After an initial positive start to the week, US equity markets gave up all its gains in the last hour of trading (8-9pm UK time): having been up over 2%, the Dow Jones closed almost unchanged on the day, while the S&P 500 closed down nearly 1% after California said it was scaling back its economic reopening due to record coronavirus hospitalisations.
California has the largest economy in the US (its economy is actually bigger than that of the UK) and this could slow a V-shaped economic recovery to a ‘Nike Swoosh’ (i.e. still a strong recovery, just slower), especially, if Americans cut back on non-essential expenditure and instead start to save (the US, like the UK, is a consumer-driven economy, with the consumer accounting for two-thirds of the US economy).
Consequently, we wouldn’t be surprised if both Donald Trump and the Fed (the US central bank) announce further stimulus measures in the coming weeks and months.
Likewise, following this morning’s disappointing UK GDP data for May, which came in at just +1.8% (meaning that over the 3 month period covering March, April and May, the UK economy contracted by 19.1%), suggests to us that further stimulus will be forthcoming. We believe that this will most likely be via negative UK interest rates as the consumer accounts for around 60% of the UK economy – and so the BoE will want to deter saving and encourage consumers to spend and businesses to invest.
Adding to the negative sentiment are new US/China tensions – this time over China’s decision to announce sanctions on four US officials coupled with the US statement that China’s claims to the South China Sea was “unlawful”.
Consequently, UK equity markets have opened lower this morning and the FTSE-100 is currently trading down around 30 points, or 0.5%.
Later today, the US Q2 earnings reporting season starts to pick up speed with earnings announcements from JPMorgan, Citigroup, Wells Fargo (all large US banks) and Delta Air Lines.
Although the earnings season is going to look ugly, the profit (or loss) numbers are almost irrelevant as everyone knows the reporting period has been difficult due to the coronavirus lockdown restrictions. Consequently, of most interest to us will be the accompanying statements and outlook guidance as we would like to see confidence that 2021 will see company profitability rebound strongly – which will in turn offset the current negative coronavirus and geopolitical sentiment and help push equity markets higher in the coming weeks and months.
Investment Management Team