Weekly market update : An uncertain August

08/03/2020 | 10:03am
Monday
August  3
Weekly market update
intro Indices have been up and down last week. Hopes of a US stimulus package have collided with good earnings reports across the US, but less so in Europe. Against this backdrop of a protracted health crisis, caution is a must this summer, when operators will be less present in front of their screens.
Indexes

Over the past week, there have been significant disparities in Asia. With a mirror effect, the Nikkei posted a loss of 4.58% while the CSI 300 (Shanghai stock exchange) posted a performance of 4.20%. As for the Hang Seng, it is almost at equilibrium over the period with -0.45%.

In the wake of the previous week, European indices continue to lose ground. Spain saw the biggest drop (-5.3%) followed by Italy (-4.4%). The two Latin countries thus underperformed the Euro Stoxx 50 (-3.7%). The Footsie (-3.4%) and the DAX (-3.9%) closely followed the changes in the European index. The CAC was the "good pupil" over the period (-3%). However, the OMX Stockholm 30 was the most resilient, losing only 2.4%.

Across the Atlantic, the indices do not seem to be moving in the same direction as Europe, except perhaps for the Dow Jones (-1.1%). The S&P was up slightly (+0.5%). Only the NASDAQ shone last week, as usual, with an upward acceleration of more than 2.7%.

End of an oblique support on the Euro Stoxx 50

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Commodities

While volatility has risen a notch last week due to the eternal questions surrounding the state of crude demand, oil prices have finally stabilized. WTI is effectively trading at USD 40.3, while Brent Crude is holding above USD 43 a barrel.

A new record for gold, which traded today at USD 1984 and is now trading closer to the USD 2,000 per ounce mark. The gold metal is still highly sought after, despite the collapse in demand for jewelry, offset by the acceleration in purchases of specialized ETFs. While silver did not hit an all-time high last week, it has the merit of having posted an annual high at USD 26.19.

Helped by the weak dollar, industrial metals posted a positive weekly sequence, as did lead and aluminum, which rose by 1.9% and 1.6% respectively to USD 1841 and USD 1681 per metric ton.
Equities markets

After experiencing a boom during the legalization of cannabis in Canada in 2018, the sector quickly collapsed and was badly battered until very recently. Nevertheless, the trend is towards liberalization, and legalization is expected to spread to other economies and even accelerate with the global pandemic.

Curaleaf Holdings, listed in Canada, operates only in the United States. To date, some 30 US states allow medical marijuana and 12 have legalized the sale of marijuana for recreational use.
With a presence in 23 states, and a distribution network of 88 stores, the cannabis operator now serves more than 350,000 patients. Curaleaf favours external growth (acquisition of Grassroots and Select), which gives it vertical integration to control all stages of the value chain, from cultivation to distribution.

The company achieved sales of $221 million in 2019, an exponential growth of 1045% compared to 2017. But the company continues to lose money with a negative free cash flow of $120 million, explained by its strategy of buying out competitors.

On the stock market, the Curaleaf share has lost nearly 74% between its 2019 high and its March 2020 low. But the share recovered very quickly with an upward acceleration of 188%. As part of its USA portfolio, MarketScreener bought the stock with a latent gain of 40% to date.

Curaleaf stock has just bounced back

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Bond market

Market participants are in a state of perplexity, as evidenced by the further decline in sovereign bond yields. The German bund is sinking into negative territory at -0.55% and is approaching the Swiss ten-year rate (-0.58%). The French OAT duplicates this performance below zero with a return of -0.22%.

Taking advantage of this craze for European government securities (which contributes to the rise of the single currency), Italy saw the yield on its 10-year debt fall below 1% and Spain paid 0.3% interest on its bond with an equivalent maturity. Even Greece has an advantageous borrowing rate of 1.05%.

In the U.S., investors are also favouring the public debt market with strong demand for the bond, which has seen its yield fall to -0.55%.
Forex market

Bearishs on the dollar may be pleased with President Donald Trump's latest tweet, which mentions the idea of postponing the November elections. Even if he later denied it, this announcement accelerated the fall of the greenback, which started 4 months ago.

The dollar is trading on the basis of USD 1,1830 against the single currency, a low since May 2018 and validating a decline of about 9.5% since its 2020 peak reached in March in the midst of the health crisis in Europe.

For its part, the cable (GBP/USD) rose significantly to USD 1.63 (+300 basis points).

Fitch has just notified Japan's current triple "A" rating, but with a negative outlook for the future. The agency expects the Japanese economy to contract by 5% in 2020 before rebounding by 3.2% next year. On the news, the Yen weakened against the EUR (JPY 124.20) but gained further ground against the Dollar (JPY 104.60), up 300 basis points on the week.

Sharp deterioration of the dollar to May 2018 levels

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Economic data

Last week's statistics focused on the GDPs of the major economies for the second quarter. In the United States, we saw a record 32.9% quarter-on-quarter drop. Within the Eurozone, the drop was "only" 12.1%, with -13.8% for France, -18.5% for Spain and -12.4% for Italy.

Unemployment publications also took place last week. Spain published Q2 data at 15.33%. Germany, Italy and the Euro-Zone released June figures at 6.4%, 8.8% and 7.8% respectively. Across the Atlantic, there was a second week of increase in weekly Unemployment Claims at 1434K, up from 1422K last week.

Still in the United States, we saw a nice increase in durable goods orders in June, at 7.3%, marked by an 85.7% increase in the automotive sector. Consumer confidence deteriorated somewhat, to 92.6, against 98.3, as Sino-American tensions increased and the virus accelerated.

In Germany, the IFO Business Climate Index jumped to 90.5 in July from 86.3 in June.

Finally, in Asia, China's July SMIs were 51.1 for manufacturing industry and 54.2 for non-manufacturing industry.

U.S. GDP plunges sharply in Q2

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An uncertain August

Macroeconomic data shows that the world's largest economy contracted sharply by 32.9% in the second quarter, even after unprecedented levels of monetary and fiscal stimulus from various institutions.

This reinforces the caution of investors, who are focusing their purchases on tech stars, while a whole section of the economy (industry, tourism, automobiles, etc.) is suffering dangerously. The divergence is intensifying with the earnings season, which highlights the damage caused by lockdowns.

The month of August opens with stress, all the more so as - historically- this period of summer has often reserved surprises for us. There is no shortage of subjects between the Sino-American trade war, the configuration of the recovery and therapeutic advances.
Patrick Rejaunier
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