All major indices finished lower on the week as the
market struggled for overall direction. The Nasdaq was the biggest loser,
closing down 1.33% followed by the Dow, Russell 2K, and the S&P 500, which
closed lower by 0.75%, 0.39% and 0.28% respectively. Sector performance was
mixed as Tech was the worst performing sector on the week after Intel
Corporation (-16.2%) reported an earnings beat, however announced they would be
delaying the launch of their next-gen chips by at least six months. Large tech,
including the FANG names, were also a drag on indices as Apple declined 3.9%
ahead of earnings, while Microsoft declined 0.8% on slower than expected cloud
growth numbers. Facebook and Netflix also both fell, 4.6% and 2.5%
Outside of Tech and Communication services, Healthcare and REITS also lagged broader benchmarks as biotech and pharma were weaker over the course of the week. Energy was the best performing sector on the week, finishing up over 2% amid strength in oil service names despite crude only gaining 1.3%. Financials also outperformed with leadership from bank-related names, particularly regional banks as the KRX index (Regional Bank Index) closed up 4.9%. Materials outperformed on the back of precious metals, which continued to rally higher after Gold hit a new all-time high of $1,945.72 (GDX + 6.4%, SLV +17.77%), while Consumer Discretionary was a standout with strength in restaurants and select homebuilders.
The Dollar moved lower, falling 1.6%, extending its losses to five straight weeks and continues to trade at levels not seen since early March. Treasuries were mixed with the curve flattening, however, remain largely rangebound as the 10-year closed just under 60bps.
Value once again outperformed growth and momentum factors over the course of the week. The outperformance in value came despite the large bounce in growth names on Monday. Over the course of the week, S&P 500 pure value closed up 1.13%, while pure growth closed slightly lower by .039%. As we have recently pointed out in other weekly insight pieces, large Tech’s heavy weighting within the S&P 500 continues to grow. The five largest names in the S&P 500 now account for nearly 22% of the index, up from 16% a year ago and 19% in January.
Overall, it was a fairly busy week from a news perspective with:
- Earnings announcements
- The lack of progress on a widely expected fifth Coronavirus relief bill
- Ongoing tensions between the U.S. and China
- Coronavirus vaccine developments
On the political front, the stimulus package has appeared to come together slower than many had hoped and runs the risk of underwhelming investor expectations in size and scope. The White House and Senate Republicans failed to finalize their proposal during the week and could not find common ground on a payroll tax cut or Coronavirus testing. Seemingly, it appears Senate Republicans have come out on top in both matters as the proposal (which was released on Monday after the bell) does not include the tax cut payroll sought by President Trump and does include additional funds for testing. Additionally, there was no agreement on enhanced unemployment benefits as Democrats have favored an extension of the current $600/week, while Republicans are looking to lower that amount closer to the $200/week range.
Throughout the week, tensions ratcheted up again in a tit-for-tat game between the world’s two largest economies. On Tuesday, the Trump administration ordered China to “cease all operations and events” at its consulate in Houston, accusing diplomats of committing economic espionage and attempting to steal scientific research against the Trump administration. In retaliation to the U.S. demand, China called the action illegal and then ordered the U.S. to close its consulate in Chengdu. Despite the recent slow escalation of aggressions between the nations, many believe the two sides will continue to take a more pragmatic approach towards additional sanctions given the importance of the Phase 1 trade deal in the broader overall economic recovery.
There were a few market moving headlines related to vaccine developments throughout the week as optimism remained fairly elevated. As mentioned in our Weekly Insight last week, there was positive clinical data published from the University of Oxford and pharmaceutical company AtraZeneca showing their vaccine candidate was well tolerated and was capable of generating neutralizing antibodies, as well as T-cells that targeted the virus. Furthermore, Pfizer and BioNtech, its vaccine partner, announced an agreement with the U.S. government for $1.95B. The agreement would produce and deliver 100M doses to the U.S. government if their Coronavirus vaccine candidate proves to be safe and effective in humans.
It was a busy week of earnings announcements with multiple heavyweights reporting, as just over 25% of the S&P 500 has now announced. The general takeaway has been that companies have beaten the extremely low expectations, which comes after the S&P 500 EPS estimates fell nearly 40% over the course of the quarter. According to Factset, about 81% (above 5-year average of 72%) of companies who have reported have exceeded consensus EPS expectations by 11.5% (also above the 5-year average of 4.7%). Additionally, corporate commentary has leaned more positive with many management teams highlighting improvements in trends throughout the quarter. There continues to be uncertainty surrounding what the second half of 2020 earnings will look like given the widespread concern for a second wave of COVID-19 infections without a vaccine having yet been developed.
On the data front, the labor market remained in focus as initial jobless claims increased week over week. The increase in claims has caused some to speculate that the recovery has begun to stall, as important states have paused and rolled back the reopening of their economies. Some reports have also shown stagnation, and in certain areas, a decrease in some high- frequency data including:
- Air Travel
- Restaurant Reservations
- Credit card spending
- Number of individuals going to work
All in all, despite some seemingly large headwinds, the market remained fairly resilient throughout the week.
Equities advanced on Monday led by strength in the Technology related names. After being the
worst performing sector last week, the Tech
sector ended higher by 1.61% propelling the S&P to close up 74bps on
the session. After lagging last week, the Nasdaq Composite outperformed broader
markets, closing up 1.67% to start the week as it snapped its two-day losing
streak, the longest since May 12th and 13th. With the move higher for the first
time in three days, the Nasdaq 100 Index is on pace to outperform the S&P
500 for a tenth straight month (the
longest stretch since 2000), posting
gains of 5.1% so far in July versus the S&P 500’s 4.5% gain.
Growth outperformed value which ended largely flat on the session as the FAANG names were all up over 1%. Materials once again saw strength amid precious metals with gold and silver continuing their surge higher by 2% and 8%, respectively. Gold finished at an all-time high of $1,942.24, while silver pushed to a multiyear high amid continued investor demand and a weaker U.S. Dollar which closed near its lowest levels since June of 2018.
It was a fairly quiet session on Monday with much of the attention surrounding the busy upcoming week of earnings and the anticipated release of the GOP proposed HEALS Act stimulus bill (which was later released Monday after the bell). Equity volumes remain subdued and option volumes were mute as the SPY recorded its lowest option volume day since February. The rest of the week however is shaping up to be a busy one. This week, by some, has been called “mega-week” as Facebook, Amazon, and Google are amongst 36% of the SP 500 companies that will report earnings. The highlights of the fifth proposed Coronavirus relief plan released by Senate Republicans included:
- $1T spending package
- Second Round of direct payments to Americans ($1,200 each)
- Unemployment relief of $200/week – down from the $600/ per week
- Additional round of forgivable loans for the small business-oriented Paycheck Protection Program
- Tax incentives for employers to rehire staff
- The extension of rental eviction moratorium
- Legal liability protection for businesses
- $16B for COVID-19 testing
- School funding of $105B
The FOMC is due to kick off its two-day meeting this week
on Tuesday and Wednesday, followed by the release of their statement and a
press conference on Wednesday afternoon. While there are no expectations for a
rate change, new program announcements or any other surprises from the Fed,
investors will be looking towards their commentary and language that
illustrates the Central Bank is remaining cautious.
THIS WEEK INTERNATIONAL
Europe – The European Central Bank (ECB) is contemplating asking banks to suspend dividends at least through the end of the year to mitigate economic uncertainty. The Euro STOXX Banks Index was down 2.44% last week.
Members of European Parliament (MEPs) are currently debating the €750B economic stimulus plan and European Union’s 2021-2027 budget presented by the European Commission. While MEPs broadly agree on the size of the recovery plan, they wanted more funds to be disbursed as grants. They also expressed their concerns regarding decreasing the funds of specific programs to finance the recovery plan. One of the MEPs commented “there is a proposal on the table, but we would like to improve that, we want to improve it above all by trying to give answers to some of the cuts that we’ve seen unjustified. If we want to bet on future generations, we cannot cut the budget for research and young people and Erasmus”.
The Euro STOXX Index was down 1.25% last week.
Michel Barnier, European Commission’s Head of Task Force for Relations with the United Kingdom, commented last week on the UK-EU trade agreement: “by its current refusal to commit to conditions of open and fair competition and to a balanced agreement on fisheries, the UK makes a trade agreement at this point unlikely.” If negotiations fail, there will be a no-deal separation between Britain and the EU at the end of 2020. The FTSE All-Share Index decreased 2.24% last week.
APAC – Chinese authorities have closed and taken over the U.S consulate in Chengdu in retaliation for the Chinese consulate closure in Houston, Texas. Tensions between the two global superpowers are reinforcing a bipolar dynamic in foreign affairs. The United Kingdom chose to adopt a strong stance toward China, favoring national security over the rollout of 5G technology by a Chinese company. Australia joined the U.S. in opposing Beijing’s South China Sea claim, risking retaliation on the trade side. The market priced in these geopolitical risks toward the end of the week. The Shanghai Composite Index was down 0.54% last week.
In Japan, the Yen climbed to four-month high as tensions between the U.S and China escalated last week. According to a recent press release, Bank of Japan (BOJ) purchased 102.9B Yen worth of ETFs and J-REITs to build its reserves and inject liquidity in the economy. The NIKKEI 225 was up 0.24% last week.
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