U.S. indices finished higher on the week led by the
Nasdaq, which closed up 3.40%. Other indices followed suit as the S&P 500
finished 3.29% higher, the Dow closed up 2.64%, and finally, the Russell 2K
managed to secure gains of +1.29% on the week. The S&P 500 traded to new
all-time highs on Friday, closing at 3,508 but touched an intraday record of
3,509.23. With the move higher, the S&P 500 finished its best week since
early June and has now risen in five straight weeks, its longest winning streak
Ten out of the 11 sectors closed higher with only the Utilities sector finishing lower by 0.56%. Gains this week were supported by dovish Fed positioning which weighed on the USD (the currency sunk to its lowest levels since May 2018) and sent yields higher, with the 10-year closing over 0.70% for the first time in two weeks. Fed chairman Powell gave commentary saying the Central Bank will now look to achieve 2% inflation on average, meaning if inflation is below 2% for some time, the group will look to achieve inflation targets above 2% thereafter. Elsewhere, Oil rose 1.49% after initially trading 2.46% higher, giving back gains on Thursday and Friday after Hurricane Laura turned out to be less damaging than initially feared.
The interesting story on the week revolved around price action seen between equity markets and VIX futures, with both marching steadily higher. When all was said and done, the VIX closed up 2.64% and market participants saw mostly out-of-the-money call buying, which appeared to be potential hedging ahead of the election. The positioning should come of little surprise as equity indexes continue to trade near elevated levels, while the volatility index continues to trade at subdued levels, below its average this year.
The trend of outperformance from growth and momentum names reversed course during the week, as value/cyclicals outpaced their high-flying counterparts despite the Communication Services and Tech sectors being the two best performing spaces on the week (both finishing up over 4.50%). Communications Services put in the best performance with strength in growth plays like Facebook +10.0% and Netflix +6.4%, while Tech was another standout with a big rally in the cloud software space after CRM reported impressive numbers. With the move higher on the week in the Tech space, and continuing to outline the dichotomy between sectors, U.S. Technology shares once again recorded a new milestone, becoming more valuable than the entire European stock market. A combination of the market caps for the S&P 500 Information Technology Index, including Amazon, Facebook, and Google parent company Alphabet (which are classified in other sectors) surpassed the Stoxx 600 Index for the first time on record last week. Looking further at sector performance, investors saw Financials and Materials as the only two other sectors that outperformed the S&P 500, finishing up 4.38% and 3.37%, respectively. Financials saw strength in banks with the Bank index (BKX) up 5.6% as yields climbed and the curve steepened.
Also picking up traction throughout the week was the diminishing lead former VP Biden holds over President Trump in the most recent polls. While the Republican National Convention was largely a non-event for the market, just like the Democratic National Convention, it is worth noting the move seen in polls recently. As you can see from the image below, odds have sharply narrowed between the two candidates with strategists from The Hill saying they believe the tightening is a reflection of “of voters starting to look at the race more seriously and partisan allegiances kicking in”.
The tightening of polls comes as President Trump has made up ground in nearly all of the top battleground states and appears to be now faring better in contested states than he was at this point in 2016 versus candidate Hillary Clinton.
- Michigan: Biden’s average poll lead fell from 8.4 in July to 2.6% in August
- North Carolina: Biden’s average poll lead fell from 3.8% in July to even in August
- Pennsylvania: Biden’s average poll lead fell from 7.4% in July to 4.7% in August
- Wisconsin: Biden’s average poll lead fell from 6.4% in July to 3.5% in August
Also in focus was the continued stalemate between party representatives as the latest COVID-19 relief bill discussions on Thursday between House Speaker Pelosi and White House Chief of Staff Meadows failed to achieve any meaningful advances. While it was not surprising, it was largely anticipated as the two parties still remain far apart on the scope and size of the package including:
- Democrats wanting a minimum $2.2T deal, while the White House is looking for a number substantially lower (Democrats were previously at $2.5T and Republicans were at $1.0T). The latest “skinny deal” proposed by Republicans called for $1.3T
- The level of enhanced unemployment benefits, additional state and local government aid, and liability protections remain the big sticking points
While both sides have seemingly supported another round of stimulus checks, an extension of PPP and additional funds for testing, it is unclear as to when a bill agreed upon by both parties could be put forth. Depending on the timeline, Congress may have to pass a stopgap measure in order to prevent a government shutdown on October 1, 2020.
U.S. equities finished the last trading day of the month mixed in what was a fairly quiet session. The Nasdaq Composite recorded another new all-time high on Monday, rising in nine of the last 11 sessions. The Russel 2K, Dow Jones and S&P 500 all closed lower on the final day of trading in August. With the close lower, the S&P 500 snapped it’s seven day winning streak as Energy, Materials and Financials weighed on the benchmark.
Despite the move lower in most indices on Monday, the S&P, Dow, and Nasdaq recorded their fifth straight monthly advance gaining 7.18%, 7.92% and 9.70% over the course of August respectively. It was the Nasdaq’s best August since 2000 and the S&P’s best returns in 34 years since 1986. Gold continued to trade above $1950/oz, however snapped it’s four-month winning streak, slipping 35bps over the 31 days in August. The bulk of the credit for the rally in August seemed to be attributed to the massive monetary and fiscal stimulus implemented, which according to Bank of America, is now pegged at $21T globally with $2B per hour of Central Bank asset purchases.
Market themes remain largely unchanged as the Fed remains dovish, the USD continues to move lower, Coronavirus cases continue their slowing trend, and economic data has largely been improving helping lead the S&P 500 to more than a 50% rally off the March 23rd lows. On the Coronavirus front, headlines remain mixed with total U.S. cases passing six Million on Monday while India surpassed Mexico for the third worst death toll in the world. However, on the positive side, New Jersey governor Phil Murphy said restaurants can re-open for indoor dining this Friday at 25% capacity.
Additionally, there continues to be optimism surrounding a vaccine/treatment for COVID-19 as headlines continue to dominate including:
- Canada Prime minister Justin Trudeau announced that the country has agreed to buy more than 100 million COVID-19 vaccines from JNJ and Novavax.
- Moderna announced last week that their vaccine candidate produced immune responses in people aged 56 years and older that were comparable to those seen in younger adults.
- The FDA granted emergency use authorization for a $5 rapid antigen test from Abbott that the company plans to ship millions of in September.
THIS WEEK INTERNATIONAL
Last week was positive overall for global equities. The MSCI ACWI Index was up 2.71%, led by Communication Services, up 3.9%, and Technology, up 3.83%. Financials gained 3.46%, while Real Estate gained 1.40% after the Fed adopted a more neutral stance toward inflation management. The Energy sector bounced back from last week’s decline as Brent Crude Oil climbed 1.58%. Abu Dhabi signaled that October oil production may be cut to meet the OPEC+ coalition production target. The transportation industry continued to recover, helped by fiscal stimulus, low oil prices, and pent-up demand. The MSCI World transportation index gained 2.58% last week.
Europe: High-frequency data such as mobility data and electricity consumption data suggest a strong rebound from the lows in Germany, France, Italy and Spain despite a fading momentum from July to August. According to data compiled by Bloomberg economics, France operated 7% below normal activity level in July, versus 5% below normal for Germany, and 10% below normal for Spain.
The French government partial unemployment scheme replaced more than 80% of the average income according to Bloomberg economics.
As a result, household income was estimated to be down by just 3% in the second quarter. The saving rate rose 27.4% during the same period. The CAC 40 Index was up 2.18% last week, led by materials, financials and Industrials.
The EU-Mercosur trade deal is currently slowed down by unresolved negotiations between the EU and Mercosur members which are Argentina, Brazil, Paraguay and Uruguay. The deal was initially scheduled to be signed in the second half of the year, but it appears that it will be delayed. The Amazon forest is one of the polarizing topics discussed in the negotiations.
Overall, last week was good for European stocks. The Euro STOXX Index was up 1.73%, led by materials, banks, and travel & leisure. Utilities and health care lagged the index, down 0.31% and 1.53% respectively.
In the United Kingdom, the Bank of England (BOE) Deputy Governor Dave Ramsden said that he will vote for monetary policy to stay on hold in September. He also said the BOE will not purchase inflation-linked bonds or debt with a shorter maturity than three years. Regarding negative rates, BOE members are still divided on the effectiveness of the policy tool. The FTSE All-Share index was down 0.29% last week, despite a good week for oil equipment services, up 7.42%.
APAC – The People’s Bank of China (PBOC) is expected to receive fiscal support, which will limit the need for liquidity injection in the repo market. In fact, the Chinese government is expected to issue more than four Trillion Yuan of bond by the end of the year. This year, the government has already issued nine Trillion Yuan of government securities. The China 10-year government bond yield rose to 3.06% last week, versus 2.98% a week earlier.
The China Construction Bank has concluded its digital currency testing and refunded money to customers who made deposits to their digital wallets. According to the customer service department of the bank, the crypto products are still “under development”. Yi Gang, governor of the People’s Bank of China said that the Yuan digital currency will be tested in closed environments, such as Shenzhen, Suzhou, and at the 2022 Beijing Winter Olympic games.
The Shanghai Composite Index was up 0.68% last week, led by Industrials, up 1.33%. Utilities were down 1.12%.
In Japan, factory output rose 8% month-over-month, beating the consensus estimate of 5% gain. The output is still 16% below last year’s level. Car production rose 39% month-over-month and domestic motor vehicle monthly sales rose 7.8%. Retail sales fell 3.3% from the previous month. The Nikkei 225 was down 0.16% last week, shaken by the news of Shinzo Abe’s resignation as prime minister of Japan. We will know the name of his successor in September.
Fitch Ratings has assigned the state of Rio de Janeiro a “BB-“ rating with a negative outlook. The rating agency noted that the state has been “unable to fully service its debt since mid-2016”. The Brazilian government projects to grow 3.2% in 2021.
Brazil is considering reinstating tariff on U.S. Ethanol after President Donald Trump cut steel import quota from Brazil. Brazilian stocks were up 0.61% last week, led by utilities.
In India, the Statistics Ministry reported that the gross domestic product shrank 23.9% in the second quarter, missing the consensus of 18% contraction. India is the third country in the world in terms of COVID-19 cases, with more than 3.6 million cases, right behind Brazil and the United States. The Nifty 50 index gained 2.43% last week, led by financials and the automotive industry.
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