Soft punch. Markets closed mixed on Friday as a feared crackdown on China by the US did not happen… yet. Pharmaceutical companies are making headway not only in the fight against COVID, but also cancer helping the Nasdaq advance.
N O T E W O R T H Y
Just a little reminder. The country is reeling in the wake of the Pandemic lockdowns. One in five American workers has been laid off in the past 10 weeks. Many US companies have been forced to take aggressive measures to survive the massive declines in sales associated with the de facto national lockdown. They have cut vital R&D and capital investment while laying off critical staff and cutting salaries of their most talented executives. In order to keep their businesses moving forward, many companies have completely tapped out their bank lines of credit and then turned to the public credit markets for more vital cash. US companies have sold a lot of bonds in the form of new issues year to date. Specifically, the pace of newly issued investment grade debt issuance year to date is greater than last year’s issuance through November. Further, they are securing those bonds with anything and everything they can dig up. Tough times, indeed. But… before I get too dark, things are looking up on the pandemic-induced pause. The country is slowly coming back to life as restrictions begin to ease. A positive signal came at last Thursday’s weekly job numbers which showed that ongoing jobless claims shrank from the prior week. To be fair, the number is still alarmingly large, but getting smaller. Lots of progress is being made on the virus vaccine front which, for now, seems to lessen the market's fear of a second wave. OK, so we are back on our feet, albeit shaky ones. The market approves.
Alas, there is something new which the market must now process as an unknown risk. It is not completely new and we should recognize it from… last year. It is, of course, tension between the US and China. It has been brewing in the background but the past two weeks’ has seen it come front and center once again. The Administration has been publicly critical over China’s treatment of the Coronavirus outbreak and has been putting lots of pressure on Chinese technology companies involved in 5G wireless network deployment. Hong Kong enjoys a special trade status due to its kinda-independence from the mainland, making it the gateway between much of the world and the Chinese economy. So Hong Hong is the entry point to the second largest economy in the world… the one which contributed 1/4 of global economic growth in the past decade. Last year saw Hong Kong take center stage as protestors took to the streets in response to a now-rescinded ruling that would allow accused defendants to be extradited to the mainland for prosecution. The Coronavirus outbreak dampened the tension which was reignited last week when China enacted some new rules. Specifically, the NPC (National People’s Congress) approved a proposal which allows mainland China to extend national security law to Hong Kong, including the establishment of a national security agency on the island. So much for independence. The Administration’s response was swift in words. On Thursday, the President announced that he would have a press conference on Friday to discuss the implication of the ruling causing stocks to sell off. investors were suddenly reminded of the costly trade war which dampened global economic growth causing the Fed to take action… just last year. Though the trade war itself is technically not over, its intensity diminished with the Phase One trade agreement signed earlier this year. In that Friday presser, the President announced that the US would remove Hong Kong's special trade status, restrict certain research-oriented Chinese graduate students from attending US universities, and look into accounting practices of US-listed Chinese companies. The announcement was far less aggressive than traders were expecting, prompting stocks to give up earlier losses and rally into the close. Investors are starting to take notice. On that Phase One trade deal which helped stocks rally into the final months of 2019, over the weekend, WHILE YOU SLEPT, Beijing fired back with rhetoric in state controlled media and an announcement that it would curb soybean purchases agreed upon in the pact. A step up in tensions could put a damper on the market’s optimism if the situation escalates further.
THE MARKETS
Stocks started Friday’s session on a down note as tensions escalated between the US and China but a less-toothier-than-expected announcement caused traders to rally markets into the close. The S&P500 added +0.48%, the Dow Jones Industrial Average slipped by -0.07%, the Russell 2000 dropped by -0.47%, and the Nasdaq Composite Index climbed by +1.29%. Bonds advanced and 10-year treasury yields gave up -4 basis points to 0.65%. Gold futures continued their advance, adding +1.38%, to $1736 per ounce and crude oil climbed an additional +5.28% to $35.49 per barrel. Crude will be closely watched in the coming days as OPEC+ is scheduled to meet soon and member countries begin to posture.
NXT UP
- The final read on Markit Manufacturing PMI (May) is expected to come in at 40.0 up from the prior read of 39.8.
- ISM Manufacturing (May) is expected to be 43.8 versus the prior month’s 41.5.
- Construction Spending (April) may have slipped by -6.0% compared to the prior month’s +0.9% growth.
- Later in the week we will get a read on vehicle sales, manufacturing/services PMI’s, Factory Orders, weekly job numbers, monthly change in Non-Farm Payrolls, and the Unemployment Rate. Earnings season has essentially wound down but we will still hear from a handful of influential companies in the week ahead. Please refer to the attached earnings and economic calendars for details.