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Weekly Markets Round-up: 13 July - 17 July 2020


This Week in Markets: 13/07 to the 17/07


The battle between Coronavirus-focused bears and obsessively optimistic bulls continued this week. Unsurprisingly the bulls won again, although the victory was not as complete. Most major markets finished the week with a small positive gain. Markets followed US movements across the week, with the latter half being relatively quiet compared to the past few weeks.

Source: MarketWatch

In the US, the markets started the week feeling bullish, but by Monday afternoon they fell rapidly. This was caused by the US condemning Chinese claims in the South China Sea and the issuing of a new shutdown on indoor operations in California. The sell-off was swift and steep, taking the NASDAQ away from all-time highs.

Source: MarketWatch


This sell-off was completely reversed on Tuesday, with the bulls once again shrugging off the bad news. It is now common for the markets to reverse any steep negative moves, which seem to start strong but have no lasting power. After the market closed, Moderna announced further positive results from a vaccine trial, causing US futures to gain.


The increasing tensions between the US and China developed this week and should be watched as the year progresses. The removal of Hong Kong’s special status by President Trump and the threat of further sanctions from China is not a good sign for markets. While the bulls are currently winning and managing to shrug off these exchanges, this may not be possible forever. These tensions and the uncertainty in Hong Kong led to the Hang Seng’s bearish performance this week. This performance may spread from Hong Kong to other markets if tensions continue to rise.

Source: MarketWatch


The rest of the week was relatively flat for the US markets, with no large swings. European markets traded very closely to US moves. Although, it is notable that European equities have outperformed the US since mid-May. Europe is also currently the most favoured market for fund managers.


Negative sentiment on Thursday in Asian markets led to a gradual sell-off. This was driven by mixed data releases. Chinese retail sales disappointed but the industrial production output met expectations and the GDP growth even beat estimates. These tell us that consumers are still uncertain, while the industrial sector is leading a recovery in China.

Source: MarketWatch


All three Central Banks that had meetings this week; the ECB, Bank of Canada, and Bank of Japan left rates the same. The EU summit also began on Friday and is currently in a deadlock; the outcome should be announced before Monday and may have an impact on markets. The size, limitations, and scope of the recovery fund will be critical factors in the recovery of the European economy.


Some specific stocks had bad weeks. For instance, Netflix fell 9% this week as its forward-looking subscriber estimate was under analysts' expectations. US bank earnings mostly met expectations as trading profits soared and huge amounts were set aside for loan loss provisions. This should be repeated in similar banks across the world including the UK.


The markets will probably continue as they have, disregarding bad news in the following weeks unless the situation significantly worsens. The increasing case numbers in several hotspots seem to be priced in or deemed irrelevant by the markets. Although the rally was muted this week, it continued, nonetheless. Future moves may remain muted until major US states manage to reopen again.


By Charles Heighton - VP of Trading at King’s Global Markets


Hedging


Amidst the uncertainty caused by the virus, there has been a battle going on in the hedging universe. Traditionally, Treasuries have been the ideal asset for playing defense. In recent weeks, gold has increasingly become part of the conversation.


With negative interest rates and low yields, many central banks seem to be following Japan’s strategy of keeping yields close to zero; bonds have lost their luster. Investors have been on the hunt for something with a little shine left and have found gold.


Gold prices have been steadily edging upwards, hitting an eight-year high last week, and have been attracting a mix of bears and those utterly at a loss as to what to do in the current environment. If there is a second surge, with rates having nowhere left to go, gold will break all records with more capital inflows.


This is made more likely by the fact that governments and corporations will again have to borrow their way out of the inertia increased infections would cause. Traditionally, gold has benefited from the public-private debt burden edging closer to oblivion and with the cryptocurrency space grappling with infighting, it will be viewed as one of the only assets to protect against a 2008-style collapse.


With these factors pumping up the gold price, it will climb ever higher, but increased activity will bring lots of volatility, not the optimal scenario for a hedge. It seems gold will become more important as a strategic asset, rather than a hedge, for this reason.


It appears the argument should move away from gold and treasuries to how to diversify a portfolio to actively hedge. The markets are simply too unpredictable and sensitive to shocks, to countenance passive hedging; e.g. buying 10-year Treasuries and locking in for years on end. The Swiss Franc would be a key part of such a portfolio with little volatility. According to Société Générale, Chinese equities, which have surprisingly resisted the sell-offs, should be used to hedge.


In the new world we are undoubtedly entering post-virus, everything, including hedging, will change. How rates can be ratcheted up from negative presents problems of its own; gold may calm down a little but not enough to be a genuine hedge, and so it appears the only way to play defense may be to put together a low-volatility portfolio and reshuffle it on an event-driven basis. Whatever happens, it will be useful to have some of Nicholas Nassim Taleb’s books at hand.


By Robert Tolan - University of Dublin, Trinity College


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