Duncan Donald

Fri, Jul 24

US Stocks start to turn from the highs, where next for value. A case can already be made for Europe,

This week we started on the same footing as has been seen in previous weeks, with stocks on the front foot determined to take on and make new highs.  This was backed up by a roundly positive set of earnings from US companies, the highlight being Tesla which surged onto new highs of around 1670 up incredibly four times the value from where we opened the year as it pushes to be welcomed into the S&P 500.


As the dust settled on the strong earnings from the surging Tesla, we started to see a rotation from investors, taking profits out of these overreaching stocks and rotating into value stocks like the banking sector. There is a clear indication that the so called “Robinhood” investors will buy at any cost, with questions remaining on whether they are actually aware they can short stocks. However, towards the later part of the week as it was announced the US and China were closing embassies in each other’s countries, the buying evaporated.


If we add in the fact that virus cases continue to surge across the US, a point that has been duly ignored by the stock markets over the last few weeks, there could well be a case for a short term top being put in the market. Indeed, we used the midweek spike as an opportunity to offload a significant percentage of our portfolio. The question is, how far does the market contract before the value buyers come back in?  Whilst we have seen a significant change in stance from US President Donald Trump in the last week as his bullish and dismissive stance towards the virus. Whilst the case numbers were increasing it started to affect his standing in the polls.  As soon as this was identified he duly picked up a mask and his stance shifted. The fact remains that for him to get reelected the stock US stock markets cannot fall, and he will use the balance sheet to underpin this regardless of the long term inflationary effects and whilst currently, everything points to lower stocks, until the election there will be verbal and physical actions to push it higher from the presidential team.


This makes next week's Federal Reserve interest rate decision very much in play from a volatility perspective. Whilst we do not expect to see movement on rates, the markets will want to hear Jerome Powell’s thoughts on the economic outlook in the short medium and long term. It's no secret there is disharmony between the Fed and the White House so this will likely be the key driver on the markets next week and I am sure the President's Twitter account will be highly active around the decision.


The European currency and sector bounced back to life this week as we outlined in our previous publication this week. The agreement of an all encompassing aid package showed to the world that the group can work together for a common goal. The European handling and in majority, emergence from lockdown had the European indices such as the German DAX surging with the Euro recording highs not seen since 2018.


In the UK we still feel behind the curve, with official lockdowns lifted, but personal lockdowns not. There was a slump in the Pound midweek as it was announced that a trade agreement with the US would not be forthcoming ahead of the US Elections. This and noises from both the UK and EU that hard Brexit may be the only reachable outcome. Whilst hard Brexit will likely have downside effects immediately on the economy, over the last few months we are becoming conditioned to accept this as an eventuality. Therefore, the market could well be pricing it in. This can be exemplified in the performance of the FTSE against its international peers, as it struggles to recoup the pandemic losses. Whilst there is a volatile period ahead for the Pound into the years end, there remains little question that there could well be value in the UK for medium and long term forecast. There is certainly a great deal of catching up to do and should a last minute deal be reached that will certainly be the catalyst.


The Week Ahead:


Monday: A quiet start to the week with UK Nationwide housing data in the early hours of the morning. In the early European session we get the German IFO and Bundesbank monthly report. The main event comes in the afternoon, with the US Core and Non-Core Durable goods. 


Tuesday: Reserve Bank of Australia's Kent speaks in the Asian session. From the UK we get CBI data mid morning. In the US session Consumer Confidence data from the US is the highlight. 


Wednesday: Australian Inflation data kicks a busier day off. From the UK we get Money Supply, Mortgage Approvals and Net Lending Data. In the US Session we get Pending Home Sales ahead of the Federal Reserve Rate decision in the evening as well as the Statement and press conference from Jerome Powell. 


Thursday: The main data in the morning session is German GDP, CPI and German and EU Unemployment data. In the US session we get Advanced US GDP and weekly Unemployment Claims. 


Friday: A busy Asian session with Japanese Unemployment and Industrial Production data. Chinese Manufacturing and Non-Manufacturing PMI data comes next, before Japanese Consumer Confidence and Housing Starts.  A busy European session follows with French/Spanish and Italian GDP, German Retail Sales, and French Italian and EU CPI. In the US session Canadian GDP. US Core PCE and Personal Spending data before the Chicago PMI and Consumer Sentiment data.