorities and despite the worst cases, such as in Melbourne, markets have not really been significantly impacted.  


On the foreign exchange side, the move to a “risk on” phase has been reflected by US Dollar weakness with the greenback establishing itself as a go to, safe haven currency during the pandemic. The US dollar weakness has been most noticeable against the Euro, with EURUSD moving close to a multi-year high, at 1.1496.


The strength in the Euro has also reflected positivity and hopes around agreement on the EU recovery fund, alongside the fact that the Eurozone appears to be coming out of lockdown, without any dramatic rise in COVID-19 cases.


Gold continues to benefit from the US Dollar weakness brought on by the buoyant stock market, still leaving the next directional play interesting. There is no doubt that raising fears of a prolonged and substantial second wave would be positive for the yellow metal, but will this be more impactful than the flight to safety buyers of the US Dollar. Gold is still stalling around the impressive $1800 level. 


In the UK, stimulus measures continue to be rolled out by the government, whilst lockdown measures continue to be eased, as yet without any significant impact on the number of coronavirus cases or deaths. The next few weeks will be important to gauge whether the unlocking of the economy has been successful from a health perspective and also from an economic standpoint. The Pound remains resilient against the US Dollar, but somewhat vulnerable versus the Euro, whilst the FTSE 100 has underperformed its European and US counterparts.


The Week Ahead:


Monday: A quiet start to the week with UK house price data from Rightmove first up before Bank of Japan minutes and Japanese Trade Balance data. In the European session we get German PPI and the Bundesbank monthly report as well as Eurozone current account data. In the afternoon there are two Bank of England Speakers Haldane and Tenreyo.


Tuesday: Japanese CPI comes first ahead of the Australian Monetary Policy Meeting Minutes and Governor Lowe speaking. UK Public Sector Net Borrowing comes at the start of the European session. In the afternoon, the main data is Canadian Retail Sales.


Wednesday: Australian Retail Sales comes in the early session. With limited European data the Canadian CPI is the focal point before US HPI and Existing Home Sales.


Thursday: The main data of the day is US weekly Unemployment Claims. We also have Haskel of the Bank of England talking and Eurozone Consumer Confidence in the afternoon.


Friday: The focus will be on Services and Manufacturing PMI from firstly Europe then the UK and in the afternoon the US. We also get UK Retail Sales in the morning.