In this week’s market update: markets shrug off US-China row and focus on Covid recovery hopes; Citi warns that markets are out of line with reality; and Brexit is back in focus.
Stock markets are determined to see the glass as half full. Investors continue to look past a cocktail of negative headlines to focus their attention on positive indications that the Covid crisis is easing.
Shares began the week on the front foot again, keeping the two-month old stock market rally on the boil. The US, which is leading the charge, is now within shooting distance of its pre-crisis high.
Overnight shares in Asia rose, with Japan 1.5% higher and gains in China, Hong Kong and Australia after Wall Street closed 0.4% up on Monday.
This is despite an escalating row between the White House and Beijing over China’s interference in Hong Kong and a deepening crisis at home after another killing of an unarmed black man by a white policeman triggered days of protests in cities across the country. The President threatened on Monday evening to send in the military to restore order.
Donald Trump responded to China’s imposition of a controversial new security law in Hong Kong with a threat to revoke special trade privileges for the former British colony. But markets breathed a sigh of relief that the rhetoric was not backed up with firm proposals.
Trump was seen to have pulled his punches and traders were relieved that phase one of the trade deal signed before the Covid pandemic swept everything else off the front pages looks safe for now.
Hong Kong shares jumped by more than 3% on Monday and Chinese shares were up almost as much. The positive tone in Asia spilled over into Europe and the US.
Europe also benefited from the first evidence that the Covid pandemic is starting to ease. An index of manufacturing activity recovered to its highest level for two months as governments started to lift their lockdown restrictions. Italy saw the biggest rebound.
There was similar good news on manufacturing in China, which saw the first expansion in activity there since January.
With the S&P 500 now above 3,000 again, the US benchmark is within 10% of its February high, prompting those investors who aren’t swept up in fear of missing out to warn that prices are out of line with economic reality.
Investment bankers are Citi are urging their corporate clients to raise money while they can on the grounds that pricing cannot get any better than it is currently. Companies have already tapped the markets where they can this year, raising $1trn in corporate debt as optimism for a V-shaped recovery has seen share prices bounce back in record time.
The overall market level may be high but it is sending out a distorted message thanks to the dominance of a small number of high-performing technology stocks.
The Russell 3000 index, which tracks the US’s biggest companies, is down 11% since the market peaked on 19 February but most companies have fared much worse than that.
A third of companies are down at least 30% while half are down 20% or more. Only a third of companies have matched or bettered the index.
That’s because the average has been dragged higher by tech and healthcare stocks which have fared best of all during the Covid crisis. Tech is the largest sector by capitalisation in both the Russell 3000 and the benchmark S&P 500 indices.
That helps explain why the US market has also done so much better than other markets with smaller technology weightings like the UK.
The remarkable performance of a handful of tech stocks is starting to ring alarm bells among older investors who remember the way in which Wall Street was distorted by the same sector during the late 1990s technology bubble.
Just 10 stocks, worth more than $150bn each, have enjoyed annual share price growth of 20% for the past five years and now represent 27% of the US blue-chip index between them. Companies like Microsoft, Apple and Amazon have been beneficiaries of the pandemic, building on their popularity with investors during the 10 years since the financial crisis when their predictable growth has been appealing in an otherwise sluggish growth environment.
The main focus for investors this week is likely to be the ECB’s meeting on Thursday at which the central bank will unveil forecasts for growth in the region this year. In April it said the eurozone economy could contract by between 5% and 12% this year. Economists at ING have pencilled in an 8% contraction.
That will shift attention to the ECB’s €750bn bond buying programme which is expected to be extended further by another €250bn or even €500bn. Further stimulus is thought necessary even if a mooted €500bn Covid recovery fund proposed by Germany and France is given the green light.
The second key data announcement this week will be Friday’s non-farm payroll numbers for May which are expected to see another 8m job losses in America to add to the 20.5m announced in April. Bad as that sounds, it is thought the slowing in the unemployment rate will be taken well by a market that has become used to the kind of data last seen in the Great Depression.
The number of Americans collecting unemployment benefit actually fell by nearly 4m last week as the highly flexible US jobs market succeeds in getting people back to work as quickly as it fires them at the first sign of trouble.
In another sign of improving fortunes for the global economy, the price of iron ore, a key input for the steel industry, has risen above $100 a tonne for the first time since July last year. Considered by many to be the second most important commodity after oil, iron ore has risen by 18% over the past month on hopes for a big Chinese stimulus package as well as less supply than expected out of Brazil.
Oil is also in focus this week as Saudi Arabia and Russia are reported to be discussing an extension of production curbs that were agreed in April but are due to taper off from July. News of the talks boosted the price of Brent crude to around $38 a barrel, well above its recent lows.
And finally, Brexit is back on the agenda here in the UK as a fourth round of negotiations between Britain and the EU gets underway this week amid an impasse over issues including access to fishing waters.
London mayor Sadiq Khan has written to Michael Gove, the Cabinet Office minister, calling for an extension to the transition period which is due to expire at the end of the year. Unless a trade deal is signed by then the UK will begin a new relationship with its nearest neighbours on unfavourable World Trade Organisation terms.
Mr Khan said red tape, tariffs and immigration controls were the last thing Britain needs as it battles to emerge from the coronavirus crisis. The Government maintains its position that it will leave with no deal at year end if it has to. Any decision to request an extension of the transition must be made by the end of June under the terms of Britain’s exit from the EU which officially happened at the end of January.