LAST WEEK

Three of the four major indexes closed higher on the week as Coronavirus vaccine developments appeared to be the main upside driver behind the risk-on tone. The Russell 2K, Dow Jones and S&P all finished in the green, while the Nasdaq lagged broader market gains. The Dow and S&P posted a third straight week of gains, finishing up 2.31% and 1.27% respectively. Treasuries stabilized as the curve steepened slightly with the 10-year closing at .6266%. Gold and Crude were largely flat (although ended higher) as the Dollar index fell 0.7%, while Silver closed ~3% higher, notching its sixth straight week of gains, its longest stretch in more than three years.

Markets were led higher by Industrials, Materials, Healthcare, Utilities, Energy, Financials and Consumer Staples while year-to-date winners Consumer Discretionary, Tech and Communication Services all finished lower. Industrials were led higher with strength in rail-related names and building materials, as infrastructure stocks seemed to benefit from Presidential candidate Joe Biden’s $2T green energy and infrastructure plan. Healthcare outperformed with optimism on a potential vaccine paired with better than anticipated earnings releases with outsized gains in Hospital and Medtech names. Financials outperformed, overcoming mixed earnings releases from big banks, while insurance names fared better over the five days. The one notable theme from bank earnings was that Net Intertest Margin (NIM) contractions and larger loan loss provisions were offset by extremely strong trading and investment banking revenues. Technology ended 1.17% lower on the week as high-flying software stocks took a breather.

The FANG index also closed lower after weakness in the Communication Services sector with the growth trade losing steam throughout the week. Value meaningfully outperformed growth/ momentum as the S&P 500 Pure Value posted gains of 4.56%, while S&P Pure Growth finished 1.24% higher.

There were many notable large cap decliners in the growth space with the following names all ending lower: Adobe (7.3%), Alibaba (5.3%), Tesla (2.8%), Nvidia (2.7%), Google (1.4%), Facebook (1.2%), Netflix (which posted its worst week of the year at -10.2%)), Amazon (7.4%) and Salesforce (5.58%). With many moving pieces, there was no lack of commentary throughout the week regarding the rotation into value and out of growth-related names including:

Investor Bill Gross believing value stocks are likely set to outperform growth due to a potential decline in real rates
JP Morgan saying that a risk associated with the election and Coronavirus could result in a rapid momentum selloff and a value rally
Bank of America (BofA) highlighting multiple dynamics that could support value outperformance relative to growth noting positioning, sentiment, potential economic recovery and value dispersion

In connection with BofA’s most recent Global Fund Manager Survey, 74% of respondents surveyed believed that U.S. Tech stocks is the “most crowded trade”, the highest reading in the survey’s history. The report also noted that over the last two weeks the sector has seen nearly $4.9B of inflows, making it one of the largest beneficiaries of Central Bank liquidity. As funds have flowed into the space, investors have recently seen QQQ break out to new high’s relative to IWM (despite reversing over the last six sessions).

QQQ/IWM

Despite a barrage of headlines regarding the pausing or reversing of reopening plans amid a pickup in Coronavirus infections, market participants still remained optimistic about the prospects of a vaccine. With the slowdown in reopening, we have also begun to see a slowdown in various high-frequency datapoints as Goldman Sachs pointed out that states representing 75% of the U.S. population have moved in the wrong direction with their plans to fully remove restrictions.

Throughout the week, investors saw the following headlines that provided a positive leaning backdrop for the risk-on trade:

Pfizer (PFE) and BioNtech (BNTX) announcing they have received a fast track designation from the FDA on two experimental Coronavirus vaccines they are developing jointly.
Moderna (MRNA) providing guidance that their vaccine candidate has produced antibodies in all patients tested during a Phase 1 trial, while noting the antibody levels produced were equivalent to the upper half of antibodies seen in patients who are infected and recover.
Expectations for positive news on early stage trials by the University of Oxford and AstraZeneca (more on this to come).
While a vaccine by year-end or earlier would ease global fears, there continues to be some concern that the current optimism may be overdone as there are still many uncertainties surrounding the virus.

Also gaining some traction and notoriety throughout the week were the current levels of Central Bank balance sheets. Reuters noted that growth in the “Big Four Central Banks” balance sheets slowed for a second straight month in June, adding just over $850B, less than half of what was seen in April. Additionally, with the Fed’s balance sheet expansion slowing, market participants now expect it to top out around $8.5T, down nearly $1T from expectations back in May. The Fed continues to signal that they stand ready to act as needed, however the lack of demand for various emergency facilities and the slowing of the balance sheet can for now, be seen as a success.

Discussions and chatter regarding a fifth coronavirus stimulus package also ratcheted up throughout the week, although initial indications appear that negotiations will be complicated between Democrats and Republicans given each party’s wants.

There was not much of a bipartisan effort seen between parties throughout the week, as Nancy Pelosi said she expects Republicans to move off of their $1T headline number and, closer to the ~$3T initially proposed by Democrats (which was deemed as a non-starter when proposed). President Trump had signaled he would potentially not sign any package if it did not include a payroll tax deduction (Which has been a non-starter for Democrats). Furthermore, Republicans look to tie in school aid, provided schools reopen (which has largely been opposed by Democrats) and also propose Coronavirus liability protections to businesses, again something that Democrats have largely opposed. While little headway was made, additional meetings are expected ahead of the August recess for Congress.

While there are many differences between the Great Financial Crisis and today, one similarity has been noted, the recovery. Despite the virus still wreaking havoc throughout many states as they attempt to re-open, the presidential election fast approaching, and select stretched valuations, the recoveries look eerily similar when laid on top of one another. With more aggressive stimulus, a relatively strong consumer and a healthy banking sector the question becomes, can history repeat itself?

THIS WEEK

U.S. equities closed higher to start on Monday, led by the Nasdaq which jumped 2.51% followed by the S&P and Dow. The S&P once again wiped out year-to-date losses, turning positive and closing up .65% on the year. Technology shares rose to record highs but closed off their best levels, ending the day 263 points higher as we saw a reversal of last week’s value over growth trade. Growth ended up 1.83%, while value closed down 80bps as high-beta Tech names provided leadership for Monday’s session. Amazon was the large outperformer, gaining nearly 8% and recouping all of last week’s losses. The slow drift higher throughout the day came after the University of Oxford and AstraZeneca announced promising results in early human testing of their COVID-19 vaccine. The results released showed that the vaccine increased levels of both protective neutralizing antibodies and immune T-cells that target the virus, according to the study organizers.

Overall, it was a fairly quiet session with muted volumes. The S&P traded in an 84bps range and the VIX tumbled 5% to 24.46 while the equity market moved higher in an orderly fashion after touching session lows shortly after the opening bell. Earnings season continues this week and ramps up as 20% of the S&P 500 is expected to report with releases from heavyweights like Microsoft, Texas Instruments, Skyworks Solutions and Tesla which could set the tone for the rest of the week. Defensive sectors underperformed with REITS, Staples, and Utilities all ending in the red. Healthcare closed largely flat on the day (-.01%).

Investors continue to remain optimistic that the government will pass another stimulus package, which could help to add another boost to the economy as benefits from the initial package expire in the coming days. Although President Trump and Senate Majority Leader Mitch McConnell were set to meet Monday to discuss the details on the Republican plan for the next bill, they continued to remain at odds with Democrats. Democratic Senator and Senate minority leader Chuck Schumer urged colleagues to stand firm against what he called the “GOP- only package” adding that the unified front among Democrats improved the last stimulus bill.

Source: Cornerstone Macro as of 07.22.2020

THIS WEEK INTERNATIONAL

Europe – The European Union members agreed on a €750B stimulus package after weeks of negotiations. The plan reportedly includes €390B of grants and €360B of low-interest loans. Italy may receive close to €82B in grants and €127B in loans according to preliminary estimates. To generate revenue for the bloc, a new tax on non-recycled plastic waste will be introduced next year. Additionally, the European Commission is working on a digital tax.

The European bond market seems optimistic about the impact of the recovery fund; in fact, the Italy-Germany 10-year yield spread narrowed down to lowest levels since March.

The Euro STOXX Index was up 1.78% last week, led by Travel & Leisure, up 4.25%.

The United Kingdom (UK) is contemplating a suspension of its extradition treaty with Hong Kong in reaction to the Chinese controversial security law. Liu Xiaoming, the Ambassador of China in the UK told BBC that he does not “want to see this tit-for-tat between China and the United States happen in the China and UK relations”. The FTSE All-Share Index was up 2.76% last week.

In Switzerland, the Swiss National Bank president said that “in light of the highly valued Swiss franc, we remain willing to intervene more strongly in the foreign exchange market”. The Swiss market index was up 1.76% last week.

APAC – China’s GDP grew 3.2% in the second quarter, up from -6.8% in the first quarter. Industrial output increased 4.8% from a year earlier in June, while retail sales decreased 1.8%. Credit stimulus drove infrastructure and property investments. Year-over-year spending by state-owned firms rose 2.1% in June, versus -1.9% in May according to the National Bureau of Statistics of China. China Manufacturing investments were down 11.7% year-over-year in June. The Shanghai Composite Index was down 5% last week.

President Trump signed an executive order that revoked several provisions of the Hong Kong Policy Act of 1992. This includes suppressing preferences for Hong Kong passport holders, eliminating license exceptions for certain passports, revoking the extradition agreement with Hong Kong and eliminating training for police and security service members. The Hang Seng index decreased 2.48% last week.

In Japan, Bank of Japan (BOJ) released a statement regarding the latest monetary policy update. Regarding short-term policy interest rate, “the bank will apply a negative interest rate of -0.1% to the Policy-Rate Balances in current accounts held by financial institutions at the Bank.” Regarding long-term interest rate, the BOJ will continue to target 0% yield for the 10-year Government bond through unlimited bond purchase. Additionally, the upper limit of ETFs and J-REITs purchases was increased. The NIKKEI 225 was up 1.82% last week.

The information provided, including any tools, services, strategies, methodologies and opinions, is expressed as of the date hereof and is subject to change. Level Four Capital Management (“LFCM”) assumes no obligation to update or otherwise revise these materials. The information presented in this document has been obtained from or based upon sources believed by the trader or sales personnel or product specialist to be reliable, but LFCM does not represent or warrant its accuracy or completeness and is not responsible for losses or damages arising out of errors, omissions or changes or from the use of information presented in this document. This material does not purport to contain all of the information that an interested party may desire and, in fact, provides only a limited view. Any headings are for convenience of reference only and shall not be deemed to modify or influence the interpretation of the information contained.

This material has been prepared by personnel of LFCM and is not investment research or a research recommendation, as it does not constitute substantive research or analysis. This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject LFCM to any registration or licensing requirement within such jurisdiction. It is provided for informational purposes, is intended for your use only, and does not constitute an invitation or offer to subscribe for or purchase any of the products or services mentioned, and must not be forwarded or shared with retail customers or the public. The information provided is not intended to provide a sufficient basis on which to make an investment decision. It is intended only to provide observations and views of certain LFCM personnel. Observations and views expressed herein may be changed by the personnel at any time without notice.

Nothing in this document constitutes investment, legal, accounting or tax advice or a representation that any investment strategy or service is suitable or appropriate to your individual circumstances. This document is not to be relied upon in substitution for the exercise of independent judgment. This document is not to be reproduced, in whole or part, without the written consent of LFCM.