SOFTER OUTLOOK FOR US AMID PANDEMIC

The number of daily cases of Covid-19 in the US is spiralling, which is reducing footfall in stores, leading to the prospect of slower growth in retail sales and weaker investor morale. Donald Trump’s warlike rhetoric towards China – aimed at galvanising voters around a common enemy as he trails Joe Biden in the polls – is also blurring the outlook.

In a historic first, the 27 EU heads of state agreed on a recovery fund weighing in at EUR 750bn, equivalent to 5.5% of the area’s GDP. This shared debt burden breaks down as EUR 390bn in grants and EUR 360bn in low-interest loans. However, this plan has to be ratified by parliaments, which is not a guaranteed win. Possibly standing in the way are the ‘frugal’ states to the North as well as the recalcitrant East, afraid of losing their financial allocations. And the South is not necessarily happy about being policed in its use of the recovery money. Still, the yield on 10-year government bonds has fallen to 1% in Italy, which stands to receive support equivalent to 10% of its GDP.

PMIs in the Eurozone beat expectations, rising sharply in mid-July to 51.1 and 55.1 for manufacturing and services, respectively. The euro last week edged past the 1.16 mark against the dollar, lifted by the pan-EU recovery deal as well as broad dollar weakness (-1.4% against a basket of currencies last week). Confidence in the US economic outlook is ebbing as the public health emergency remains untamed. Neither is the greenback supported by the Fed’s lax monetary stance, and that is unlikely to change when the policy committee meetson Tuesday and Wednesday. Initial jobless claims boomeranged by 1.42 million in the week of 12-18 July, showing that the recovery in the job market is thwarted by the resurgence in coronavirus cases, thus pouring cold water on the demand outlook.

Congress is struggling to agree on a new $1 trillion fiscal package as the previous stimulus nears expiration. The Democrats are particularly hesitant in this pre-electoral climate. The White House is also considering a recalibration of the $600 weekly compensation system, considered too generous. This scheme is due to expire at the end of July.

Reporting season is in full swing in the US. Tech stocks took a dive last week, pulled down by lower-than-expected guidance from Microsoft, delayed development of Intel’s new processor, and an ongoing investigation into Apple in relation to consumer protection. Their historically high valuations also stoked fears in this space.
If you have any questions please contact the office on (03) 9670 6070.