Week in Review: U.S.-China Trade Tensions Escalate

Escalating tensions between the U.S. and China weighed on global equity markets this week, with the S&P 500 Index briefly turning positive for 2020 before retreating. Tensions arose after the U.S. accused two Chinese hackers of targeting American companies working on virus research and stealing information. It also ordered the shutdown of China’s Houston consulate, claiming it was a necessary step to protect intellectual property and the data of private citizens. In a “tit-for-tat” move, China ordered the U.S. to close its Chengdu-based consulate. China has also threatened to stop recognising British National Overseas passports held by Hong Kong residents as valid travel documents. This, after the UK offered a pathway to future citizenship for disgruntled Hong Kong citizens.

Earlier in the week, there was some positive news on the vaccine front. Confirming earlier reports, Oxford University and AstraZeneca announced that their joint vaccine trial involving 1,077 participants, produced healthy levels of both antibodies and T-cells, with the latter offering the hope of prolonged immunity. Studies on candidates being developed by Pfizer in partnership with BioNTech and CanSino Biologics also indicated significant immune responses, though with moderate side effects in some patients. Worldwide confirmed coronavirus infections now exceed 15 million people - double that of six weeks ago.

Turning our attention to economics, U.S. initial jobless claims unexpectedly increased last week for the first time since March, raising concerns that the economic recovery may be stalling. Initial claims rose by 109,000 to 1.42 million in the week ended July 18.

After five days of negotiations, EU leaders eventually found unity, announcing a massive EUR 750 billion stimulus plan. The Recovery Plan is to provide fiscal support for the countries most affected by the COVID-19 pandemic. The fund will comprise EUR 390 billion in grants and EUR 360 billion in low-interest loans. Italy will likely be the biggest recipient. Meanwhile, business activity in the eurozone grew in July for the first time since February.  Both the manufacturing and services segments of the eurozone economy returned to growth.

Global equity markets finished the week mostly lower. In the U.S., the Dow Jones (-0.76%), S&P 500 (-0.28%) and Nasdaq (-1.33%) Indices all ended the week in negative territory. Similarly, the Euro Stoxx 50 (-1.63%), FTSE 100 (-2.65%) and Shanghai Composite Index (-0.54%) were all negative, with the Nikkei 225 Index (+0.24%) marginally stronger.

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Market Moves of the Week

The South African Reserve Bank (SARB) cut the repo rate by another 25-basis points on Thursday, taking the rate to a four-decade record low of 3.5% and the prime lending rate to 7%. This was in line with market expectations, extending relief to South Africa’s embattled consumers and businesses. The SARB also reduced its GDP forecast further for 2020, expecting a contraction of 7.3%, compared with its May forecast of 7.0%.

Lockdown measures have weighed down heavily on South Africa’s retail sector, with retail sales plummeting 12.0% in May on an annual basis, following on from a drop of 50.4% in April.

The JSE All Share Index ended the week down -0.48%, led lower by the financial (-3.03%) and industrial (-1.26%) sectors. The resource sector (+1.69%) was supported by a higher gold price ($1899.95 per ounce).

Market Moves - 26 July 2020
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Chart of the Week

This week’s chart looks at bond yield differentials between the U.S. and Germany. On Wednesday, the U.S. 10-year yield fell below 0.6%. The gap between U.S. and German nominal yields has dropped sharply this year, while the gap in inflation expectations is mostly unchanged. One natural consequence of this development should be the weakening of the dollar — particularly as Europe has fared much better to date in dealing with the pandemic, which should mean more support for the Euro. Lower real yields (the nominal yield minus inflation) is also supportive of the gold price, which is now closing in on its record high set earlier in 2012.

Chart of the Week - 26 July 2020
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