Global equities continued to pull back last week, driven in large part by the tech-heavy NASDAQ-100 Index. Compared to the previous week’s news (SoftBank and Tesla) there was little fundamentally new that triggered the further equity sell-off – suggesting this remains nothing more than an overdue retreat in some popular U.S. tech names which (perhaps due to retail’s new love affair with call options) simply rose too far too fast. While there is a clear desire for some investors to rotate from ‘growth’ to ‘value’ stocks, bond yields stayed low and oil prices retreated last week, which makes it hard to embrace the value-biased financial and energy sectors.
At its recent peak, for example, the NASDAQ-100 was 13% above its 50-day moving average – a degree of extension not seen since May 2009. This Index has now retreated 10% in two weeks and closed just below its 50-day moving average on Friday – and just above its closing low in this retreat last Tuesday. As such the market may well start to find some support, though a further cleansing pullback might still be on the cards – without necessarily threatening the broader uptrend. Based on the advance since late March, a reasonable retreat to, say, the 38.2% ‘Fibonacci level’ would take the Index back to around 10,400 or another 6% from Friday’s close.
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That said, last week’s U.S. economic news was less than inspiring. Washington again failed to pass a new stimulus bill, though pressure to agree on a package of measures could intensify if Wall Street’s pullback gets much worse. Weekly jobless claims also failed to fall, which again raises the risk that the pace of the U.S. recovery is moderating somewhat. Meanwhile, annual growth in the U.S. core CPI printed a bit higher than expected at 1.7%, which is close to its long-run average and only a bit lower than the Fed’s 2% target. Again it begs the question – what is all the fuss with inflation!
In Europe, final agreement on a trade deal between the UK and the EU is proving difficult, and the risk of a ‘hard Brexit’ – where the UK simply resorts to Word Trade Organisation provisions in its trade relationship with the EU – have increased. How this game of brinkmanship plays out remains to be seen, but my view is that the UK should do very well outside of the EU in years to come, and so any further near-term weakness could provide a buying opportunity, such as through the FTSE-100 ETF.
In terms of the week ahead, the main focus will be the U.S. Fed meeting (released Thursday AM Sydney time), and in particular the updated quarterly ‘dot plot’ of Fed member projections for the Fed Funds rate, which will be extended from 2022 to 2023. Such is the stability in the near-term rate outlook, analysts are now debating what might happen in two or three years time! As seen in chart below, for example, in June only two of 17 surveyed Fed Governors suggested a lift in rates in 2022 (with no-one predicting a rate rise next year). How will that change, and how many will predict a rate rise in 2023?
Other news includes Wednesday’s U.S. retail sales, which are expected to show consumer spending remained fairly firm in August. The market will also be naturally focused on the tech sector, Washington’s stimulus plans and weekly jobless claims.
U.S. Federal Reserve “Dot Plot” as at June 2020
Local stocks again fell in sympathy with global markets last week, with local news still dominated by the ongoing plight of Victoria. Local data was mixed, with an impressive rebound in the Westpac index of consumer confidence but a renewed slump in the NAB index of business conditions. Facing strong criticism, I sense a wavering in Victoria’s tough extended lockdown stance, though more State assistance for hard-hit business has at least been announced.
As I’ve noted previously, the reality worldwide is that the second wave of new COVID-19 cases we’re seeing has not been associated an equally strong second wave in deaths – which again highlights the fact this disease particularly effects the elderly and those with pre-existing health conditions. This in turn is allowing more cities and countries to experiment with more targeted prevention measures which avoid a return to draconian lockdown. In further encouraging news, it was announced the promising Oxford/AstraZeneca vaccine trial has been resumed following investigation of why one participant unexpectedly got sick.
This week’s local data highlight is Thursday’s employment report, which is expected to show a moderate 30k decline in jobs in August after the 115k surge in July. Thanks to rising labour force participation, the unemployment rate is expected to edge up to 7.7% from 7.5%. Properly measured (i.e. allowing for those recently unemployed but not yet actively looking for work, and those twiddling their thumbs at home on Jobkeeper payments) I suspect the true unemployment rate is closer to 10% – but is at least now falling from a recent peak of 15%.
Have a great week!
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