Market Review 06/2020

In June, US stock indices held their positions without showing any specific dynamics. The exception was Nasdaq, which grew by more than 5%. European indices Euro Stoxx 50 and Dax behaved less modestly, adding 6% and 6.25% respectively. At the beginning of the month, after the S&P 500 rose slightly above the 3230 mark, the indices entered a phase of a slight correction, which, however, did no great harm to anyone.

Optimistic pessimism

Technically, we are seeing consolidation and hints of continued growth, possibly with updating historical highs on the S&P 500 and Dax indices. At the same time, we assume that in the coming months we will see index values that will be lower than the current levels. It is not only negative press – troubles of various sorts are haunting businesses per se. We see an ongoing series of bankruptcies with Chesapeake Energy and Wirecard AG throwing in a towel, the latter with great scandal and number of questions to its auditors and regulators.

Activity returns, cautiousness remains

US manufacturing activity rebounded in June, hitting its highest level in more than a year as the broader economy reopened. Nevertheless, rising Covid-19 infections threaten the recovery. The Institute for Supply Management said its index of national factory activity jumped to a reading of 52.6 last month from 43.1 in May. The rebound in the ISM index was in tandem with improvements in regional manufacturing surveys and added to positive data on job growth, consumer spending and housing market. Private sector added 2.36 million jobs in June as businesses reopened and US consumer confidence grew more than expected. The Federal Reserve Chair Jerome Powell said that while recent signs of improvement including a surprise gain in employment and a record rise in retail sales last month are encouraging, the damage inflicted by forced economic shutdowns to curb the spread of the virus has left a very deep hole to fill, especially on the employment front.

German retail sales rebounded sharply in May and unemployment rose less than expected in June. Retail sales rose by almost 14%, rebounding from a 6.5% drop in April, largely supported by online shopping. Figures meant that 2.943 million people were jobless in Germany last month, nudging the seasonally adjusted unemployment rate up to 6.4%. German annual inflation accelerated at low levels in June, but remained well below the European Central Bank’s target, providing further justification for stimulus.

China gives hope to the whole region

China’s factory activity grew at a faster clip in June after the government lifted coronavirus lockdown measures and ramped up support. The Caixin/Markit Manufacturing Purchasing Managers’ Index rose to 51.2 last month, the fastest pace of growth since December. China’s economy is gradually emerging from a sharp 6.8% contraction in the first quarter, with much of the country now reopened after weeks of disruptions early in the year. Demand remained subdued however, as many manufacturers are still struggling with reduced or cancelled overseas orders amid faltering global demand. Asia’s factory pain showed signs of easing in June, as a rebound in China’s activity offered some hope for the region. Manufacturing activity also expanded in Vietnam and Malaysia. India’s manufacturing activity contracted for the third straight month in June but at a much slower pace.

Interesting opportunities in FX market

Dollar index bounced off 96 level and spent all June in the usual choppy environment. We feel that USD wants to attack large medium term support at 95 mark, so accordingly we need to watch EUR/USD weekly chart for confirmation. Idea is that EUR/USD weekly close above 1.1310 might set the stage for some action.

While precious metals and yields are not doing much, we found one interesting FX chart – EUR vs GBP. Pair has spent last 3-4 years in chaotic narrow sideways action and if we read larger pattern correctly – eventually it needs to see impressive move higher in EUR vs GBP followed by dramatic reversal. Will it work out and how it will work out is yet to be seen, but if we prove to be right about it – it offers excellent trading opportunities.

Good month for fixed income

June was a good month for fixed income investments. Despite the strong statement from the US Federal Reserve that negative interest rates are not on the cards for the US, the 2-year Treasury note yields fell to 0.1485% on the last day of June. The overall level of government bond yields both in the US and Europe remain at their lows.

Meanwhile, six months into 2020, new bond issuances are on track to surpass the total amount issued in 2019 any moment now. Such widespread borrowing spree is widely seen as acceptable due to extraordinary circumstances to overcome the Covid-19 blowout. Governments around the world are announcing ever-newer stimulus programs all the while sinking deeper into debt. Luckily, financial market’s risk appetite seems insatiable and is able to gobble it all up, thus pushing prices higher. Consequently, corporate high yield indices in US and Europe gained 2% in June, while Bloomberg Barclays EuroAgg Corporate managed a 0.98% gain.

Who is ready for acceleration?

As an endnote, we once again remind our readers that financial markets are quite far away from the real economy therefore sharp changes in sentiment cannot be ruled out. The fall in prices in the first quarter of the year by 35-40% and the current rally of 50-60% possibly mean a transition to much greater speed of change in realities and trends to which most investors are not ready.