One of the key events at the start of last week was the publication of phase 1 clinical trial data from AstraZeneca and Oxford University: this is seen as one of the more promising vaccine prospects and the trial results were positively received. A successful vaccine would be a gamechanger in terms of driving the economic recovery forward, particularly given restrictions have had to be re-imposed in a number of areas due to further Covid-19 outbreaks. Another key development was the EU leaders’ summit on the Next Generation EU fund, which was extended into Monday, but finally came to agreement amongst the member states. The package was hailed as a big step forward in terms of agreeing that the fund would provide EUR390bn in grants and the balance of EUR360bn in loans to member states to be funded by bonds issued by the European Commission. It is a gamechanger in that it represents a unified response. Fitch commented: “Next Generation EU will mutualise part of the cost of the coronavirus response at the EU level, thereby introducing some fiscal risk-sharing and central debt issuance. It also opens the door to some central tax collection.” Plus, “We view the fund as a net supportive factor for EU sovereign ratings over the medium term, particularly for the main beneficiaries. These are poorer member states and those hardest hit by the pandemic and are mostly located in southern and eastern Europe.” Hence the euro strengthened and Eurozone bond markets, particularly peripheral markets, have seen good buying interest: for example, the 10-year BTP-Bund spread has tightened with the 10-year BTP yielding 0.99% at Friday’s close. USTs broadly rallied: the yield on the UST 10-year tightened 4bps to close the week on a yield of 0.59%. However, US real yields have fallen a lot, and the US Dollar has been on the backfoot with the DXY index falling 1.57% over the week. Despite a positive start the S&P lost momentum into the end of the week ending -0.28% wow although this follows a stellar rally from the March low.
US-China tensions continued to build into the latter part of the week with the US State Department ordering the closure of China’s Houston consulate. China retaliated ordering the closure of the US consulate in Chengdu. Thus, investors are likely to continue to monitor these developments closely. Earlier today, China’s industrial profits growth for June was released showing a gain of 11.5% yoy which was stronger than May’s increase of 6% yoy and pointing to China’s continued economic recovery.
For the week ahead, the July 28-29 FOMC meeting press conference on Wednesday is likely to be a focus although no change in interest rates or policy is expected at this juncture. Negotiations between the Republicans and Democrats to agree another stimulus bill is also likely to come to the fore with the Republicans expected to unveil their proposal. Treasury Secretary Steven Mnuchin announced last week that a payroll tax relief will not come as part of this next bill but is likely to form a separate measure which has at least removed one obstacle to reaching an agreement: some sort of agreement is important with the unemployment payments granted under the CARES Act due to expire. Earnings season continues with earnings due from a good number of high-profile companies around the world e.g. Rio Tinto, Vale, Exxon, Shell, Credit Suisse, Barclays, Starbucks, LVMH, Samsung and Pfizer. Key US technology companies reporting include Amazon, Apple, Facebook and Google. Today, data releases include the German IFO business climate reading for July (which came in slightly above expectations) and US durable goods orders for June which is expected to recover as companies start to ramp up production. Later in the week, US 2Q GDP is forecast to plummet 35% on an annualised basis in 2Q and Eurozone 2Q GDP along with individual countries which are expected to register some ugly declines too. On Friday China’s July manufacturing and non-manufacturing PMI data is due to be released: July’s readings are expected to remain in expansionary territory and the manufacturing sector should benefit from continued reopening around the world. Other notable data includes the US consumer spending data for June. Importantly, the continued path of Covid-19 remains a market focus following a number of recent moves to reimpose restrictions in response to a number of outbreaks around the world.