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LGT Navigator: Uncertainty factors increase pressure on stock markets

July 27, 2020

The renewed tensions between the US and China are dampening investor sentiment and depressing stock market prices. In addition, fears of a second pandemic wave and a further escalation of the crisis situation in the US and Brazil are growing. Investors are again focusing on a number of corporate results this week, as well as the monetary policy meeting of the US central bank. 

Uncertainty factors put stock markets under pressure

Increasing tensions between Washington and Beijing following the closure of embassies, as well as a slide in the price of Intel shares, increased the nervousness on Wall Street at the end of last week. The semiconductor company's stock fell by more than -18% at times after Intel postponed the introduction of a new generation of chips for another six months. Analysts fear that Intel will fall behind its competitors in terms of technology. The Nasdaq 100 technology stock market index closed just under -1% lower at 10 483.13 points. The broad S&P 500 index lost -0.62% and closed the week at 3 215.63 points. The Dow Jones Industrial dropped by -0.68% to 26 469.89 points. On a weekly basis, the leading stock market index recorded a minus of -0.76%. The Tokyo stock exchange was slightly weaker at the beginning of the week. The Nikkei index, which comprises 225 stocks, stands at 22 729.43 points, a minus of -0.10%. While the US dollar extended its losses and fell back to the lowest level since March 2019, the gold price reached a record high of USD 1 943.

This week's focus on US monetary policy and corporate earnings

This week, in addition to the interest rate decision by the US Federal Reserve (Fed) on Wednesday evening, a multitude of corporate results will again be in the focus of investors. These include heavyweights such as Pfizer and Kerning (Tuesday), Sanofi and BASF (Wednesday) or Apple, Credit Suisse, Nestlé or Volkswagen (Thursday) as well as Merck & Co and BNP (Friday), to name a few.

PMI survey signal rapid acceleration of US economy…

The Purchasing Managers' Index (PMI) for the US private sector, i.e. industry and service providers combined, surveyed by the London market research company IHS Markit, improved in July from 47.9 points in the previous month to 50.0 points, bringing the index back to the growth mark for the first time since the corona shock. In detail, the PMI for US industry climbed from 49.8 to 51.3 points and the PMI for the service sector rose from 47.9 to 49.6 points.

…while economists expect an only protracted recovery

In a recent survey (July 13 to 22) by the Reuters news agency, a two-thirds majority of the 60 or so economists surveyed believe that it will take at least two years for the US economy to regain the level seen before the corona crisis. The remaining economists expect a recovery period of one to two years. Following a historic slump in gross domestic product of -33.8% on average, most economists expect a recovery of +17.8% as early as the third quarter.

Fed expands its crisis support

At the end of last week, the US Federal Reserve (Fed) announced that it would further expand its “Term Asset-Backed Securities Loan Facility“ (TALF), “Commercial Paper Funding Facility“ (CPFF) and “Secondary Market Corporate Credit Facility“ (SMCCF) credit programs launched in the wake of the corona crisis. Specifically, the credit facilities are now to be made available to brokers. Previously, they were reserved for primary dealers. However, these financial institutions had made little use of the additional credit facilities due to the relatively rapid recovery in the financial markets.

Leading indicators confirm hope for economic recovery in the euro zone

Corporate sentiment in the euro zone continued to brighten in July. This was indicated by the Purchasing Managers' Index (PMI) published regularly by IHS Markit. As a result, the barometer climbed from 48.5 points in the previous month to 54.8 points and, with a value of over 50 points, is even signaling a growth trend again. According to the survey results, sentiment improved in July in both the industrial and service sectors. The PMI for the German economy jumped sharply from 47.0 to 55.5 points. According to IHS Markit chief economist Chris Williamson, the euro zone economy is now regaining momentum after the corona collapse in the second quarter. However, measures to contain the pandemic, higher unemployment and the companies that have been hit could slow down the recovery.

The UK economy also appears to be recovering from the corona shock faster than expected. The Purchasing Managers' Index for the service sector, which was massively affected by the pandemic, rose from 47.1 to 56.6 points. The industrial PMI recovered from 50.1 to 53.6 points in July.

Russia's central bank with another interest rate cut

In view of the corona crisis, the Russian central bank has again eased its key interest rate by a quarter of a percentage point to 4.25%. Analysts had predicted a more substantial cut of 50 basis points. This is the fourth interest rate cut in the current year. The central bank forecasts a decline in economic output of 4.5-5.5% this year.

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