Stock Markets
The equity markets saw volatility return last week, with Thursday seeing declines of 3% and Friday 1%1. Before this last week, the S&P 500 advanced for four straight weeks, with technology stocks leading the index to a new record high. The strength of the stock market, though, seemingly disconnected from current economic fundamentals, has been supported to date by aggressive fiscal and monetary stimulus and stronger-than-expected economic indicators of future growth. The Department of Labor released data last week showing initial jobless claims coming in at 881,000, beating analysts’ estimates. The economy also added 1.4 million jobs in August, with 10.1% growth in productivity. On the trade front, the U.S. deficit reached a 12-year high.
US Economy
We’re two-thirds of the way through 2020, but the year so far has produced more than its fair share of extraordinary statistics. With Labor Day bringing the unofficial end to an unusual summer, here’s some of the year’s unusual figures and where they are now: While market volatility increased sharply this year, it was particularly notable in March, which included a single-day decline of 12% — the second-worst day in the last 50 years – as well as two 9% daily gains (the third- and fourth-best days) a handful of days apart. After bottoming in late March, the stock market has been on a steady path higher, with relatively modest fluctuations along the way, including only 22 daily moves larger than 2% during that time. Last week saw a return of volatility, with the market falling 3% on Thursday, as many of the higher-flying segments of the market, such as tech stocks, sold off following a lengthy winning streak. Analysts don’t see this as the beginning of a new broader direction lower for the market, but instead a more normal breather for a market that has been on quite a run.
Metals and Mining
The bears in gold could only manage one day in keeping prices down as the yellow metal bounced back Friday from a brief selloff across markets forced by the shock collapse of U.S. gross domestic product in the second quarter.
“Gold mania continues and after tentatively clearing the $2000 level, traders are starting to doubt whether a profit-taking pullback is in the cards,” said Ed Moya, analyst at New York-based online trading platform OANDA. Spot gold, a real-time indicator of trades in bullion, last traded up $19.47, or 1%, at $1,976.11. It fell a meagre 0.6% in the previous session, touching a session low of $1,939.69 that remained well above the level it attained when it rewrote for the first time this week record highs from 2011. On New York’s Comex, the August futures contract last traded up $28.90, or 1.5%, at $1,971.20 before expiring and going off the board. On Thursday, August fell just 0.5%. For July, Comex gold ended up 9%, for its biggest monthly gain since February 2015. For the year, gold futures are up 28%. Further, December gold hit a record high of $2,005.40 in Friday’s Asian session, before the start of European and U.S. trading. That also means the new front-month for Comex would likely aim for a higher peak in the new week to sate gold bulls pursuing $2,000-territory.
Moya expounded that “Gold will continue to shine bright as real yields continue to fall deeper into negative territory, virus surges will keep economic recoveries limited, and the stimulus trade will not go away until the labor market bounces strongly back.” Silver, which rallied along with gold through most of July, rose 36% for the year, outperforming not just the yellow metal but the entire commodities complex as well. Silver’s front-month contract on Comex, September, last traded up $1.263, or 5.4%, on Friday at $24.625 per ounce.
Energy and Oil
Oil prices hit a rough patch this week, falling back in concert with broader financial markets. The dollar gained strength, which also pushed down crude. The demand rebound is also sputtering. WTI was driven below $40 for the first time since June. Iraq is looking for an exemption from the OPEC+ deal for the first quarter of 2021, raising fears that the group’s compliance may start to slip. A separate report says that Iraq wants a two-month extension on the extra production cuts that it agreed to implement in August and September. Kuwait’s budget deficit is expected to reach $46 billion this year. But oil revenues collapsed after the 2014-2016 downturn and never recovered. Now the country is grappling with tapping its sovereign wealth fund as the days of huge oil revenues appears to be over. A new report from the European Commission warns that the shortage of critical materials could threaten the EU’s push to become climate neutral by 2050. The EU estimates that it will need up to 18 times more lithium and five times more cobalt in 2030, a figure that rises to 60 times more lithium and 15 times more cobalt by 2050. Natural gas spot price movements were mixed this week. The Henry Hub spot price fell from $2.51 per million British thermal units (MMBtu) last week to $2.19/MMBtu this week. At the New York Mercantile Exchange (Nymex), the September 2020 contract expired this week at $2.579/MMBtu, up 12¢/MMBtu from last week. The October 2020 contract price decreased to $2.486/MMBtu, down 9¢/MMBtu from last week to this week. The price of the 12-month strip averaging October 2020 through September 2021 futures contracts climbed 10¢/MMBtu to $2.973/MMBtu.
World Markets
European shares pulled back in sympathy with the technology-led decline in U.S. equities. However, news of merger talks between Spanish lenders Bankia and CaixaBank helped to curb losses. In local-currency terms, the pan-European STOXX Europe 600 Index ended the week 1.76% lower. Germany’s Xetra DAX Index fell 1.46%, France’s CAC 40 slid 0.76%, Italy’s FTSE MIB declined 2.27%, and the UK’s FTSE 100 Index dropped 2.76%.
An early estimate of eurozone consumer prices showed inflation of -0.2% in August—the first decline since May 2016—heaping more pressure on the European Central Bank (ECB) to increase stimulus. Speculation that the ECB would have to act soon to counter a stronger euro had mounted before the release of the latest data on consumer prices. The euro’s strength is worrying policymakers, who warned that further appreciation would weigh on exports, drag down prices, and hold back the economic recovery, according to the Financial Times newspaper. Evidence of this unease emerged earlier when the euro briefly rallied to more than USD 1.20 for the first time since 2018, prompting ECB Chief Economist Philip Lane to say the euro-dollar rate “does matter” for monetary policy. The consensus calls for the ECB to keep its policy settings unchanged at its meeting next week.
Mainland Chinese stock markets fell, with both the large-cap CSI 300 and benchmark Shanghai Composite Index shedding 1.5% following the overnight sell-off on Wall Street. The yield on China’s 10-year bond increased and ended the week at 3.14%.
The People’s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) announced simpler rules to facilitate trading of domestic bonds by overseas investors. Under the new measures, foreign investors can access onshore foreign exchange and rate-hedging tools and invest in exchange-traded bond products. Separately, the PBOC said on August 31 that the depositary institutions repo rate (DR) would now be the key short-term reference rate. Following the move, DR rates will become the pricing basis for most money and liquidity products. Along with the medium-term lending facility rate, the new key rate will form the backbone of China’s policy rate system and brings the country a step closer to the rate-setting systems of other major central banks.
The Week Ahead
Important economic releases this week include Consumer Credit, CPI data, and hourly earnings growth.
Key Topics to Watch
- NFIB small-business index
- Consumer credit
- Job openings
- Initial jobless claims (regular state program, SA)
- Initial jobless claims (total, NSA)
- Continuing jobless claims (regular state program)
- Continuing jobless claims (total, NSA)
- Producer price index
- Wholesale inventories
- Consumer price index Aug.
- Core CPI
- Federal budget
Markets Index Wrap Up
