The tug of war between an economic recovery versus a rise in coronavirus cases has continued overnight. US equity markets yesterday recouped the vast majority of last week’s losses, after the Dow Jones rallied nearly 600 points, or 2.32%, while the broader S&P 500 index ended the day just shy of 1.5% higher, on economic optimism following better than expected economic data. In the UK, the FTSE-100 having closed up 66 points yesterday (1.08%) has this morning fallen, and is currently down around 30 points (0.5%), on worries that the rising number of US coronavirus infections could slow the economic recovery.
As we have previously warned, over the coming weeks and months taking two steps forward and one step back is something we are now going to have to live with as elevated equity market volatility is now the new ‘normal’.
Yesterday’s rally was helped by a record increase in US pending home sales, which clearly suggests that US consumers aren’t concerned about unemployment or coronavirus risks and are still happy to spend – no doubt helped by record low mortgage rates.
In addition, the Dallas Fed’s Manufacturing Outlook and Business Activity index rebounded sharply, adding to the list of Fed districts reporting regional recoveries – as we highlighted yesterday (Monday 29 June 2020, please see here), Texas has the second largest economy in the US, but it is also currently one of the coronavirus infection hotspots, so the index readings are of particular interest.
Unfortunately it wasn’t all champagne and caviar, while the general business activity index jumped by 43 points, it remained negative (with a reading of -6.1), as did employment (-1.5) and the length of the workweek (-4.3), with the bank stating that 15% of firms reported adding workers, while 17% were laying people off – so we may see the state of Texas report another increase in jobless claims on Thursday (2 July 2020).
Overnight Chinese PMI data also came in stronger than consensus expectations, indicating that their economic expansion is continuing, despite lockdown restrictions elsewhere around the globe: manufacturing PMI rose from 50.6 to 50.9, while non-manufacturing strengthened from 53.6 to 54.4.
Investment Management Team