Weekly market update - 4th of August 2020
Written and accurate as at: Aug 04, 2020 Current Stats & Facts
Key points
Domestically the focus is on Victoria, which has entered stage four lockdown. This is a near-term headwind economically and for parts of the market. But it clearly signals a bias to go for effective elimination of Covid-19 in Australia. The local market fell -1.6% last week. In the US there are signs of improvement in aggregate case growth and hospitalisations. The economic recovery is stalling, but critically it is not reversing.
There were important policy signals from the Fed last week in terms of inflation-targeting. This could mean the economic environment looks very different from the last few decades.
Significant near-term issues we are watching:
- COVID impact on US hospitals: Encouraging signs continue.
- US earnings season: So far a little better than many feared. Very strong numbers from the large-cap tech names, especially Amazon and Apple.
- Vaccines/therapeutics: Little news flow last week. Phase one and two trials from Novavax are due this week. This is the first of the “adjuvanted subunit” possibilities –potentially a more robust basis for vaccines.
- US Policy: No progress on the fiscal package, but Fed signals are a short-term positive.
Domestic health: Victoria enters stage four. NSW holding the line, but remains a key swing factor. - Australian policy: Support package for Victoria emphasises the intention to underwrite the economy.
- Australian earnings: Mixed so far, but broadly speaking OK.
Australian outlook
The move to stage four restrictions in Victoria is a clear near-term negative for economic growth and domestically-focused companies. The economic effect of stage four is rough twice the effect of stage three — meaning an additional 0.5% to 1% hit to the economy.
This move clearly signals the preference for an effective elimination strategy. The aim is to absorb near-term pain so the economy can re-open to a greater extent when this wave has passed. We have seen before that lockdown measures work and it is reasonable to assume they will again. This will go hand-in-hand with policy support designed to take much of the economic impact onto the government balance sheet, shielding business as much as possible.
NSW remains a key swing factor. At this point, there has been no material break-out in daily new cases. Victoria has demonstrated this can change quickly, though their lockdown reduces the risk of transmission north of the border. Data over the next fortnight should give a good indication of whether the virus remains contained.
Overseas outlook
The outlook for the US remains constructive at this stage, for three key reasons:
- Cases and hospitalisations appear to be rolling over at an aggregate level. The mid-west is getting worse, but this is offset by an improvement in the larger southern states where increased use of masks and partial lockdowns are helping.
- The overall severity of cases is better than in April and May, reflecting a younger cohort of patients, better health protocols and improved understanding of treatment.
- Economic recovery is stalling but not going into reverse
There is scope for a scenario described as “targeted mitigation with universal masking”. This means the economy is improving while not fully recovering — and the virus contained. The economic gap is filled by the government and buys time for the development and distribution of a vaccine. The risk is how long it takes for the latter to emerge.
There has been an uptick in caseloads in some European countries including a material wave in Spain. It is important to watch whether this is contained and the impact on hospitalisations. Like the US, this wave is hitting younger people and so far hospitalisations are lower. The use of face masks in Europe is becoming widespread.
Economy and markets
Data suggests the US economy is slowing — but it is holding up and has not gone into reverse. If cases start to fall and the theory on masks proves correct we could see data start to pick up again in September, particularly in combination with renewed fiscal stimulus.
In the US surveys are pointing to diminishing concerns around the effect of the second wave. Instead, people are focusing on the risk around the time-frame of a vaccine. There’s a view that current policy settings can manage the crisis for 12 to 18 months, but becomes more difficult after then.
So far trends in US earnings emphasise the acceleration of economic digitisation. Apple has seen 20% growth in Macs and 30% in iPads as households see the need for multiple devices. We are also experiencing growth in demand for infrastructure to support bandwidth, security and networking needs.
While the US fiscal package remains a work in progress, there have been some important signalling from the Fed. They have made it clear they are moving to a focus on average inflation, implying they would be willing to let inflation go through the target of 2%, rather than pre-emptively tighten as it reaches that point. With governments active in credit markets we may see an environment where control of money supply shifts away from central banks. This could, in turn, lead to an extended period of negative real rates where inflation is allowed to pick up without any change in nominal interest rates to arrest it.
This would mark a material change in the underlying economic environment that has prevailed in recent decades — which has important consequences for markets. This will take time to play out, but fundamentally it is supportive of real asset prices such as gold, commodities and property. Companies with pricing power will be able to pass through the effect, while price-takers could be in a painful situation.
There was little movement in some of our key gauges of sentiment last week. US 2-year bond yields fell 4bps, EURUSD rose +1% and oil was flat. Gold continued its rise, up +4%.
Stocks
AMP (AMP, -14.3%) was the worst performer in the ASX 100 last week as it downgraded FY20 results. Qantas (QAN, -11.3%) fell on the expectation of the Victorian shutdown. The energy names were all weak: Oil Search (OSH) -7.0%, Worley (WOR)-6.4%, Beach (BPT) -6.0%, Origin (ORG) -6.0% and Santos (STO) -5.6%. Elsewhere Alumina (AWC, -8.9%) and Star Group (SGR, -7.9%) were among the worst performers.
The soaring gold price is feeding through to a better outlook for mining services company ALS (ALQ, +9.4%) which is closely linked to activity among the junior miners. Fortescue Metals (FMG, +6.7%) delivered a strong quarterly update and continues to print cash.