Monday’s Bullseye 29 June 2020

After stocks rebounded on Thursday despite the US reporting a record number of virus cases, there was some follow-through for European indices first thing Friday morning. However, the gains were short-lived and after Wall Street opened, European and US indices both fell. US bank stocks were hammered in response to the Fed’s stress tests, released Thursday. Although lenders were found to be well-capitalized, the Fed announced steps to preserve their capital. These included banning banks from buying back their shares in the third quarter and capping their dividend to no more than the amount paid in the second quarter. It will be interesting to see how the markets will close on Friday, as it was all about follow-through or lack thereof.

So far, every small and big dips have been bought on optimism over the re-opening of major economies and as concerns over the virus outbreak in the US have so far been offset by ongoing support from central banks. However, given the big rally post lockdown, I wonder whether the impact of central bank stimulus is now priced in. And as concerns remain elevated about the economic impact of the resurgence in virus cases, could we see a more profound sell-off this time?

Indeed, the biggest concern among market participants right now is the alarming spread of the coronavirus in the US which shows no sign of easing, as global cases also continue to rise. Thursday saw a record rise in new cases in the US, which broke the previous peak in April. There is a risk we could see even more cases on Friday and over the weekend, which could mean more states may reverse plans to reopen. As a result, the economic recovery could slow down, and concerns over a slower recovery could hit risk assets in the week ahead.

Week Ahead: Independence Day

The US Independence Day will be observed on Friday as July 4 falls on Saturday, which means: (1) Friday will be a bank holiday in the US, and (2) the monthly US jobs report will be published a day earlier than usual, on Thursday.

Besides the non-farm payrolls report on Thursday, there will only be a handful of other key economic data releases to watch out for in the week ahead. These include:

Non-farm payrolls key data in the week ahead

Clearly the focus will be on US employment, with millions having lost their jobs due to the economic impact of Covid-19. After last month’s surprise 2.5 million rise, the key question is whether more jobs were recovered in June following that big 20.5 million losses in April. But judging by the weekly claims data released throughout this month, which consistently showed slower-than-expected falls in claims, employment is likely to have been weak in June, especially with coronavirus cases rising alarmingly in some states during the month.

Changes in US virus cases will likely dominate agenda again

So, most of the action in terms of macro events will happen in mid-week in a holiday-shortened week for US investors, with US monthly jobs report being the main focal point. The lack of more data may mean the markets will be rather quiet as they normally would be around this time of the year. However, this year is not like any other; for investors have been kept on their toes due to the pandemic which is still wreaking havoc across the world. So, despite a shortened week for some, the markets could still be quite volatile and provide plenty of trading opportunities as investors respond to the changing virus situation, especially in the US.  

Featured chart: Dow Jones

With increasing concerns over Covid-19 in the US, there is a risk that equity indices could drop more profoundly next week. After the recent sharp recovery stalled, the Dow looked poised for a breakout or a breakdown as the converging trend lines neared. The bears had the upper hand after the rally above the 200-day average proved short-lived. But they still needed a confirmed break down in order to put the pedal to the metal:


Source: TradingView and ThinkMarkets

South African Markets in Focus

By Kearabilwe Keatlegile Nonyana

The market continues to create contradictions in the minds of market participants. It has become confusing to decern price action from the market as global markets continue to change direction on reasons which have no foundation. The disconnection between the real economic reality and the global market creates a large schism in the minds of market participants. This week a slue of bad economic data and rising corona virus cases drove markets lower and left the JSE ALSI trying to hang on to the gains of the past couple of weeks. Unemployment numbers came in at 30.1% which was higher than estimates by most economists. The emergency budget tabled by the finance minister brought to the fore the dire state of our fiscal finance. Expenditure continues to increase while revenue collection continues to decrease.


 
The Week ahead

In the coming week, our GDP Quarter on Quarter and Year on Year numbers will be released on Tuesday for the 1^st quarter. A poll of economists believes that the forecast will see a contraction of 3.4% for the quarter and a contraction of 3.2% for the year. This numbers do not consider the Lockdown period as it would only be in the last week of their time series data. This is an illustration that our economy was in a precarious position before the lockdown.

Current account data will also be released on Thursday we anticipate a reduction in the deficit to 24 Billion this will be favourable to markets as we cut one of our deficits down. Twin deficits (Budget and Current account) do not bode well for a sovereign’s currency so a reduction in one of these currencies will balance the rand to find some normalcy at these levels.