While US markets continue to set new records, markets elsewhere are finding upside progress much more difficult to attain, with the Nikkei 225 still below its pre-pandemic highs for this year, along with similar underperformance for European markets.
After a negative session yesterday markets here in Europe continue to look lacklustre in thin holiday trade, opening slightly lower against a backdrop of governments across Europe expressing concern about rising infection rates, and a US government striving to get a new stimulus bill agreed.
On the margins there are also concerns about the ongoing tit for tat between the US and China, after President Trump said he had postponed the latest China trade talks, saying he didn’t want to talk to them right now. While these tensions have always been a concern this is not really anything new and have been a market staple for over three years now.
In Germany, Angela Merkel ruled out the prospect of any further easing of existing lockdown measures over concern about a sharp increase in infection rates, which may also help explain why the government decided that it would be prudent to extend their job furlough scheme to 2 years. In Ireland there has also been a tightening of restrictions after a surge in cases there.
Airlines seem to be enjoying a bit of an uplift despite concerns about travel quarantines being widened, with IAG outperforming after the airline was described as a “quality play” amongst legacy carriers in a broker note this morning.
While the mining sector has been one of the few sectors to have actually done well in the last few months, recouping its losses for the year, it’s not been plain sailing for all miners. Hochschild Mining shares have plunged this morning after reporting pre-tax profits of $6.5m for the half year, a huge drop from the $29.5m that it posted a year ago. A big decline in revenue to $232m due to coronavirus related stoppages at its Peru and Argentina mines appears to have hit the business hard despite record highs in gold prices, and the recent surge in silver prices. Expectations for the second half of the year are more optimistic, given the higher prices, but they will be contingent on the mines remaining Covid-19 free, as production gets back to full capacity.
Net debt also rose sharply to $58.4m from $33.2m at the end of 2019.
On the earnings front container shipping company AP Moeller Maersk has seen its shares rise sharply in Copenhagen, after raising its outlook for the full year, largely as a result of cutting back its operating costs by 16%. The upgrade did come with a caveat that it was contingent on there not being a second phase of lockdowns. The company went on to say that they still expected to see a significant drop in demand for this year.
The latest UK inflation numbers showed that headline and core CPI jumped sharply in July to 1% and 1.8%, driven largely by fuel prices and clothing costs. The easing of lockdown restrictions may well have also had something to with the sharp spike. We already have anecdotal evidence that hair salons hiked prices to offset the loss of income as a result of lockdowns, so this is likely to have played a part in the sharp rise in prices.
The pound hit its highest levels this year against the US dollar as a result of the higher than expected jump in consumer prices, however it still remains below the post-election peaks in December, when it moved to within touching distance of 1.3600. The pound doesn’t appear to be being significantly affected by some of the smoke signals coming from the resumption of Brexit talks, which appear to have hit yet another snag over access rights for UK truck drivers.
The US dollar has remained under pressure this week, hitting its lowest levels against the euro since May 2018, as it continues to lose its allure as a haven trade.
US markets look set to open higher ahead of the release of the latest Federal Reserve minutes. Last months Fed meeting was notable for what was done outside of it once again, with the US central bank announcing that it would be extending its central bank and US dollar repo and swap lines until the end of March next year, as a precautionary measure to ensure the smooth functioning of financial markets.
While monetary policy was left unchanged it was quite apparent from Fed chair Powell’s comments that the Fed was trying to get ahead of any possible economic deterioration while also acknowledging that current events are likely to remain largely out of their hands, and dependent not only on the overall course of the virus, but also on any further fiscal action from US politicians.
Powell’s comment that the Fed needed to hope for the best but prepare for the worst could as easily have been aimed at Capitol Hill, and the partisan nonsense going on there, as to the probable stop start nature of how the virus will affect life in local communities, and the implementation, as well as lifting of lockdown measures in response to future outbreaks.
Powell also made clear that the Fed was in this until “we’re well through it” which suggests that there probably was some discussion of an extensively easy monetary policy and how long it might last. We’ll also get to find out how close the Fed is to a policy of yield curve control, as we look ahead to what would have been the Jackson Hole symposium, but which will now be held virtually with the theme “Navigating the Decade Ahead: Implications for Monetary Policy” on August 27th and 28th
We also have the latest Q2 numbers from US chipmaker Nvidia, another US tech stock that has outperformed the wider market over the past few months, the shares are up over 80% year to date helped by a combination of outperformance in its data processor business, which has seen revenues surge by a similar percentage amount, but also due to the higher demand for home computers as a result of the rise in home working.
The recent rise in crypto currencies could also help boost demand for its chipsets as well, with bitcoin back at one-year highs. Nvidia’s A100 GPU is used by the likes of Amazon, Google, and Microsoft in their respective cloud businesses, where demand has been strong, and is likely to remain that way as all companies look to boost their cloud capacity. While most people know the company for its high-performance graphics chips, demand here has also been fairly robust, however there is a concern is that while video games have become more popular, gaming console demand could slow, given they are expensive bits of kit. This could make the share price vulnerable to a pull back if this week’s update falls short in any areas.