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Weekly market update - 13th of July 2020

Written and accurate as at: Jul 13, 2020 Current Stats & Facts

Key points

  • Markets held up relatively well despite worse COVID-19 case and hospitalisation data last week.
  • Australia’s probability of suppressing the virus has taken a significant step back, impacting Real Estate Investment Trusts and domestic cyclicals
  • Liquidity is still clearly prevalent as the NASDAQ hit new highs, driven by the “FANGMAN” stocks and others. Tesla is up 60% in two weeks. The Chinese market has also broken out – Ali Baba is up 21% in two weeks.
  • Commodities are performing well, reflecting their real asset status

The on-going disconnect between the economy and markets continues. This is a distortion created by fiscal stimulus propping up spending and central bank actions underwriting government and corporate bonds – and effectively equities. 

This accelerates structural trends supporting growth stocks in the market, with their higher weightings in indices, the momentum created by passive funds, active funds forced into growth – and now day traders.

Australian focus is on Victoria

The big issue for investors is rationalising the fact that markets are still behaving relatively well despite negative headlines and case surges.  The focus is on Victoria – which represents 25% to 30% of national GDP – and assessing the risk of this surge affecting consumer confidence in other States.  It is right to be concerned about the near-term effect on the market. But we can see in Brazil and the US  that markets can easily disconnect from poor COVID case data. These markets continue to rally as case numbers spike.  The number most are paying the closest attention to right now is the positive test rate, which has continued to rise.  However, there is a ramp-up in the amount of testing in Victoria, which is critical in preventing new outbreaks to build. When this number rolls over it will be the first sign that things are improving.

US health system stability is a key issue

A key question in the US is the severity of strain on hospitals and the associated impact on death rates.

Hospitalisations are moving higher with a two-week lag. It’s becoming apparent that the south of the US is effectively following the Swedish approach of “controlled spread”. It is unlikely we will see a significant reinstatement of lockdowns.  The US hospital system is still largely coping – Phoenix and Houston are the two worst-affected areas. Elective surgery has been suspended in Texas and some big-city hospitals in Florida and California.  Capacity is still available though.  Some of the market’s apparent ambivalence can be explained in favourable statistics (which will need to be watched carefully).  For example, the US death rate for hospitalised patients has dropped from 20% to 10%. The rate peaked at 25% in New York and has since dropped to between 5% and 10%.  Treatment techniques have also changed, leading to fewer patients on ventilators – down from 25% to 15%. A slower rise in death rates may result from wider use of facemasks, more testing, improved awareness of safety protocols in nursing homes and younger patients.

Global growth

It’s clear the economic V bounce is slowing in the US. But other global growth signals are holding up reflecting China’s recovery (copper), strong housing (lumber prices) and ample liquidity.   In fact, liquidity is overwhelming other factors. The world’s two biggest economies, the US and China, have increased money supply 18% year-on-year. This drives financial assets and supports parts of the economy such as housing. The Chinese market has broken through a five-year down-trend and US mortgage rates are making new lows as a result.

The bull case versus bear case

The bull case narrative for August/September centres on these potential outcomes:

  • Decelerating cases in the US
  • Death rates remaining lower
  • Vaccine progress
  • Large US fiscal stimulus
  • Resumption of Fed balance sheet expansion

Meanwhile, the bear case scenario:

  • US economy goes into second effective shutdown as death rates follow hospitalisations
  • Consumer confidence slumps
  • US economy stalls as the market loses confidence in policy-makers’ ability to do enough
  • Growth stock premiums begin to unwind

Market update

Movement in the bond markets remained somewhat muted last week:

  • US 2y bond @0.16% – flat
  • US 10y bond @0.64% – down 3bps
  • Aus 10y bond @0.86% – down 4bps

Oil was flat, however, some gains were clearly evident in the commodities market. Iron ore passed the $100/mt mark and was trading at $105.6 (+6%). Copper was also up strongly by 7% while the gold price added 2%. As abundant liquidity from central banks continues to flow, real assets will inevitably become more valuable.  

The Australian equities market pulled back last week, whereas the US market came out flat on the back of continued vaccine hopes.  The S&P/ASX 300 Accumulation index lost -2.2% as the surge in cases inside Victoria weighed on market sentiment. The Melbourne lockdown saw Real Estate (-5.3%) the hardest hit sector, led by the mall operators (VCX, -9.0%) and some property developers (LLC, -9.8%; SGP, -7.5%).  Elsewhere significant rotation away from value to growth continued on fears of the economic impact of lock-downs on consumers. This highlights how liquidity is still looking for a home within the equities market, although it is getting channelled into a smaller part of the market. We saw Consumer Discretionary (-3.4%) and Financials (-3.0%) among the worst-performing sectors. Health Care (-4.4%) also pulled back as investors remain concerned on subdued volumes for elective surgery domestically (COH, -6.6%; RHC, -6.3%) and ongoing disruption of plasma collection for CSL (-5.1%) in the US.  On the other side of the ledger, IT (+1.9%), Materials (+0.8%) and Communication Services (+0.8%) outperformed the market.

It was again a quiet week on the company front. The major story was the $800 million capital raising of market darlings Afterpay (APT). There was a $250 million sell-down by the co-founders. Nevertheless, APT’s share price added another +7.1% as the buy-now-pay-later sector benefited from perceptions of more consumers buying online.  Mining stocks such as Northern Star (NST, +6.1%), Fortescue Metals (FMG, +5.9%) and Saracen Mineral (SAR, +5.5%) outperformed on the back of strong commodity prices.  On the other side of the spectrum Domain (DHG, -12.5%) pulled back on expectations that property listings will fall in Melbourne. Some travel stocks were also impacted including Qantas (QAN, -8.1%), Sydney Airport (SYD, -7.7%) and Flight Centre (FLT, -7.5%).

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