The Slow Recovery
Macro newsflow is starting to take the driving seat in terms of stock market performance, with Q1 earnings reports largely done. It's been a shaky week on the macro front with a number of factors pushing stocks higher and also a number of factors pulling them back lower, so we thought it might be useful to take a look at what's been helping and hurting financial markets this week.
What's been helping?
First and foremost, we've seen incrementally positive news flow regarding a potential COVID vaccine. Anthony Fauci - one of the lead scientists in the US coronavirus task force - stated he was "cautiously optimistic" with regards to a potential vaccine currently being developed by Moderna. This was followed by news that the US government is handing $1.2bn to AstraZeneca in order to secure a third of the first billion doses of the company’s promising experimental vaccine which is being developed jointly with the University of Oxford.
Thanks to the dismal nature of most economic data releases in recent weeks, financial markets have seen increasingly muted reactions with every additional piece of dismal economic data released. That is to say, worse-than-expected economic data has added limited downward pressure on stock prices. This was evident when we saw limited reactions to worse-than-expected German manufacturing data and UK retail sales.
On the flip side, this week we've also seen better-than-expected economic data drive increasingly positive investor sentiment. UK Purchasing Managers Index data - a leading economic indicator - signalled economic activity in the UK is seeing a better-than-expected rebound, adding to positive investor sentiment. We also saw a sizeable reduction in US crude oil inventories - a sign of increasing economic activity ahead for the US, perhaps.
Although most of the stock market's heavyweights have already reported Q1 earnings, there are still some which continue trickling through. This week, we saw signs that the real economy in the US is hanging in there - in particular US retailers - which announced mixed Q1 earnings relative to expectations, with Best Buy, Target and Walmart all managing to report Q1 earnings without sounding any significant alarms amongst the investor community. We also saw Starbucks indicating there may be positive signs of recovery in the company's sales - important given the company's global footprint. Elsewhere, we saw digital economy names continue their streak of robust earnings releases, with Palo Alto Networks one of the highlights this week as it outperformed versus analyst expectations thanks to increased demand for its cybersecurity products.
Fiscal & Monetary Policy
We've seen the big fiscal and monetary stimulus packages already announced but there are continuing signs of support from politicians and central bankers across the world. This week, US Federal Reserve chair Jerome Powell reiterated that the Fed still had plenty of ammunition it could deploy if additional monetary policy measures were needed to support the US economy. This helped bolster investment sentiment in the US.
Meanwhile in Europe, Angela Merkel and Emmanuel Macron proposed in a joint press conference on Monday a €500bn recovery fund to distribute grants to the hardest hit sectors and regions of the EU. Under the plan, the EU would borrow the money as one entity on behalf of all 27 member states - a proposal which has since faced opposition from other member states. Whether they can pull this off remains to be seen, but the news definitely helped boost short term sentiment across European stock markets.
What's been hurting?
US / China Trade Tensions
A new legislation currently making its way through US Congress - the Holding Foreign Companies Accountable Act (HFCAA) - poses a threat for Chinese companies listed on US stock exchanges. The law would require companies to certify - among other things - that they are not owned or controlled by a foreign government. An estimated 165 Chinese companies currently listed on US stock exchanges couldl be affected by the legislation, including heavyweights such as Baidu, Ali Baba, JD.com and Tencent. It's unlikely at this stage that all of these companies would have to delist from US stock exchanges but it's something to keep an eye on with some companies already actively exploring the possibility of re-listing their stocks closer to their home market either in Mainland China or Hong Kong. While this isn't directly aimed at the Chinese government, the law does inevitably add fuel to the broader US / China trade war.
The Chinese government also made a move of it's own this week, announcing plans to impose national security legislation in Hong Kong, overriding the territory's constitution in a move that has been perceived as a slap-in-the-face for democracy. Hong Kong stocks and the HANG SENG stock index fell by more than 5% after the announcement yesterday. Given the Trump administration's vocal support of the Hong Kong protests towards the end of last year, we'll be watching this space for US retaliation next week.
Huawei was also back in the limelight this week with President Trump insisting that Huawei technology would not be allowed in the US unless it was made in the US. This news dragged a number of semiconductor stocks lower.
Chinese Growth Concerns
The Chinese government abandoned it's decades-long practice of setting an annual target for economic growth in the face of uncertainty driven by the coronavirus pandemic.
The Yuan weakened following the announcement while stock markets in Mainland China dipped to close lower for the week. The news also prompted a sell-off in crude oil yesterday, with prices dropping by around 5% and giving pause to an oil price rally which has been motoring higher for the past month since recovering from the heavy declines seen throughout most of March & April.
At this stage, it seems as though the positive news flow which is helping the global economy is outweighing the negative news flow which has largely been driven by US / China trade tensions.
While the "Phase 1" deal between the US & China - which was so emphatically celebrated by financial markets during Dec '19 / Jan '20 - looks like it's still in place, each additional source of trade tension puts the deal at incrementally higher risk of collapsing and takes us further away from any "Phase 2" deal being successfully negotiated.
This is why we'll be looking out for trade tensions to come back into the fore as a prominent driver of global financial markets over the next few weeks just as it was before COVID entered the fray.
As always, we look forward to keeping you up to date with the latest developments. Meanwhile, we hope you have a great week ahead - until next time!
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