Today’s podcast

Overview: I won’t back down

• Tech shares lead the US equity gains on Friday. Capping a solid week and month
• Democrats and Republicans are not backing down. No progress over the weekend
• USD makes broad gains on Friday, but not enough to avert worst month in years
• AUD trades above 72c for the first time since mid Apr-19, before closing the month at 0.7143
• FX month end flows a factor at play while COVID-19 outbreaks are a growing concern
• The UK is considering sealing off Greater London while Victoria moves to Stage 4 ‘Stay at Home’ restrictions
• 10y UST real rates break below -1% for the first time in history
• US to steps up measures against Chinese software companies
• What to watch this week
  • Today we get China’s Caixin Manufacturing PMI, US ISM Manufacturing PMI and Fed speakers
  • Rest of the week: RBA, AU Retail Sales, RBA SOMP, NZ Q2 Labour Market report, ISM Non-Manufacturing and non-farm payrolls

Well, I won’t back down, No I won’t back down

You can stand me up at the gates of hell, But I won’t back down – Tom Petty

US tech shares led the charge on Friday, helping main US equity indices end a solid month of gains on a positive note. USD makes broad gains on Friday, but not enough to avert worst month in years. Month end flows a likely factor at play, but undercurrents also point to some cautiousness. Global virus hotspots, including Victoria, along with the need for more severe containment measures is a growing while US politician remain at odds on a new economic relief package.

The S&P 500 gained 0.8% on Friday and the NASDAQ was up 1.5%

After reporting solid earnings numbers on Thursday (after the bell), tech giants such as Apple (10%), Facebook (8%) and Amazon (4%) made solid gains on Friday, helping the S&P 500 record its fourth consecutive month of positive returns, up 5,51% while the NASDAQ climbed 6.82%. But a broader look at the US equity market depicts a more sobering picture.

The COVID-19 crisis has been good for tech companies

However other sectors in the economy are hurting, Exxon Mobil Corp. and Chevron Corp. posted the worst losses in a generation, oil over supply and  containment measures have had a big negative impact, meanwhile Caterpillar, an economic bellwether, is cutting cost to make up for a decline in sales and remains concern over the prospects for the rest of the year. The Russell 2000 index of small cap stocks, arguably more representative of the US economy than the now tech-heavy S&P500, fell 1% and was only up 3.38% on the month.

Looking at other equity markets

The Shanghai composite was the outstanding performer in July, up just under 11% while the Nikkei was down 2.59%. Both reflecting contrasting fortunes from the COVID-19 crisis.

Meanwhile

US politicians remain at loggerheads unable to find a common ground for a new virus economic relief package. US employment benefits expired on Friday and now around 30m American face the prospect of no income support, harming the US recovery, which was already showing signs of losing momentum. White House Chief of Staff Mark Meadows said on Sunday he was not optimistic on reaching agreement soon on a deal for the next round of legislation to provide relief to Americans hit hard by the coronavirus pandemic. Treasury Secretary Mnuchin sounded a little bit more optimistic, noting that there was “still a lot of work to do” to find a compromise agreement, but talks were described as productive. The Senate is due to go into recess on Friday and the lack of breakthrough over the weekend could see risk assets struggle at the start of the new week. 

An additional concern for markets at the start of the new week

…. is the increase in tensions between the US and China. Microsoft expressed interest in buying the US operations of the video-sharing app TikTok, but late Friday president Trump opposed the deal. Over the weekend, US Secretary of State Michael Pompeo said that the White House will announce measures shortly against “a broad array” of Chinese-owned software deemed to pose national-security risks. Chinese software companies doing business in the US are feeding data directly to Chinese authorities “whether it’s TikTok or WeChat — there are countless more,” Pompeo said on Fox News Channel’s “Sunday Morning Futures.”

Moving onto to currencies

The USD enjoyed an impressive rebound on Friday with JPY (-1.05%) and NZD (1.04%) bearing the brunt of it. Month end flows were probably a factor at play while some profit taking may have also played a part. Still the greenback gains on Friday were not enough to reverse the big losses for the month July with the BBDXY falling 3.3% and the EUR rising almost 5%, its biggest monthly gain since late 2010, buoyed by the €750b EU Recovery Fund.

The AUD traded above 72c on Friday ( intraday high of 0.7227), but the broad USD gains weighed on the pair before the close. The AUD closed the month at 0.7143, down 0.72% on the day, but up 3.30% for the month of July. The aussie opens the new week at 0.7130, so a little bit softer and likely reflecting weekend news from Victoria. The Australian notes this morning that Melburnians will spend the next six weeks under the strictest curfew in Australia’s history, following the introduction of new restrictions on the city’s residents. Premier Andrew’s conceded that his government’s existing strategy had failed to curtail the deadly sweep of the coronavirus across the state.

One of the factors weighing on the USD (albeit not so much on Friday) has been the steady decline in US real (inflation-adjusted) interest rates.  The 10-year US real rate fell to an all-time low on Friday, breaking below -1% for the first time.  Nominal interest rates were little changed (the US 10-year rate continues to sit just above 0.5%), with the latest decline in real rates more to do with rising market-implied inflation expectations.  The Fed is expected to alter its forward guidance, possibly as soon as its next meeting in September, to communicate a willingness to accept a period of above-target inflation.  Credit rating agency Fitch put its AAA rating on the US government on negative outlook late in the session, due to the deterioration in the fiscal outlook, but there was little market reaction.

The theme for UST yield over the month of July was a big flattening of the curve with the long end leading the move lower. The 30y bond was down 22bps and ended the month at  1.19%.

There was plenty of economic data released on Friday but to little market reaction

Eurozone Q2 GDP fell more than 12%, in-line with economist expectations, led by an 18.5% fall in Spanish GDP.  Higher frequency data, like the PMIs suggest the region has returned to growth, although the recent pick-up in COVID-19 cases in several countries is a risk for the outlook.  Spain reported over 3,000 new cases on Saturday, its most since mid-April.  Meanwhile, in the UK, the government announced that it was banning separate households in the parts of Northern England from visiting each other, to contain the spread of the virus, and there have been reports the government is considering sealing off Greater London from the rest of the country.

Finally a word on commodities

Gold had another glittering day on Friday, up 1.06%, but iron ore was not too far behind, up 1.05% and indeed for the month, iron ore was the outstanding outperformer, up just under 14% while gold gained 9%. Overall commodities had a good month of July with Steam coal the struggle, down 0,38%.

Coming up

• We have a busy start to the new week with China’s Caixin Manufacturing PMI for July the highlight during our day (51.2 unchanged expected). Final PMIs for July are released around the globe including for Japan, many EU countries, Euro Area and the US. The US Manufacturing ISM (July Mkt at 54.0, up from 52.6 in June) is also out later tonight and there are three Fed speakers on the roster, Fed Bullard (non-voter, dove), Barking (non-voter, centrist) and Evans (non-voter, dovish).
• Tuesday brings two important domestic events for the week. The RBA meeting, where it is almost certain the bank will keep monetary policy and its policy guidance unchanged and the retail sales which should show real retail spending fell in Q2 by 1.4% q/q, taking ¼ pp from Q2 GDP. The RBA Statement on Monetary Policy is published on Friday.
• NZ gets its Q2 labour market report on Wednesday with our BNZ colleagues forecasting 5.9% for the unemployment rate (from 4.2% in Q1), a 2.1% quarterly decrease in employment, and a drop in the participation rate to 69.8%, from in 70.4%.
• In offshore markets, the US has a busy week with the non-manufacturing July survey out on Wednesday, followed by non-farm payrolls (July) on Friday, where 1.5mn jobs are expected to be created (but where the range of estimates is a wide -1m to +3.3mn). The unemployment rate is expected to decline from 11.1% to 10.5%, but much will depend on the participation rate. China’s Caixin Services PMI is released on Wednesday, the BoE meets on Thursday – no policy changes are expected.

Market prices

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