Weekly Markets Round-up: 03 - 07 August 2020
This week’s explosion in Beirut was the latest tragedy in a country beset by mismanagement and corruption. As I write, one hundred and fifty people have died simply because basic safety instructions were ignored. This same apathy is behind a slow killer that is also ravaging the country, hyperinflation.
Governed by a complex political system that assigns ministerial position based on religion, it has not had an effective government in the seventy-five years of its existence. This March, this led to Lebanon’s first default. Even in the darkest days of its civil war, this did not happen. Spiralling fiscal deficits and a Balance of Payments Account depleting the foreign reserves left in Beirut meant the government was no longer able to pay a $1.2bn Eurobond. Lebanon pegged its currency, the Lebanese Pound (L£), to the US Dollar in 1997 to escape some of the inflation caused by the war. Vastly overvaluing the L£ at $1 : L£ 1507.5, a rate not available since the peg, the government has allowed at least six internal exchange rates to arise. A shadow currency market is always a recipe for disaster in inflationary terms but at least provides some proof the ordinary people knows how inept the technocrats are.
Currently at 500%, inflation has caused essential items to be unattainable for the vast majority of people. Save the Children say about one million people are at risk of starvation. Homelessness has also skyrocketed, power outages are a regular occurrence, due to a corrupt fuel deal with Algeria going wrong, but somehow unemployment has remained relatively low at 6.70%. However, if the hyperinflation saga continues, unemployment will skyrocket as demand plummets and jobs have to go.
This situation is completely the government’s fault. Officials failed to secure a bailout in fully sixteen meeting prior to the default. It appears they were unwilling to submit to the usual IMF economic liberalisation policies. A likely reason is that these reforms would likely spell an end to much of the corruption that has plagued the country. A corollary of any kind of centralisation, particularly when it comes to currency controls, is cronyism. It could be argued the Central Bank of Lebanon could have lent some money to the government to plaster the deficit and to give some room to service the Eurobond but this would have depleted vital foreign exchange reserves.
An alternative, as anything is better than default, is to have given the bonds owned by Lebanese banks a haircut but insiders would hardly destroy their own private assets in the form of bank shares. With capital outflows of $10bn since August, these banks are probably not worth much now anyways. Another approach to combating hyperinflation is floating the currency and this has unofficially happened. According to Garbis Iradian of the Institute of International Finance, a parallel market exists where $1 : L$4,100 predominates though this appears to only be available for internal trade and is therefore not much use if exports are to get the country out of this situation.
Of course, bilateral support would be useful. The problem is Hezbollah, commonly regarded as a terrorist group, controls the government and doing business with them is anathema to all Arab states. The only viable option appears to be complete government reform and then a deal must be done with the IMF. If not, Lebanon will become a failed state and that will be a much worse explosion than any that could be caused by opening up the economy.
By Robert Tolan - University of Dublin, Trinity College
This Week in Markets: 03/08 to the 07/08
Markets around the world have had their eyes fixed on US lawmakers this week. Unfortunately, no deal was reached despite intermittent market optimism. US earnings have also continued to play a role. The majority of companies in the S&P have now released Q2 reports, and around 82% of them beat expectations. Although these estimates were revised massively down due to the current climate, this is still positive. Sino-US tensions also continue to captivate market watchers. Investors are also waiting for any vaccine news with bated breath.
Tech stocks ended their seemingly endless bull run this week due to President Trump’s attack on Chinese tech firms. He announced bans of certain apps like Tencent’s WeChat and ByteDance’s TikTok. This caused a fall in US tech stocks and as a result the NASDAQ. This news also forced Asian markets lower early Friday morning. The Trump administration also announced sanctions for Carrie Lam and Chinese officials, further increasing tensions.
This fall in tech stocks was complimented by a rise in defensives in the US. This has become somewhat of a rarity in the past few months. Although moves earlier in the week were firmly driven by giants like Microsoft and Apple, they lost this dominance towards the end of the week. It is certainly refreshing to see a market not driven by tech even for a day. Realistically this will probably not continue. Although to put this into perspective, the FAANG stocks are up 30% for the year while most stocks are down 5%.
The market has been waiting weeks for US lawmakers to agree to a stimulus package. Another week has past and investors are still disappointed. The two parties seem no closer to a deal, which is weighing negatively on all markets. President Trump attempted to rectify this on Friday by promising to unilaterally suspend payroll taxes and extend unemployment benefits. It is unclear whether Trump has the power to do this in a way that actually helps US citizens. It is also important to note that Trump has so far only made threats. Worldwide markets have followed this saga closely because any US stimulus is seen as a boost to the world economy.
This week ended with the S&P 500 only 1.5% away from all-time highs. Some have argued that this has caused lawmakers to lose any sense of urgency regarding a deal. When a deal is eventually reached the market will probably react positively and may even find new highs. It is impossible to say how long this will take though.
The most important data release of the week related to the state of the US jobs market. Non-farm payrolls for July came in at 1.7 million a 63% fall from June. While this was above estimates, the huge decline was not taken well by the markets. The beating of expectations also concerned investors because it takes pressure off of US lawmakers.
Interestingly on Friday value stocks outperformed growth stocks. Like the victory of defensive stocks, this will probably not last.
The FTSE 100 ended the week up 2.3% due to better than expected earnings and strong economic releases. For instance, UK data showed that shoppers returned in July. A slip in metal and oil prices caused some stocks to fall, but others rallied on good results. The FTSE 250 ended the week rallying due to optimism regarding Brexit trade negotiations.
Major European indexes logged gains for the week, despite negative moves early on Friday due to Sino-US tensions. The week was led by strong earnings and improving data. At this point 60% of stocks listed on STOXX have beaten earnings estimates. While this is less than the US, it is still positive news. This gain occurred despite a negative move on Thursday caused by the Bank of England revising its forecast down for the foreseeable future.
In Asia, markets were affected by increasing Sino-US tension. Earnings have also been relatively weak from Japanese companies, further dampening the market. Increasing case numbers and lockdowns in certain areas also depressed Asian markets this week.
Investors all over the world are still fixed on US moves and are keen to see a stimulus deal. When this is resolved the markets will probably rally. Until then it is hard to predict how the markets will move.
All graphs and data sourced from Trading View and show a five-day period.
By Charles Heighton - VP of Trading at King’s Global Markets
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