Last week, the S&P 500 index gained 1.25% and taking it only marginally lower (-0.2%) YTD after an impressive rally off the March lows. Bond markets continue to be well supported: the UST 10-year yield compressed 2bps to 0.63% at Friday’s close. In terms of market drivers, investors looked more to the supportive policy backdrop around the world, the positives from US corporate results, and encouraging news of Moderna Inc.’s vaccine trial for Covid-19 rather than any cautionary commentary from a number of central bank governors and speakers.
Lael Brainard, a Federal Reserve Board Governor, struck a cautious tone noting: “the recent resurgence in COVID cases is a sober reminder that the pandemic remains the key driver of the economy's course. A thick fog of uncertainty still surrounds us, and downside risks predominate.” Reflecting this, she emphasised “Fiscal support will remain vital.” The ECB and BoJ were the key central bank meetings and both took a ‘wait and see’ announcing no change to policy. Christine Lagarde, ECB President, warned that although there was a “significant but uneven recovery” there was also “exceptionally elevated uncertainty”.
Data wise, there were a number of key releases. In the US, regional manufacturing gauges and the Fed Beige Book pointed to improvement. US June retail sales exceeded expectations although the July Michigan Index of Sentiment fell back from June levels. On the inflation front, US CPI registered 0.6% mom due to a pick-up in gasoline prices but ex food and energy it remained subdued rising only 1.2% yoy. Elsewhere, UK and China GDP data reflected the different stages of the impact of the Covi-19 pandemic: UK GDP for May disappointed at 1.8% mom when expectations had been looking for a 5.5% rebound. China’s 2Q GDP returned to positive territory registering 3.2% yoy. In Europe, the EU summit of leaders began on Friday to try and progress the proposed European Recovery Fund. The talks continued over the weekend and have been extended into today.
In Monday morning trading, equity markets are trading with a subdued tone. Overnight, the PBoC maintained the one-year loan prime rate, the reference rate for bank loans to companies, at 3.85% suggesting it remains comfortable with the pace of credit growth and the recovery. The five-year rate was also held steady at 4.65%. In terms of key events this week, markets continue to focus on the path of the Covid-19 pandemic hence vaccine news continues to be of interest. The publication in the Lancet of phase 1 clinical trial data from AstraZeneca and Oxford University, which is seen as one of the more promising vaccine prospects, is due today. A successful vaccine would be a gamechanger in terms of driving the recovery forward. Plus, it is a busy week for US corporate earnings with investors looking for guidance on the outlook. US data releases include the June Chicago Fed National Activity Index, July Markit PMIs for both manufacturing and services, plus existing and new home sales data. In Europe, along with any news on the recovery fund, a slew of July PMIs are due at the end of week. UK PMI and retail sales data are also expected on Friday and Brexit talks continue. Central bank meetings include the South African, Russian and Turkish central banks: a rate cut looks likely from the Russian Central Bank, South Africa is seen as a closer call and Turkey is expected to remain on hold. On Tuesday, the minutes of the July RBA meeting are due to be released and RBA Governor, Philip Lowe, is also due to speak. The Australian government is also expected to give a fiscal policy update in its July Economic Statement later in the week. Other speakers include Jonathan Haskel, a member of the BOE MPC, on the effects of Covid-19 on Thursday.