Market Overview

24 August 2020

U.S. Home Sales, Retail Sector and Optimism over Virus Situation Boost Markets

European markets started trading on Monday in an extremely optimistic way. Pan-European Euro Stoxx 50, as well as the German Xetra DAX30 and the French CAC40 stock indexes quickly recovered from their Friday's losses almost to the highs of the previous week. Many traders call a specific reason for this round of the upside movement, as the U.S. medical officials signed off a new potential Covid-19 treatment over the weekend. The U.S. Food and Drugs Administrations on Sunday said that it had issued ‘emergency use approval’ for the use of blood plasma from recovered patients as a treatment option for certain patients suffering from the effects of the coronavirus. 

The Financial Times also reported that the U.S. administration is considering by-passing normal U.S. regulatory standards to fast-track an experimental coronavirus vaccine from the U.K. for use in America. As for Europe itself, Ranieri Guerra, assistant director general of strategic initiatives at the World Health Organisation, has said some increase in European cases is mostly explained by an increased use of tests. The second wave of coronavirus can be avoided, he added, and currently medical specialists have all the necessary tools they need to do this. 

But first of all, the sentiment of the Old World is following the all-time records that American stocks continue to set. In America, the "northward" market traffic already began to accelerate before Friday evening. The Nasdaq100 high-tech futures are swiftly approaching the mark of 11700 points, although they were in the area of 11225 points just a couple of working days ago. The broad market peloton is also catching up with IT-leaders. The S&P500 index has finally outperformed its own pre-coronavirus gains too. From a purely technical point of view, the breakthrough above the former psychological resistance of 3,400 points may open the highway for further growth of the index itself, as well as for the process of replenishing the investment portfolios of various funds with a wide range of companies' shares in various sectors. 

Market positions are exactly tracking expectations outlined by the influential White House economic adviser Larry Kudlow, who told Fox News on Thursday: “Twenty-percent-plus growth in the third and fourth quarters. You can score that... we’re going to have a big bang year next year..." And in keeping with his earlier predictions, Mr Kudlow remarked he expects the economy to muster a sharp, V-shaped recovery. “From the pandemic, which was a bone-crusher and a heartbreaker, you’ve got a whole series of indicators that are booming,” he declared, mentioning the strong housing sector data, which is widely viewed as a leading indicator of flourishing economic performance. 

In proof of his statement, the existing home sales measured by the National Association of Realtors (NAR) on Friday showed a remarkable 24.7% monthly uptick, and a recent Commerce Department report said that new home construction surged by 22.6% in July, while applications for building permits also jumped by 18.8 percent from the readings for June. Economists polled by Reuters had average forecast sales rising 14.7%. Existing home sales, which make up about 85% of all U.S. home sales, rose in all regions and were up 8.7% nationally from a year earlier. Earlier, The National Association of Home Builders reported that builders’ confidence this month matched the record high first reached in December 1998. 

“The housing market is well past the recovery phase and is now booming with higher home sales compared to the pre-pandemic days,” said Lawrence Yun, NAR’s chief economist. “With the sizable shift in remote work, current homeowners are looking for larger homes and this will lead to a secondary level of demand even into 2021”. However, part of the increased demand for houses may be due to the desire of many people to change the current flat in the city centre they are living in for a house in some other district, in order to move to cheaper homes away from the city centre, just because of the prospect of remote work. Sales are also helped by the 30-year fixed mortgage rate, which is at an average of 2.99%, just near low levels last seen in the early 1970s, according to data from the mortgage finance agency Freddie Mac. 

Meanwhile, a purchasing managers’ survey showed U.S. business activity returned back to the highest levels since early 2019 in August. IHS Markit reported its Composite PMI Index rose to a reading of 54.7, the highest since February 2019, from 50.3 in July. Its manufacturing indicator stood at its highest level since January 2019. 

Anyway, the retail sector, which depends more on rising spending of the poorest people or low income households, wins the most after U.S. President Donald Trump ordered the extension of the pandemic benefits and cancelled the payroll taxes for the annual income below $100.000 without waiting for any delayed decisions of the Congress. Trump also signed a presidential decree that allows for financial easing and lessens the chances of  evictions, which is a critical problem for a large part of the American nation. The investigation of the Apartment List portal says that missed housing payments continued to pile up in the course of July. Now, five months into the pandemic, at least 30% of renters and homeowners declared they still can't pay their full rent or mortgage payments on time. And, according to the Centre on Budget and Policy Priorities data, nearly one in four U.S. families reported that they don't have enough food.

 Even an attempt to solve the problem of the lack of consumer demand with new unemployment benefits and tax credits, has helped to raise the shares of fast-food chains and supermarkets. For example, Walmart Inc, a well-known discounter stores' network, showed a fresh price peak of $137.40 per share, which is almost $20 higher than the levels of the beginning of July. And before the end of last week, Walmart shares rolled back to almost $130, but most investment managers declared the targets of at least $140 per share, according to Bloomberg polls. 

Another example is Target Corporation stocks which jumped from $137 to $153.5 last week. The Target Corporation is an old general merchandise retailer with almost 2,000 stores across the United States, offering an edited food assortment, including perishables, dry grocery, dairy and frozen items, that also have a network of clothing discount stores of different brands and its own digital channels of selling. McDonalds' stock price exceeded $210 per share, already risen by more than $15 over the previous three weeks, with the most likely targets being at least another $15-20 higher, as fast food is almost the last thing consumers would save on. 

But, of course, we should not ignore the IT giants factor, which is still giving a piggyback ride to all the other segments of the market. An Apple-infused rally is currently underway as the surge in Apple shares were up to $499.45 on Friday, which is the highest price they have ever been at and which marks a  remarkable event. It comes with just months to go until the release of its new slate of 5G-enabled iPhones, which many in the market expect to become a game-changing point for the upgrade cycle, as the sales would rise at least on trade-in programs. Tesla automaker is also in focus, rising to a new high near $2,050 as it prepares for a five-for-one stock split - a move that would make the stock more affordable for small retail investors. Meanwhile, Google shares are gaining for the second month in a row, showing a new historical peak price, and almost touching the mark of $1,600 per share. Therefore, it seems that "stay-at-home" shares are still a very important driver and the essential part of the present cut of cards.



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

Lysakov Sergey
Market Focus

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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