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OFFON

Patrick
Rejaunier

Equity Analyst
By the same author
More articles

Weekly market update : Strong index divergences persist

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08/10/2020 | 10:03am EDT
Monday
August 10
Weekly market update
intro
Encouraging economic data from China, the Euro-Zone and the U.S. helped financial markets to resume their upward trend last week. Europe has regained some ground, while Wall-Street is close to its historical highs despite Sino-American tensions. US employment figures also reassured investors. Some profit-taking happened before the weekend.
Indexes

Over the past week, following successive record-highs for the Nasdaq100 (+29% since January 1), most of the indices have risen.

In Asia, the Nikkei gained 2.9%, the Shanghai composite 1.3% and the Hang Seng lost 0.5%, affected by D. Trump's decrees against the Chinese applications TikTok and WeChat.

In Europe, the CAC40 gained 2.2%, the DAX 2.9% and Foostie 2%. For the peripheral countries of the euro zone, Spain gained 0.9%, Portugal 1.7% and Italy 2%.

In the U.S., it's a full house.The Nasdaq100 scored a weekly surge of 3.3%, the Dow Jones is up 3.4% and the S&P500 is up 2.4%.

Comparison between the Nasdaq100 and the MSCI World Index, normalized one-year data

image
Commodities

Last week, gold continued its bullish run, surpassing the USD 2,000 mark. In 100 years, the value of the yellow metal has increased 100-fold from USD 20 to USD 2,000. This represents an annualized growth of about 4.7% (see chart).

Silver also has a good track record, with a 16.1% increase in value. In addition to jewellery, this metal also has many industrial applications, taking advantage of improvements in the manufacturing sector. Nevertheless, it seems to have hit a hard spot, close to USD 30.

A very nice week for lumber as well, which rose by 9.5% to USD 641.6. Also worth mentioning is aluminum, up 4.1% to USD 1780.

Oil continues to rise in small steps. It still remains stuck below the levels of the March 6 gap, at USD 44.6 (BRENT) and USD 41.5 (WTI) respectively.

As for agricultural commodities, wheat, soybeans, corn and oats dropped 5.3%, 1.6%, 1.4% and 1.2% respectively.


Gold performance over 100 years

image
Equities markets

With lockdowns, gardening soared in popularity, and Tractor Supply Company did too. This is an American chain of stores offering products for horses and pets (47% of sales), DIY tools, tractors and lawn mowers (21% of sales) as well as plant care products, lawns, garden furniture and barbecues (20% of sales). The group has a total of 2024 sales outlets in the United States.

Tractor Supply Company is worth more than $17 billion in Nasdaq Composite. Moreover, its stock market performance is rather good, with a constant upward trend.

Since March and the start of lockdowns, the stock has been propelled to historic highs, with an acceleration of more than 120%. This allows it to post a gain of nearly 60% over 2020.

The group's turnover increased by 15% between 2017 and 2019. More recently, its Q2 2020 sales are up 30.5%, partly thanks to its e-commerce site, and the company has opened 21 new stores. With free cash flow of nearly $600 million and a return on equity of 36%, Tractor Supply even increased its quarterly dividend by 14.3% to USD 0.4.

Linear path of the Tractor Supply Company share

image
Bond market

At the moment, it is difficult to detect a market environment conducive to an increase in yields. Uncertainty about the trajectory of new infections and the shape that the economic recovery will ultimately take is simply too great on both sides of the Atlantic. Major sovereign borrowers have dismissed the idea of possible consolidation in the near term and the bull market has found new strength.

The Bund is trading on a yield of -0.54% and is close to the 10-year Swiss debt, which generates -0.57%. Conditions are also improving for the OAT which falls to -0.23% as well as for Italian (0.93%) and Spanish (0.27%) securities. Greece took advantage of this momentum for safe havens and saw its rate fall to 1%.

The easing is confirmed in the U.S., with a bond yield of only 0.51%, an all-time low.

As for primary market issuance, in Europe, the summer break for the Economic and Monetary Union (EMU) governments seems to have been cancelled this year. Heavy spending programmes by national governments and fiscal deficits are creating a real "insatiable thirst" for public treasuries. Despite low market yields, ECB purchases on the secondary market should keep primary market activity buoyant.
Forex market

Forex traders continue to ditch the Dollar and the Yen. The greenback is once again losing ground against all of its counterparts. The health care crisis and Congressional delays are weighing on the U.S. currency. As for the yen, traders are moving to riskier currencies. It is the euro that is benefiting, with notable advances against the Japanese currency (JPY 125.3). The major EUR/USD parity also pulls on the single currency side, with trading close to USD 1.18.

On the other side of the Channel, the pound continues to climb against the greenback, taking 2.6% on a slippery week. There was no specific catalyst behind this rally. The British Trade Representative even stated that trade talks with the EU remained deadlocked while Prime Minister Johnson announced that the two sides were not that far apart. The British currency is traded at JPY 138.6 and USD 1.31.

Among the news from the emerging currencies, the Brazilian currency is taking advantage of the Dollar's weakness to stabilize against the greenback at BRL 5.3. However, the Central Bank of Brazil lowered its key rate to 2% after a 0.25 point cut, in an attempt to revive an economy plagued by the coronavirus crisis. This is the ninth consecutive cut in the rate.
Economic data

In China, the Caixin PMI indices were mixed. The manufacturing index exceeded expectations (52.8 vs. 51.1 expected) but the service index came out at 54.1 (consensus 58). They nevertheless reflect an expansion of activity, being well above the 50 threshold.

The same is true for the euro area, with indices at 51.8 and 54.7 respectively (against 51.1 and 55.1 expected). The PPI index rose more than expected (+0.7%) while retail sales rose by only 5.7% (consensus 6.5%).

In the U.S., both the manufacturing and services ISMs exceeded expectations (54.2 and 58.1). Oil inventories dropped to -7.4M as did weekly jobless claims to 1186K.

On the other hand, construction spending fell back by 0.7% (+1% last month) and private sector job creation rose by only 167K (1200K expected). Last month's figure was nevertheless revised sharply upwards (from 2369K to 4314K).

As for the monthly employment report, 1762K jobs were created (consensus 1530K), for an unemployment rate better than expected at 10.2% and an hourly wage up by 0.2%.
Strong index divergences persist

Balanced markets in Europe, rising US stocks and soaring tech stocks - this sums up the performance of indices over the last few sessions. These sectoral and geographical divergences persist while uncertainties on all sides remain.

No need to list them, they are known. The shock caused by the figures on the second quarter economic collapse in many major economies is still deeply rooted. The world PMI stands at a modest 50.8.

In the short term, markets will be paying close attention to the sounds of Capitol Hill, after Donald Trump decided to promulgate four decrees without going through Congress. Short-term volatility could therefore resume in parallel with the rise in August temperatures.
Stocks mentioned in the article
ChangeLast1st jan.
CAC 40 -0.69% 4729.66 Real-time Quote.-20.88%
CORN FUTURES (C) - CBR (FLOOR)/C1 0.48% 365.25 End-of-day quote.-6.25%
DAX -1.09% 12469.2 Delayed Quote.-5.89%
DJ INDUSTRIAL 1.34% 27173.96 Delayed Quote.-4.78%
HANG SENG -0.61% 23215.26 Real-time Quote.-17.65%
NASDAQ 100 2.34% 11151.132967 Delayed Quote.24.77%
NASDAQ COMP. 2.26% 10913.561787 Delayed Quote.21.63%
NIKKEI 225 0.51% 23204.62 Real-time Quote.-1.91%
S&P 500 1.60% 3298.46 Delayed Quote.2.09%

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