20 July 2020
Chinese stock market falters
China’s stocks ended their remarkable recent rally last week, despite second-quarter data suggesting that the country’s economy is bouncing back from the effects of coronavirus. The CSI 300 Index dipped almost 5% on Thursday, in its biggest one-day fall since February. This slump suggests that investors have doubts about the recent news that Chinese GDP grew 3.2%, compared with the same period last year. Indeed, the picture is slightly uneven, with data suggesting the industry and construction sectors are faring well, but hospitality, retail and transport are lagging.
Julian Evans-Pritchard, Senior China Economist at Capital Economics, noted:
“The upshot is that while there are some reasons to think the GDP figures may be overstating growth slightly, there is little doubt that the recovery has been rapid”
Meanwhile, a renewal of tensions between China and the US is continuing to pull on markets. The situation worsened last week, as President Trump hit back at China’s imposition of a draconian security law in Hong Kong by signing the Hong Kong Autonomy Act, a piece of legislation that paves the way for sanctions on Chinese officials.
There has also been discord between the UK and China – last week, Boris Johnson’s cabinet decided to ban Chinese technology giant, Huawei, from supplying new 5G equipment to the UK, following intense debate about the security implications of Huawei’s involvement in critical infrastructure due to its close ties to China’s ruling party.
This morning, UK Foreign Secretary Dominic Raab accused China of “gross and egregious” human rights abuses against its Uighur population and said sanctions against those responsible cannot be ruled out. The move follows the appearance of drone footage that appears to show Uighurs being blindfolded and led towards trains. And in a further move against China, the UK has announced it will indefinitely suspend its extradition treaty with Hong Kong. Announcing the move, Raab said the UK “wants a positive relationship” with China, but he said the “imposition” of the new national security law in Hong Kong by Beijing was a “serious violation” of the country’s international obligations.
‘Tis the season
Earnings season is upon us once more. Companies have begun releasing their second-quarter results, detailing the true impact of COVID-19 and the global economic slowdown. Very few companies will escape unharmed by the crisis – according to FactSet, S&P 500 earnings in some sectors are expected to drop almost 45% year-on-year. Keen-eyed investors are now scouring results for clues about how companies have coped, and how they are positioned for the coming months.
George Curtis from TwentyFour Asset Management, Co-managers of the St. James’s Place Diversified Bond fund, argues:
“We expect headlines to be bad, but for the market reaction to be muted to positive on outperformance of exceedingly low expectations.”
Banks face loan losses
The major US banks fired the starting pistol on earnings season last week. Despite the fact they have largely benefitted from market volatility and central bank support, Wells Fargo, J.P. Morgan and Citigroup together set aside $28 billion to deal with expected loan losses due to COVID-19, in a sign of further fallout from the pandemic.
Wells Fargo also reported a $2.4 billion loss for the quarter. The bank is contending with operating costs that it can’t cut easily due to pressure from regulators, while unable to improve its margins by growing its balance sheet due to federal limitations, notes Dan O’Keefe of Artisan Partners, co-manager of the St. James’s Place Global Value fund. Artisan Partners exited its position in Wells Fargo earlier this year due to its view that the bank was being “squeezed on all fronts”.
Both Citigroup’s and JP Morgan’s results were positive, says O’Keefe, but they were interpreted differently by the market – with the former’s stock going down and the latter’s going up. In his view, the only explanation is that Citigroup’s statement was more pessimistic about the future than J.P. Morgan’s. That difference highlights how a tumultuous quarter has left investors especially keen to hear predictions about the future business environment.
But it’s more useful to scan results for clues about the present, says O’Keefe:
“Nobody knows what’s going to happen for the rest of the year, but the results reporting season gives you an insight as to how well the businesses are managing, how good those management teams are, and how resilient those businesses are.”
Eurozone stocks fall
Two big meetings took place in Europe last week. The first was at the European Central Bank, which, as expected, decided not to alter its level of stimulus. European stocks fell on the news.
Markets were more focused on the summit in Brussels, where European leaders gathered on Friday to thrash out the details of a €750 billion COVID-19 recovery fund. There were disagreements surrounding how much of the total ought to consist of grants rather than loans, and what sorts of conditions should be attached to funds when they are distributed. It appeared that the final sum, if agreed, might be smaller after the weekend.
At the time of publication, a weekend of talks had pushed the participants closer to a deal, with negotiations set to resume this afternoon. Markets seemed cautiously optimistic that an agreement was near. The euro strengthened against the dollar on signs that progress had been made, reaching its highest level since March.
Dutch Prime Minister Mark Rutte, one of the ‘frugal group’ of nations seeking to limit the number of grants that are disbursed, struck a note of optimism in the early hours of Monday morning, when he told reporters that the talks were “back on track” after clashes over the weekend.