Weekly View - To V or not to V
With an uptick in covid-19 infections in some US states and elsewhere, markets were jittery last week, showing the recent rally lacked a certain conviction. This is reason enough to remain relatively cautious on equities overall. Consumer spending in the US rebounded sharply in May—but the decline in incomes suggests the road to full recovery will be rocky, especially as emergency government help for households fades. This week, the release of the June nonfarm payroll figures will provide another indication of prospects for the domestic US economy. The bankruptcy filing by Chesapeake Energy, one of the most emblematic (and debt-laden) US energy companies, shows that the effects of the pandemic are continuing to pan out and that in credit, as in equities, it makes sense more than ever to be selective.
There is also room for some guarded optimism around Europe, with the easing of lockdown measures resulting in improved business activity. The Markit Purchasing Manager Index (PMI) for June still showed economies contracting, with continued supply-chain disruption and job cuts meaning we see no reason to alter our central euro area GDP forecast of -9.5% in 2020. Nevertheless, the rebound in data is welcome and together with a possible agreement on a pan-EU recovery fund in the coming weeks could justify taking a closer look at European assets again. On a less positive note, there is the risk that trade tensions with the US escalate after Washington pulled out of talks on the taxation of multinational tech companies. There is further reason to be worried about trade after White House trade advisor Peter Navarro suggested the Phase 1 trade deal between China and the US was “over”. Trump’s clarification that Navarro’s comments were “taken wildly out of context” might have helped calm market nerves, but Navarro’s remark embodied the increasingly brittle relations between Washington and Beijing.
The fallout from the US Fed’s latest stress tests on banks was a reminder of why we prefer less regulated sectors. Although the Fed fell short of banning dividends outright (unlike some of their European counterparts), dividends and share buybacks were capped. The Fed’s intervention may be salutary, but it does remove some of the banking sector’s immediate appeal.