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Tech divergence continues, as European markets open lower

Tech divergence continues, as European markets open lower

Yesterday I talked about the divergence, or disconnect between the Nasdaq and other US equity markets, and that continued yesterday, with the Nasdaq hitting a new record high, while the Russell 2000 slipped sharply, as once again the US tech big caps continued to act as a type of haven proxy.

This week we’ve seen the FAANG stocks of Facebook, Apple, Amazon, Netflix and Alphabet trade at or close to record highs, along with Microsoft as well. These six stocks have a combined market cap of $6.5trn, with only Netflix and Facebook not being $1trn companies.

Whether this trend will continue remains to be seen, but the move into big blue-chip tech stocks with strong free cash flow, and balance sheet size appears to be becoming a trend, rather than investing in government bonds which have next to no yield, or a negative yield. This is probably what is also driving the move higher in gold prices, which hit a nine-year high earlier this week.

Markets in Asia have finished a choppy week very much on the back foot, as rising coronavirus cases in the US, and the southern states especially, appear to be now translating into a rise in fatality rates. The closure of schools in Hong Kong and the further tightening of virus restrictions in Australia has also fed into the underlying negative mood at the end of the week.

Some are blaming the premature re-opening of some parts of the US economy, for the sharp rise in infections there, however some of the rise is probably more down to a lack of care in social distancing rather than the re-openings themselves, with infection rates here in Europe and the UK so far continuing to fall, despite a continued relaxation of the rules.

As we come to the end of another choppy week, markets here in Europe have opened lower this morning, and look set to finish the week very much on the back foot, as it becomes increasingly apparent that any economic recovery is unlikely to be V-shaped in nature, with a wide range of companies starting to announce thousands of job losses this week.

This month alone we’ve seen John Lewis, Boots, Burger King, Rolls-Royce, Airbus, Upper Crust, and Harrods, to name but a few, announce thousands of job losses, in addition to the cuts announced last month from the major airlines, energy and car companies which has pushed the total of jobs at risk up to well over 100,000.

The pound has had a fairly decent week across the board against most G10 currencies, rising the most against the US dollar, which to some extent helps to explain this week’s underperformance by the FTSE 100.

Early fallers today include the airlines and oil and gas stocks, with Royal Dutch Shell and BP lower on the back of a weaker oil price, while new restrictions being imposed in Asia, along with rising cases in the US appears to be acting as a drag on long haul airline stocks, with British Airways owner International Consolidated Airlines at the bottom of the FTSE 100, following on from weakness in US carriers yesterday, as well as in Asia today, with Cathay Pacific down over 3%.

Gym Group has seen a decent start to the day on yesterday’s news that gyms in the UK will finally be reopening, albeit at a lower capacity than previously.

It was bad news for Carlsberg this morning after it reported that total volumes fell by 7.7% in the first half of this year, while operating profit declined by 8.9%. Revenues also fell by 11.1%, however a strong rebound in its Chinese business in Q2 has seen the shares rise strongly in opening trade.  

US markets also look set to open lower later today on the back of today’s weaker start for European markets. The exuberance in some of US stocks has also extended to Tesla which has now seen its share price rise to just shy of $1,400 pushing its market cap well above that of Volkswagen and Toyota, who are two of the world’s largest automotive brand by output. Unlike other US stocks there is widespread scepticism about the sustainability of this rise with short interest in Tesla shares set to rise to $20bn.

One week on from a decent US jobs report, it’s now Canada’s turn to see a rebound in its jobs market in June. Having seen a total of 3m jobs lost in March and April, we saw some of that damage reversed in May when the Canadian economy surprisingly saw 289.6k jobs added back as workers returned to work from furlough. While the rebound wasn’t anywhere near as robust as the one seen in the US, the hope is that the worst is over for the Canadian economy, with the recent rebound in the oil price also helping in terms of the recovery. Despite the rebound in the jobs market the unemployment rate still rose to a high of 13.7% in May, however this is expected to fall to 12.1% in June, with the return of 700k jobs expected.    

Oil prices have also slipped back in the last couple of days as concerns about a slower pace of economic rebound have weighed on demand expectations. With US driving season usually in full swing by now, US crude oil inventories rose by 6m barrels, well over double expectations with gasoline demand half of what it would normally be at this time of year.

Gold prices have slipped back from their recent 9-year peaks above $1,800 an ounce, but still remains fairly well supported on any pullback. The attraction of gold has been garnished in recent months by the fact that more and more government bonds are trading at record low, or negative yields, thus making the attractions of having some in your portfolio that much greater. With gold prices already at record levels against most other currencies its surely only a matter of time before we see a new record peak against the US dollar.


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