Market Update – 2nd July 2020.

The tug of war between an economic recovery versus a rise in coronavirus cases and geopolitical tensions continues to yo-yo equity markets.

However, this morning the bulls are in charge as equity markets are trading higher, with the FTSE-100, as we write, up around 60 points, or 1%, at 6,220, following positive economic data and news of a possible coronavirus vaccine.

In the US yesterday afternoon, the initial headline ADP Employment Change data appeared disappointing as just 2.37m jobs were added in June – well short of economists’ consensus estimates of 2.9m.  However, May’s data saw a massive revision:  having previously reported that 2.76m jobs were lost, it was revised to show 3.06m jobs were added – an incredible 5.82m difference!

Consequently, May and June data taken together shows that the US employment market is improving rapidly as lockdown restrictions start to be eased.

Additionally, this bodes well for this afternoon’s important and market sensitive, non-farm payroll data for June – and if we get a blow-out number (which we believe we will, given the number of states that have reopened, which would boost leisure and hospitality jobs), it will give equity market sentiment a nice boost going into the weekend (US equity markets are closed tomorrow, Friday 3 July 2020, for Independence Day).

US ISM manufacturing also unsurprisingly recovered nicely from 43.1 to 52.6 – we have mentioned a number of Fed district activity indices over the past couple of weeks (such as the Empire State and the Philadelphia Fed surveys), which have come in strongly, and gave us a big hint that this reading would be strong.  50 is the line separating expansion and contraction, so not only is a reading of 52.6 very positive in itself, but this is the best reading since April 2019!

This all indicates that the US (the largest economy in the world) is on track for the V-shaped economic recovery that we have been talking about in these daily commentaries for some time.

Admittedly, uncertainties have increased with the spread of the coronavirus in a few states, however we believe it is wrong to assume data will quickly turn negative, given that we are still in the early stages of the recovery, coupled with the fact that a coronavirus vaccine probably isn’t too far away given the staggering number of drug companies around the world working on a vaccine.  And yesterday afternoon’s announcement that Pfizer’s phase 1 vaccine trial produced a strong immune response is very positive.

Elsewhere the minutes of the last Fed monetary policy meeting, held on 10 June 2020, didn’t shed much more light on their thoughts other than the Fed is currently conducting a review which may mean a symmetric 2% inflation target – thus allowing the Fed to run the economy (and inflation) a little hotter in the future, as the current 2% target has been massively undershot for most of the period since the 2008/9 global financial crisis (as the focus on not breaching the 2% target can, and has, resulted in the premature withdrawal of monetary stimulus).

It is a very busy afternoon and evening for us given the volume of economic data due out, including, as we mentioned earlier the highly important non-farm payrolls, plus the US unemployment rate; average earnings; participation rate; the weekly initial and continuing jobless claims; trade balance; and durable goods orders – which we will update you about in tomorrow’s commentary.

Investment Management Team