Read the 10 stories to remember from the week which ended September 4.
Story #1: US stocks are down for the second week in a row
The major U.S. stock indexes fell for the second week in a row, as technology stocks experienced their worst pullback since March. The market was volatile in a holiday-shortened week, with the NASDAQ posting a 4% decline on Tuesday followed by a nearly 3% gain on Wednesday. There was no single catalyst for the move lower, which left the Nasdaq about 10% below its all-time high reached just six trading days ago. However, broad valuation concerns, skepticism about a compromise on a coronavirus stimulus package before the election, and signs of slowing progress in the labor market all contributed to the negative sentiment. We note that the FANGMAN (Facebook, Apple, Netflix, Google, Microsoft, Amazon, Nvidia) has lost over $1tn in market cap this week (but they still account for over 25% of the total market value of all S&P 500). Coming back to the Nasdaq (see chart below – source: The Market Ear), the 50-day moving average (purple on the chart) is key to watch as the 200 day moving average (in green) is far below.
Story #2: European equities gained
Stocks in Europe rose on the continuing economic recovery, shaking off the resurgence in coronavirus infections continued across the Continent, renewed fears of a hard Brexit (more on this below) and the disappointment that the European Central Bank (ECB) did not announce additional stimulus. The pan-European STOXX Europe 600 Index ended the week 1.67% higher while Germany’s DAX Index rose 2.80%. The UK’s FTSE 100 Index gained 4.02%, which benefited from weakness in the British pound. We note that there is still some room for EU equities to catch up with US equities as they stand at a 100-year low vs. US stocks. Barclays just made a bullish call on EU equities, writing that stars are aligning: “The stimulus package agreed by EU leaders is potentially a game changer for the region. Decisive progress on fiscal integration, along with credible ECB policy, could help the Eurozone to re-rate vs. the US and see inflows returning, as it is also cyclically exposed to the global recovery. We expect domestic plays and periphery to benefit most”.
Story #3: Oil prices tumbled
Crude oil prices dropped for the second week in a row, sinking below USD 40 per barrel for the first time since July, in part because of Saudi Arabia cutting oil prices for some customers. Energy stocks took a hit. As oil prices are tumbling, open interests (OI) on crude oil WTI futures are on the rise (see chart below – source: MPS). The rise in OI could be long liquidation or fresh shorts.
Story #4: Euro stayed strong
The euro surged in currency markets after the president of the European Central Bank expressed optimism for the continent’s economic recovery, citing positive trends for manufacturing and services. Christine Lagarde also played down recent concerns over the euro’s strength, and the ECB offered no concrete plans for further stimulus measures. Still, the Euro-Dollar gave back some of its gains by the end of the week as Brexit risk built (see chart below – source: poundsterlinglive.com)
Story #5: Pause in AstraZeneca trial weighs on sentiment
News late Tuesday that AstraZeneca was pausing the trials of its leading coronavirus vaccine candidate after a participant developed a serious neurological disorder may have also weighed on sentiment—particularly after recent reports that the White House was considering the vaccine’s fast-track authorization as soon as late October. AstraZeneca announced on Saturday that its Phase 3 COVID-19 study would resume, days after a participant fell ill. A vaccine timetable for the main candidates is shown below (source: Airfinity).
Story #6: Continuing lack of progress in Congress on a new stimulus package
Prospects for approval of another congressional stimulus package before the November election appeared to dim. On Thursday, Republicans brought their “skinny” USD 300 billion relief package to a vote in the Senate, but it was blocked by Democrats, who passed a package roughly 10 times as large in the House of Representatives in May. Some analysts believe that new stimulus is key to keep the bull market going – see below the record Put/Call ratio for single stocks (source: Goldman Sachs).
Story #7: Rising US Inflation
US inflation data released Friday surprised on the upside, with both core (less food and energy costs) and headline consumer prices rising 0.4% from July to August, or 1.3% from a year earlier. A jump in used car prices—the largest in over five decades—was partly responsible for the uptick as Americans shunned public transportation and air travel. Note how US Used cars prices were following the Nasdaq in August (source: Crescat Capital).
Story #8: The ECB left its policy measures unchanged, as expected
ECB President Christine Lagarde said after the meeting that economic data since July suggested a strong rebound in activity. Lagarde asserted that the balance of risks to the euro area’s growth outlook remains to the downside, reflecting the pandemic’s uncertain economic and financial implications. In response to the euro’s appreciation, Lagarde indicated that the central bank’s governing council would “carefully monitor” exchange rate movements and their implications. She reiterated that ample monetary stimulus remains necessary to support the economic recovery and to safeguard medium-term price stability. Note that the ECB has not been passive by comparison with the Fed. Indeed, its balance sheet growth this year exceeds the Fed’s – see below the chart of cumulative year-to-date change in total balance sheet, % of GDP (source: JPM)
Story #9: Potential impasse on Brexit
The United Kingdom’s process of divorcing itself from the European Union continues to run into obstacles, with U.K. Prime Minister Boris Johnson and the EU at a potential impasse in talks toward a trade agreement. The UK published a draft law to create an internal market after December 31, but some elements overwrote sections of the withdrawal accord that the two sides agreed to last year. The UK government conceded that some clauses would breach international law, prompting the European Commission to threaten legal action and to advise member states to prepare for a no-deal Brexit. On the back of this, Cable crashed and recorded worst week since March (see chart below - Bloomberg).
Story #10: Precious metals continue to lose their shine
Gold managed modest gains on the week while Silver futures limped modestly lower on the week, unable to hold $27. We note that Silver ETFs suffered their biggest weekly outflows in a year (see chart below – source: Bloomberg).
Read our next articles: Brexit bill 1st debate & tech stock sell-off