Market Overview

26 June 2020

US Larry Kudlow and Pickup in EU Business Activity Vs Second Wave Fears

Stock markets are still in a mixed mood today. All major European indexes opened slightly lower, but quickly recovered by midday thanks to a high close on Thursday. Wall Street’s S&P500 and Nasdaq indexes even turned positive before the end of yesterday's session, as last moment gains in the financial and energy sectors allowed them to overtake some early losses. It happened just a day after New York assets posted their worst corrective day in two weeks.

As a remarkable example, Boeing shares declined below $175 again after Berenberg analyst Andrew Gollan downgraded them to “Sell” from “Hold" with a price target of $150 unchanged. Boeing shares are up about 28% over the past month. “The market’s recent exuberance for reopening economies and an early resumption in air traffic has driven a strong rebound in aerospace shares,” Gollan wrote on Thursday in a research report. A slower-than-expected 737 MAX recovery and weak second-quarter results, set to be reported around the end of July, are two factors that could drive shares lower over the near term. For the second quarter, Gollan sees the possibility of Boeing losing about $1.6 billion in operating profit, roughly $1 billion wider than estimates. And despite the fact that just a couple of weeks ago, Boeing shares were valued by the market at $230, and right now they are again at the low levels of the beginning of June and are in a short-term downward trend, many investors are keeping much higher price targets. 

At the same time, Disney Co shares initially slipped below $109 as the reopening of theme parks were delayed in the U.S. but the price partially recovered to $111.36 later, so even the entertainment sphere is between the devil of the second corona wave threat and the deep blue sea of pickup in global business activity. This week, the Manufacturing and Services Purchasing Managers Indexes (PMI) for June in many EU countries exceeded even the brave expectations of some optimists. The Markit Composite PMI in the Euro area was 47.5 after 31.9 in May, and against the average 42.4 in a Bloomberg’s poll forecast, and the same indicator performed at even 51.3 in France. In the United Kingdom, the Composite PMI was 47.6 after 30.0 in May, and the average analyst's forecasts was 41.0 only, while the UK Manufacturing PMI even showed 50.1 points.

The European Central Bank’s President Christine Lagarde said that the worst of the pandemic is over. "We probably are past the lowest point and I say that with some trepidation, because of course there could be a severe second wave," she said during an online event on Friday. At least continental Europe may be "set for a spell of outperformance vis-à-vis the U.S. market: its success in bringing the coronavirus under control", Geoffrey Smith wrote in Investing.com today. The United Kingdom also has ordered the reopening of most service-sector enterprises this week, and the UK government on Friday abandoned some previous plans for a quarantine of all visitors from abroad, a plan that had brought about  many negative reactions from crowds  from the badly suffering travel sector. So, the UK FTSE 100 stock index was the best performer of the major indices on Friday morning, rising 1.5% in the afternoon.

As for the United States, it has an increasingly multidimensional picture. The American stock exchanges are doing well so far, perhaps because of the historically large number of huge international corporations there, whose assets are always in demand, and many investors are just happy to have an opportunity to buy them on dips, which make them much cheaper than usual prices. The U.S. Manufacturing PMI for June was 49.6 in June after 39.8 in May, and the Service PMI is a little bit weaker at 46.7 points. Not only is the pace of recovery in business activity relatively high, but also trillions of Dollars pumped into the economy by the Federal Reserve is doing its job in U.S. markets. But all these positive realities and expectations are very strong and obvious when looking at the long-term horizon, and much more vague in the short-term prospect of the coming weeks as Wall Street traders have much more reasons to worry about the threat of a second viral wave after spikes of infections were detected in several American states.

Nationwide, the United States recorded its second greatest daily increase in COVID-19 cases since early March, with a nationwide surge of nearly 36,000 new cases on Tuesday - the highest since a record 36,426 new U.S. infections recorded on April 24. The governor of Texas temporarily halted the state’s reopening on Thursday. “This temporary pause will help our state corral the spread until we can safely enter the next phase of opening our state for business,” Governor Greg Abbott, a two-term Republican, said in a statement. But the coronavirus may have infected ten times more Americans than reported, the U.S. Centres for Disease Control and Prevention (CDC) said, indicating many people without symptoms have or have had the disease, and that is a more frustrating proposal. CDC officials gave the statement to a small group of reporters on Wednesday night, and it was cited by Reuters yesterday. The estimate is based on the number of known cases, which is between 2.3 million and 2.4 million, then multiplied by the average rate of antibodies seen from the serology tests, which is about an average of ten to one. “If you multiply the cases by that ratio, that’s where you get that 20 million figure,” said one official.

Spikes in novel coronavirus cases in parts of the United States will likely trigger closures in certain areas, but there will not be a nationwide shutdown, White House influential economic adviser said on Thursday, in an interview on Fox Business Network. To quote verbatim, “There will be some shutdowns individually ... in individual places and certain stores. We are keeping a very close eye on this,” Larry Kudlow, an economic adviser to the White House, said. He added that he still expects to see a “strong V-shaped" economic recovery and anticipated a 20% growth “snapback” in the third and fourth quarters of 2020. “We’re going to have hot spots. No question,” he later told reporters at the White House. “We just have to live with that,” he added.

“It appears that the market may have entered into a new stage of needing direction. It doesn’t seem that the worries over a virus resurgence are enough to truly start forming a down leg of a W-shaped recovery. But without some new catalyst to give market participants some optimism, stocks might not be able to move much higher either,” said JJ Kinahan, chief market strategist at TD Ameritrade. This opinion may reflect fairly accurately today's wary or moderate optimism but wait-and-see at the same time consensus in the markets.


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Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.


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