In this week’s market update: Chinese shares bounce on recovery hopes; fresh economic data points to strong pent up demand; and Wall Street starts to price in a Biden presidency
Stock markets are back on the front foot as hopes for a quick economic bounce back from the pandemic in China was supported by positive market commentary from a state-backed investment publication. The CSI 300 index of leading stocks in Shanghai and Shenzhen rose as much as 5.7% on Monday and by another 2% on Tuesday, to take Chinese shares to a five-year high, up 13% on the week albeit still 13% below the all-time peak.
Other markets in the region picked up on the positive tone in China, with shares in Japan, South Korea and Hong Kong also in positive territory at the beginning of the week. Shares in Hong Kong were in technical bull market territory, up by more than 20% from their recent low despite recent concerns about the imposition of a new security law by Beijing.
The optimistic mood carried over into Europe and the US, where investors were also able to reflect on last week’s strong American employment data and an apparent bounce back in European economies.
The non-farm payroll data issued just before the Independence Day holiday last Friday saw another nearly 5 million jobs added to the upwardly revised 2.5m in the previous month, pointing to the flexibility of the US jobs market where hiring and firing are quick and easy, unlike in Europe.
China was first into the pandemic and is seen as emerging first too, having successfully contained the spread of Covid-19 despite occasional flare-ups in infections around the region. Bullish retail investors were given further encouragement by a front-page article in the China Securities Journal, which referenced a ‘healthy’ bull market.
The upbeat market tone was fuelled in Europe by the latest Eurozone retail sales figures which showed activity bouncing back by 18% between April and May. This was a better recovery than expected and points to significant pent up demand by consumers eager to get back to normal after long lockdowns in many countries.
Unsurprisingly, online sales led the charge as some people remain cautious about going back to the shops. France and Spain registered the biggest percentage recoveries, although this reflected smaller declines in the first place in Germany and the Netherlands. A number of northern European countries, including those in Scandinavia, have now returned to pre-pandemic levels of spending.
Also on the continent, German factory output was up by a record 10.4% between April and May, although this still leaves orders 30% lower than in the first quarter. Almost all the improvement came from Germany itself and its near neighbours in the Eurozone. Orders from further afield in Asia and the US, for example, were only slightly better.
The challenge facing one of Germany’s main export industries, the automotive sector, was underscored by a prediction from the country’s auto industry association that sales of cars would fall by a quarter this year.
Here in the UK, housebuilders contributed to better sentiment as the construction part of the purchasing managers’ index almost doubled from under 30 to over 55. It was the fastest rise in activity for the house-builders but civil and commercial building also bounced back from April’s low point.
That set a positive backdrop to the Chancellor’s speech on Wednesday, being dubbed a mini-budget in some quarters, although that probably overstates what Rishi Sunak will set out this week. He continues to tread a narrow path between doing too little for an economy under severe pressure from more than three months of lockdown and over-doing stimulus at an unaffordable cost for future generations.
The rumour mill is already pointing to some eye-catching measures such as a stamp duty holiday for first time buyers, a hand out of around £500 to all resident adults to spend in the most pandemic-affected sectors, or a VAT cut. Already announced this week is a £1.5bn package to support the arts sector which is under enormous pressure as theatres and concert halls remain unable to stage performances.
The scale of the Chancellor’s potential handouts underscores the hole in which the UK economy finds itself. UK car sales, for example, were down by a third in June, the first month when showrooms were able to re-open after lockdown. Big ticket items like cars are particularly vulnerable to weak consumer confidence as people put off discretionary big purchases when they are nervous about the outlook for employment.
Also, the re-opening of bars and restaurants, despite pictures of busy streets in central London, was less of a Super Saturday than perhaps the government had hoped for. Footfall in High Streets, retail parks and shopping centres was around 50% lower than on the equivalent Saturday a year ago.
Nervousness about the ongoing health risks are inevitable given the still steady drip of bad news from around the world on the pandemic front. Melbourne this week reinstated a 6 week lockdown as infections in the city surged. The US recorded 47,000 new cases on Monday as hospitalisations continue to rise. And in India, the death toll passed 20,000.
On the corporate front, the US is enjoying the last week of relative calm before second quarter earnings season gets underway next week. This will be a crucial reporting period, shining a light on the first full period under the shadow of Covid-19. The messages from company bosses from next week will provide a tangible test of whether the stock market has gone too far too fast in the recovery from what looks like being the shortest bear market ever.
On this side of the Atlantic, there is actually a good spread of results and trading statements this week. The housebuilders are in focus with Barratt, Persimmon and Vistry (the old Bovis) due to report. Whitbread will provide some guidance as to the impact of the shutdown of hotels where it is the Budget accommodation leader via Premier Inns. A similar story from FirstGroup about he impact of a near shutdown of train travel. Meanwhile, the employment market will be in the spotlight as both Page Group and Robert Walters report.
Looking further ahead, the US Presidential election is coming onto investors radars as the opinion polls point more clearly to a possible Joe Biden Presidency. Donald Trump’s handling of both the pandemic and the aftermath of the killing of George Floyd and the rise of the Black Lives Matter movement has made it more likely that the Trump era could be restricted to one term of office.
Last week the odds of Biden winning the election hit 59%, 23 percentage points ahead of Donald Trump and investors are starting to think seriously about what this outcome might mean for markets.
Key areas of focus include taxation, with Biden expected to at least partially reverse the big cut in corporation tax introduced by Trump. He cut the headline rate from 35% to 21% and maybe half of that might be expected to be handed back under a Democrat majority government.
Healthcare will be in the White House’s sights too, with Biden promising an expansion of Medicare and a renegotiation of the prices that Government pays to pharmaceuticals companies. A question mark also hangs over technology, where the Democrats have indicated a willingness to go after the likes of Facebook and Amazon. Elizabeth Warren, a former Presidential hopeful, wanted to see the tech giants broken up under anti-trust rules.
With a $15 minimum wage part of the Democrat offer to voters, retailers might find themselves under greater pressure. So too would the energy sector, long protected from environmental concerns by Trump’s climate change scepticism.
So, the Presidential election offers a genuine choice this year and markets are likely to price in the likely outcome as November approaches. It’s not a simple case of Trump good for markets and business, Biden bad because investors are likely to welcome an end to some of the more chaotic parts of the Trump White House.