- Weekly global market focus
- States refuse full shutdowns despite the surge in the pandemic
- U.S. announces French tariffs for digital tax but will delay implementation by 6 months
- Q2 earnings season begins with expectations for -44% y/y plunge
Weekly global market focus — The U.S. markets this week will focus on (1) the pandemic surge and the extent to which it slows the U.S. economic recovery, (2) the beginning of Q2 earnings season with reports this week from 19 of the S&P 500 companies including big banks, (3) any fresh U.S./China tensions regarding Hong Kong, trade, or Chinese tech companies, (4) another busy week for Fedspeak with seven appearances by various Fed officials, and (5) a busy economic schedule with the highlight being Thursday’s June retail sales report (expected +5.0% m/m after May’s +17.7% m/m).
In Europe, the ECB at its meeting on Thursday is expected to leave its policy unchanged since it just expanded its QE program at its last meeting in June. The markets are hoping that EU leaders at their meeting on Friday will make progress towards an agreement on a large pandemic rescue package.
In Asia, the markets will continue to closely watch the Chinese stock market, which has surged in the past two weeks. The Shanghai Composite posted a 2-1/2 year high last Thursday and is up by +13.4% so far in July. However, Chinese stocks ran into some long liquidation pressure last Friday after state-owned funds sold Chinese large-cap stocks. Chinese authorities last week tried to throw some cold water on the rally before it got into bubble territory by cracking down on margin loans and by encouraging state-owned funds to do some selling.
The markets will watch China’s Q2 GDP report on Wednesday night (ET time) to gauge the extent to which the Chinese economy was able to begin a recovery in Q2 after being hit hard by the pandemic in Q1. China’s Q2 GDP is expected to improve to +2.2% y/y from -6.8% y/y in Q1.
States refuse full shutdowns despite the surge in the pandemic — The U.S. is currently seeing a resurgence of the pandemic that is even worse than the first wave in March. The 5-day average of new daily infections surged to a new record of 62,825 over the weekend, which is more than double the earlier peak seen in April. The U.S. is the global leader in Covid infections, with the runner-ups being Brazil and India.
Despite the surging pandemic, hard-hit states have so far refused to go back to full shutdowns of non-essential services. At most, those states are implementing mask requirements and the shutdowns of businesses that pose particularly high risks of transmission such as bars, gyms, and restaurants.
The stock market displayed some jitters last week as new U.S. Covid infections rose to new record highs. However, the stock market so far continues to take the pandemic surge in stride because of the market’s belief that the American public, on the whole, will not tolerate a return to mass shutdowns. Yet, full shutdowns are still possible in hard-hit areas if hospitals are overwhelmed by Covid patients. While death rates have recently been low, death rates are expected to rise over the next few weeks as more of the new Covid patients seen in the past few weeks eventually succumb to the disease.
U.S. announces French tariffs for digital tax but will delay implementation by 6 months — The Trump administration, after last Friday’s market close, announced tariffs on $1.3 billion of French goods as retaliation for France’s digital tax. The $1.3 billion amount of tariffed goods was well above market expectations. The tariffs were mostly on French makeup, soap, handbags, and other beauty and luxury goods, but not on French wine and cheese as in the administration’s proposed list.
The Trump administration announced that it will delay implementation of the tariffs by 180 days because the French government has delayed the collection of the digital tax on tech giants such as Amazon, Google, and Facebook.
However, the tariffs seem likely to go into effect at year-end since neither the U.S. nor France are showing any signs of flexibility. French Finance Minister Le Maire last Friday said that France will go ahead with its digital tax by year-end if there is no global agreement on digital taxes, even if the U.S. retaliates with tariffs. The prospects for a global digital tax deal seem very unlikely since the Trump administration has walked away from the talks that are being held under the auspices of the OECD.
Q2 earnings season begins with expectations for -44% y/y plunge — Q2 earnings season begins this week with 19 of the S&P 500 companies scheduled to report. Notable reports include Citigroup and JP Morgan Chase on Tuesday; Goldman Sachs on Wednesday; Morgan Stanley, Bank of America, and Netflix on Thursday; and Blackrock on Friday.
The consensus is for a plunge of -44.0% y/y in S&P 500 Q2 earnings, according to Refinitiv, due to the widespread economic shutdowns seen across the United States and the world. Looking ahead, the consensus is for earnings to fall by -24.4% in Q3 and -12.9% in Q4, then recover sharply in early 2021. On a calendar year basis, the consensus is for SPX earnings to fall -23.4% in 2020 and then recover by +31.3% in 2021.
Earnings results in Q2 will be highly variable depending on how hard a particular sector was hit by the pandemic. The earnings consensus by sector, according to Refinitive, is as follows: Energy -154.9%, Consumer Discretionary -116.2%, Industrials -89.1%, Financials -51.7%, Materials -39.2%, Communication Services -30.1%, Consumer Staples -16.8%, Real Estate -15.1%, Health Care -14.2%, Info Technology -8.0%, and Utilities -4.8%.
