Virus spoils re-opening party

Global equities managed to shrug off mounting U.S. virus concerns last week and instead focus on better than expected ‘re-opening’ economic data. Of course, the Fed chipped in with further “whatever it takes” supportive comments, and another drug company announced early promising vaccine results. Equities bounced and the $US weakened, though bond yields held remarkably steady and gold also held up well. In terms of data, June readings on U.S. manufacturing, consumer confidence and employment were all better than expected, and May existing home sales also surged back after sharp falls in March and April.

 Does this mean a V-shaped recovery is underway? Not necessarily – a sharp re-opening bounce in economic data was always to be expected and the strength of the rebound likely reflects the solid underlying fiscal and monetary support that has been provided in recent months – and the fact that economists tend to underestimate the volatility of data around major economic shocks.

Given the rebound in U.S. virus cases and some re-imposition of social distancing restrictions, U.S. data is vulnerable to softening again in coming months. Another challenge is the impending ‘fiscal cliff’ as most current bridging support for households (such as higher unemployment benefits, rent and mortgage relief) is due to expire over coming months. As in Australia, the U.S. faces a delicate balancing act of weaning the economy off costly and potentially disincentivising support without risking the recovery.

This week will be relatively light in terms of data, with Wednesday’s U.S. job opening (‘JOLTS’) report for May and Thursday’s jobless claims. As a result, the focus is likely to remain on whether the renewed U.S. COVID-19 outbreak gets worse or stabilises – which in turn may determine whether the S&P 500 breaks to the upside or downside of its recent 3,000-3,200 range.

As a heads up, the Q2 U.S. earnings reporting season also starts in coming weeks! With much less earnings guidance than usual, we should expect some ugly and surprising results, though the market may well try hard to look through the weakness. Of interest though will be the extent to which the results cause analysts to further scale back CY’20 and CY’21 earnings expectations, which will put even more upward pressure on already lofty PE valuations.

Australian market

Local stocks and the $A rose in line with the lift in global risk sentiment last week even as Melbourne’s virus outbreak went from bad to worse. Encouragingly, however, what we are seeing in Victoria is an attempt (so far at least) at a less economically costly and more targeted response this time around, and the virus also remains relatively well contained in other states.

Data wise, the only new news last week was a larger than expected slump in home building approvals during May, which only highlights the ongoing challenges facing this sector due to high unemployment and reduced immigration.

Highlights this week include today’s ANZ June Job Ads, today's RBA policy meeting and May housing finance approvals on Thursday. Job ads should bounce somewhat after the plunge over recent months, though May home lending should remain weak. The RBA will remain firmly on hold and express guarded optimism about the future.

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