Please see below for Invesco’s latest Investment Intelligence Update:
News flow last week, such as Non-Farm Payrolls and the ISM surveys in the US, was generally supportive of a positive tone in financial markets. “V” looks the shape of the recovery, for now at least. The virus news, however, remains mixed. New confirmed cases continue to roll over in the US, albeit still at elevated levels, while in Europe and DM Asia case growth remains relatively low, although it has risen in recent weeks. Case growth continues at elevated levels in Latin America. Central Bank dovishness remains very much the order of the day, with the Bank of England last week reiterating the uncertain outlook and the preparedness to do more if needed. Geo-political strains between the US and China refuse to go away, and in fact look as if they are escalating, while progress towards further US fiscal stimulus continues to frustrate.
Global equities hit their highest level since the bear market low during the week and are now back into positive territory for the year, now just 3% from their all-time high. Small caps and value/cyclical sectors led the way. In the UK further £ strength weighed on FTSE 100 relative performance, which dragged the All Share lower.
There was mixed performance in fixed income, with government bonds weaker at the margin, with the odd exception (Italy, EM). IG and HY continue to make progress. A new record low for yields for the former, while further declines in yields for the latter returned the asset class to positive territory for the year. Spreads for both still remain well above the lows seen earlier in the year.
The US$ halted its decline (see Chart of the week). Economic optimism helped boost economically sensitive commodity prices. China, the world’s biggest consumer of copper, saw record imports for the second straight month. Gold pushed to new highs as real yields declined to record lows and investor demand remained elevated.
Market performance last week (%)
Past performance is not a guide to future returns. Sources: Datastream as at 9 August 2020. See important information for details of the indices used.1
YTD market performance and YTD low (%)
Past performance is not a guide to future returns. Sources: Datastream as at 9 August 2020. See important information for details of the indices used.1
Chart of the week: US$ Index
Source: Datastream as at 8 August 2020.
- One of the features of financial markets since the peak of the pandemic crisis dislocation in late March has been the weakness in the US$. In this chart we use the US$ Index (DXY) as a proxy for the currency’s performance (Fixed currency weights for DXY are Euro 57.6%, Yen 13.6%, £ 11.9%, Canadian $ 9.1%, Swedish Krona (SEK) 4.2% and Swiss Franc 3.6%).
- At its YTD peak (late March) it had risen just under 7% on the back of its safe-haven, reserve currency characteristics and a shortage of US$ liquidity. Since then it has given up all those gains and more, declining 9.1% and now down just over 3% YTD. It is now at levels last seen in May 2018 and its 100-day decline has been the worst since November 2010. The major contributor to this weakness has been strength in the Euro (10.3%), given its high index weight, but other currencies have been stronger (SEK +18.7%, £ +11.1%). The Yen has been the weakest on a relative basis, but has still risen 4.6%.
- Why has the US$ been so weak? A number of factors have contributed: the global rebound in growth has favoured more cyclical currencies, such as the Euro; an unwinding of safe-haven flows into the US$ on the back of this; real and nominal interest rate differentials between the US and another major markets have collapsed; aggressive Federal Reserve policy has alleviated US$ funding issues; fiscal and structural optimism in Europe on the back of agreement on the European Recovery Fund; the Federal Reserve and US government is happy to see a weaker currency; and finally, idiosyncratic US political and fiscal risk. All have weighed on a currency that on most measures was overvalued and where investor positioning was extended.
- Can the US$ weaken further? Fundamentals are currently stacked up against the currency for now, but this is in the context where the DXY has moved from its most overbought level ever (relative to its 12m average) to its most oversold level since 1978. At the same time investor positioning (based on CFTC data) is now at a record short.
- What does US$ weakness mean for financial markets? Historically it has benefitted global equites (and non-US stocks in particular), cyclical sectors, EM assets in general and commodity prices, such as Gold and Copper.
Key economic data in the week ahead:
A relatively quiet week ahead on the data front.
In the US there is July’s CPI reading on Wednesday. Headline inflation is expected to rise slightly to 0.7%yoy, off the pandemic lows, but still at the lowest level since 2015. Core inflation is expected to see a marginal decline to 1.1%yoy, its lowest level since 2011. The pandemic has been disinflationary. Initial jobless claims out on Thursday are forecast to show another 1.4m people receiving unemployment benefits, despite the better than expected Non-Farm Payroll data last Friday. Data on the strength of the US consumer is also out, with US retail sales for July published Friday and forecast to show a slowing recovery (1.9%mom vs 7.5%mom in June), while the preliminary reading of the University of Michigan Sentiment Index is expected to fall further and continue to hover around pandemic lows.
In the UK the most anticipated datapoint next week is the Q2 GDP release on Wednesday. If the forecasts of -20.5% prove right it would be the worst quarterly contraction of the UK economy on record. Broad-based weakness is expected, with the increase in government spending the only positive, depending on your point of view. Monthly GDP for June will also be released at the same time, which should show an underlying improving trend in the economy not seen in the quarterly numbers, with 8%mom forecast compared to May’s 1.8%mom. The latest UK unemployment report is published on Tuesday. The unemployment rate is expected to rise only slightly to 4.2% from 3.9% as the labour market continues to be underpinned by the government’s job retention scheme. The true health of the labour market will be seen away from the headline data in areas such as the number who are now economically inactive, hours worked and vacancy levels. These all point to higher levels of unemployment by year end, with the Bank of England’s Monetary Policy Report last week seeing it at 7.5%. Finally, there is July’s RICS house price data on Friday, which is expected to show a -5% drop in July, but up from -15% last month, highlighting the gradual improvement in the housing market in England and Wales.
China’s July data pipeline started last week and will continue throughout this week with figures on CPI (Monday) industrial production, fixed investment, retail sales, house price inflation and unemployment (all on Friday). Most indicators are forecast to post better readings than they did in June, suggesting that the third quarter is off to a relatively firm start.
Nothing of note during the week from either the EZ or Japan.
An insightful look into the markets by the experts at Invesco. These weekly updates are useful in terms of providing a regular overall view of the market.
Please use Invesco’s Investment Intelligence updates as well as our other blogs to refresh your view of current goings on in the global markets.
Keep safe and well.
Paul Green
11/08/2020