Weekly Roundup 17.07.20

Let’s round up the main events from last week.

We’ll kick things off with the main news.

Stimulus – It’s coming, and before the end of the month.

Mnuchin backed turning PPP loans given to the smallest businesses into grants

Will look to target the funds more this time after criticism of the first round of funding found its way into the hands of larger firms, celebrities etc. 

 “I think this time we need to have a revenue test and make sure that money is going to businesses that had significant revenue declines,”

The low-interest loans are forgivable if the business uses the money to keep employees on the payroll or rehire workers who have been laid off. 

Companies recently got an extension of the time for them to use the loans, from eight weeks to 24. 

Expect a lot more chatter about stimulus in the coming week, as the programs need to be approved before the end of July. 

Covid-19

Let’s start with the bad news.

The virus isn’t going away. Record numbers of reported new cases in the U.S. last week.

Call it an extended first wave, a second wave, it really doesn’t matter. 

Even the overall numbers don’t seem to matter to the markets at the moment. 

Rumours of a second shutdown in Texas did put the markets on edge, but equity markets & the USD reversed their risk-off moves once the rumour was quashed by Texas Governor Abbott. 

Generally, the trend is moving towards mandatory mask-wearing and restrictions on activities that put people in close contact. 

Expectations are that these measures will slow the spread.

The numbers may get slightly worse before they begin ticking lower.

Onto the good news. 

Vaccines. Lots of progress, but the star of the show is the “Oxford” vaccine.

Armchair expert coming up.

Many vaccines thus far have been successful in producing an immune response: i.e. antibodies.

However, antibodies seemed to disappear from the bloodstream over time. The difficult question…

Just how effective will those vaccines be over time

This is where the Oxford vaccine shines. 

“I can tell you that we now know the Oxford vaccine covers both bases – it produces both a T-cell and an antibody response,” the senior source told The Telegraph. “It’s the combination of these two that will hopefully keep people safe.

“So far, so good. It’s an important moment. But we still have a long way to go.”

Scientists increasingly believe that any successful vaccine may need to trigger both an antibody and T-cell response – the two key aspects of our “adaptive” immune system. 

The key takeaway here is that markets are sure to be more selective on the vaccine news going forward. 

In simple terms: “T-Cell response or I’m not interested mate”

Breaking Vaccine News from now on:

If you want to take a deeper dive, the Telegraph article is here and this article in the FT adds some colour too.  

Earnings

The focus was on the banks. 

Earnings were generally up, mainly due to an increase in profitable trading activity. 

However, JPMorgan, Citigroup, and Wells Fargo set aside a combined $28 billion to cover potential defaults on loans amid the pandemic recession.

JPM’s Jamie Dimon summed it up.

“This is not a normal recession. The recessionary part of this you’re going to see down the road,” JPMorgan Chief Executive Officer Jamie Dimon said Tuesday. “You will see the effect of this recession. You’re just not going to see it right away because of all the stimulus.” 

Fitch maintains a negative outlook for the US banking sector – In short, the levels of trading and bond issuance activity that drove profits in this quarter will not be sustained. 

Revenues will decrease, and loan losses/defaults will increase over the remainder of the year and into 2021. 

So, whilst we may see stories like this one, banks’ prospects from here should be more closely linked to the overall economic outlook.  

Which brings us nicely onto everyone’s favourite subject.

Central Banks

Three of them met last week. No big policy changes announced, so I’ll keep it brief.

ECB 

Expect to use the full envelope of PEPP, cautiously optimistic on the economy, still pointing to high uncertainty. 

BOJ 
Lowered economic growth forecast. Maintained all previous policy tools.

BoC
0.25% Bank Rate and C$5bn of weekly bond purchases to continue.

While noting signs of improvement, the Bank of Canada has emphasised that policy will remain ultra-accommodative for a number of years. This means short rates pinned to the floor and longer-dated yields staying depressed. This suggests the central bank will play second fiddle to other short-term drivers of CAD: global sentiment, oil and US covid cases. 

In the press conference, Governor Macklem really underlined that rates will stay low for a long time.

“until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved”, and highlighted that any transitory inflation overshoots will be ignored. 

Fed’s Kaplan basically said the same thing.

The bar for raising interest rates is high.

Inflation will have to significantly (and consistently) overshoot the magic 2% figure before rate increases are even discussed. 

Chinese trade data surprised positively. Exports grew 0.5% year-on-year while the consensus was -2.0% YoY, and imports grew even faster at 2.7% YoY when the consensus was -9.0% YoY.
GDP growth also beat expectations, coming in at 3.2% y/y for Q2. 

There was disappointment in the detail here though. 

The gains were mainly via increased industrial production. 

The service sector is still weak, and retail sales disappointed at -1.8% for June. 

In the U.S. initial and continuing  jobless claims were reported as being lower. 

But… seasonal adjustment came into play and there is some speculation that claims are actually rising now. 

OPEC+ also agreed to trim production cuts by 2 million bpd, starting in August.

OPEC+ is anxious to see higher crude prices as soon as possible but its ambition is likely to be thwarted in the short term by the renewed softness in fuel consumption.

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