• The London Financial

Weekly Markets Round-up: 6 July - 10 July 2020



SG, environmental, social and corporate governance, investing has been a bit of a bull market amidst Covid. Were it not for the pandemic, the fact sustainable investing has broken all its records in the first half of this year. There would be a lot more ESG headlines. As Drowning Pool would say ‘Let the bodies hit the floor’.


Blackrock’s sustainable ETFs have doubled their 2019 inflows over the last six months. This accounts for the $11bn of the $15bn that has entered the ESG market this year. Sustainable funds are beating the market. Post-Covid, this is unlikely to change.


The definition of ESG is not exact but it basically means accepted environmental and social principles govern the underlying asset. Rating agencies such as MSCI and Oekom do the heavy lifting by rating the companies involved. With Moody’s and S&P Global 500 trying to muscle into this market, it is highly likely ESG will have all the major players in the near future. ESG is effectively a movement to ensure Capitalism is more sustainable. Socialists are unlikely to read this piece anyways but I would still like to take this moment to say Capitalism, in any form, is always more sustainable that any leftie nonsense.


Over the coming years, ESG looks set to become a major part of investment strategies. Whether it does so by slowly seeping into the conventional wisdom or becoming a tsunami and forcing the associated change in the market depends on how long it can outperform the market. Regardless, it will eventually become a cornerstone of Capitalism.


Bank of America predicts millennials could pour $15-20tn into ESG in the next twenty years. Maybe the something that’s got to give is proposed US Department of Labor regulations. Trump, in all his wisdom, has decided that pension administrators must prove that ESG investments must not sacrifice returns in favour of a particular agenda. How this is to be determined is yet to be revealed. All the same, it’s quite an alarming development considering investments with a high ESG score is associated with lower earnings volatility. In other words, an ESG investment is ideal for a pension portfolio.


Besides this, a substantial body of literature exists to say that an ESG bet is a good one.  ESG can after all be a competitive advantage. In essence, there is no need to regulate this area. Hopefully this bill will die a quick death and escape regulations unlike so many other promising areas.


By Robert Tolan - University of Dublin, Trinity College



This Week in Markets: 06/07 to the 10/07 


This was another tumultuous week in markets as the tug of war between bulls desperate for an economic recovery and bears terrified of the continued spread of Coronavirus. The countries accelerating the fastest in terms of daily case numbers are the US and Australia. Arizona and Florida still have the highest growth rate in cases in the US. While the picture in the UK and Europe is more positive as cases have plateaued or declined. 



Source: Marketwatch

United States


Monday started bullishly in the US, caused by the 4% gain in Chinese markets (in the CSI 300 index). This was driven by bullish comments by state-owned media encouraging retail investors to buy stocks. Chinese markets have had a stellar recovery, causing some to suggest a bubble in Chinese equities. 


The NASDAQ gained 2.21% on Monday, driven by technology stocks. Across US markets, all-time highs are not far away. Amazon broke $3000 for the first time. This bullishness occurred as hospitalisation numbers worsened in 23 US states. The ISM nonmanufacturing index also beat expectations significantly and is now firmly back in expansionary territory. This index measures orders, employment, and pricing in nonmanufacturing industries via surveys.  

On Tuesday, the NASDAQ, the S&P, and the DOW all closed lower. This was driven by sharp selloffs in airline, hospitality and hotel stocks. Due to rising case numbers, as investors feared the continued slowing of the reopening of major states. 

Source: Marketwatch, showing data from the 06/07 to the 10/07

On Wednesday US markets closed higher driven by tech stocks. Airlines also reversed the negative move from Tuesday. As an interesting aside, a Morgan Stanley analyst Adam Jones said that Tesla’s rally this week, which has brought the stock above $1400 was driven by the ‘Power of Hope’. 


On Thursday the NASDAQ gained, while the S&P and Dow fell. The NASDAQ was protected from a broader sell-off by stellar gains in tech stocks. The wider sell-off was driven by rising fears about case numbers and the effect this has on the prospect of reopening. 


On Friday, all three indexes gained. The NASDAQ even had a record close. This bullishness was driven by positive news from Gilead Sciences about their COVID-19 vaccine. This rally occurred, despite a sharp fall in Chinese stocks as state-run media labelled the recent rally as ‘crazy’. President Trump also stated that no phase two Sino-US trade deal is being discussed as relations worsened between the two powers. The market's ability to ignore these factors may show that investors have a singular focus on the Coronavirus. 


Europe


The week began similarly in Europe. Early in the day housebuilding shares in the UK rallied on news that the property tax threshold would be raised. HSBC had a particularly good day rallying significantly due to its Asian exposure. Data also showed that Eurozone retail sales rebounded reversing the bearishness of the past two months. 


European stocks declined on Tuesday, as the sentiment reversed. Financial and energy stocks led the decline. The growing caseload in the US and the increased fears of a deep Eurozone recession forced the indices even lower. The FTSE also fell as the pound rallied, partly in response to optimism regarding EU-UK trade talks.

Source: Marketwatch, showing data from the 06/07 to the 10/07

On Wednesday European shares opened lower again, led by the same sectors as Tuesday. HSBC had a notably bad day as the US discussed the possibility of undermining the Hong Kong dollar peg to the USD. The WHO’s acceptance of the airborne spread of the virus coupled with increasing caseloads in certain hotspots weighed heavily on sentiment. In the UK, the Chancellors announcement of a further £30 billion in stimulus did not reverse the negative trend but may have slightly calmed the highly negative sentiment. Nokia also performed very badly due to the potential loss of a large customer.


On Thursday, the DAX was led higher by SAP, who announced a rebound in business. German stocks performed particularly well, due to its exports to China and the further lifting of lockdown measures. However, another record-breaking rise in cases in the US caused a reversal. The oil price was particularly badly hit as economic concerns increased. This caused a fall in many FTSE listed oil companies. National Grid also declined over 5% because of regulator reports of high investment needed to reduce carbon emissions.

Friday was more positive. While the day began with losses, this was reversed by strong data releases. For example, positive industrial output data from Italy and France reversed the negative sentiment.


Next week the focus will be on Q2 earnings, an ECB meeting and an EU Summit centred on economic stimulus.


APAC


On Monday APAC markets also rallied in response to the Chinese bullishness. The Nikkei was led by shippers and steelmakers.

This sentiment was reversed on Tuesday as Japanese household spending dropped by a drastic amount. SoftBank stock reached a high not seen since 2000 because of increased share-buybacks. While Australia reintroduced lockdown measures in Melbourne as cases rose causing a fall in the ASX.


On Wednesday the markets fell again due to the increased US case count, as well as increasing cases in Tokyo and Melbourne.



Source: Marketwatch, showing data from the 06/07 to the 10/07


Thursday was more positive for the Nikkei as US tech gains the previous day triggered gains in Japanese tech stocks. However, increased cases in Tokyo reversed this later in the day.

Friday saw a further fall in APAC markets in response to even higher case numbers, domestically and abroad. Highly cyclical stocks suffered the greatest fall.


Overall it was a mixed week with gains for US indexes but bad or uncertain results elsewhere. The virus is still the focus of the markets and will continue to be for the foreseeable future. In the long run, only time will tell if the optimistic bulls can overwhelm the virus-obsessed bears.

 


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


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