Market sentiment improves on hopes for a vaccine

Blog
Thursday 21st May 2020

Market sentiment improves on hopes for a vaccine

Blog
Thursday 21st May 2020
Written by Chris Lioutas

Markets:

  • Local and global shares inched higher this week, getting some support from hopes of a vaccine and more economies opening back up.
  • US listed drug maker Moderna Inc’s share price rose strongly after the company said its experimental Covid-19 vaccine showed promising results in a small early stage trial. Their share price subsequently fell after the health community felt that the company did not provide enough data regarding the effectiveness of the potential vaccine.
  • In local stock news, Village Roadshow shares rose strongly after the theme park and cinema owner entered into exclusive talks to be taken private by private equity firm BGH Capital.
  • Wesfarmers announced that 75 Target stores will be closed and up to 90 others converted into Kmart stores, with many regional Target stores to be converted into small-format Kmart stores. That would amount to half of all Target stores.
  • Fletcher Building shares fell after the company announced it had lost $51m after having to shutdown 400 job sites during NZ’s level 4 lockdown. The company also plans to lay off 500 Australian workers and 1,000 NZ workers as it forecasts less building activity ahead.
  • Qantas CEO Alan Joyce has said he could have up to the half the airline’s domestic network back in the air by July if states eased restrictions. That is unlikely to happen given current Victorian and Queensland stances on border closures.
  • Afterpay shares hit an all-time high after the company announced it had added another million customers in the US in the last 10 weeks to grow its customer base to 5 million active US users since launching 2 years ago.
  • The iron ore price rose on supply concerns out of Brazil given the impacts of the virus and on likely increases to Chinese demand in light of a potential increase in government stimulus.
  • The Aussie dollar rose this week as the US dollar saw weakness, whilst the oil price continued to rise buoyed by Chinese demand and potential Western demand as lockdown restrictions ease.


Economics: 

  • Australian retail trade fell by almost 18% in April, the largest monthly fall on record. The decline was led by food retailing, following the hoarding in March, whilst sales were 50% lower on the same time last year for cafes / restaurants and clothing / footwear / personal accessories.
  • Australian credit card spending is down on the same time last year, with a similar result last week. Spending is weakest in NSW, Victoria, and the ACT. Absent JobKeeper payments, spending would be down significantly. 
  • Australian manufacturing and service sector data remained deeply in contractionary territory, with both sectors continuing to shed jobs at a solid pace in May.
  • The US central bank chairman make it clear the bank was not out of ammunition and that there was a lot more they could do and are willing to do to support the US economy. He also said he expects the economy to start to recover in the 2nd half of the year but argued that a vaccine would need to be widely available for consumer confidence to return to its pre-virus levels. The US economy can’t grow without the US consumer.
  • Germany’s economy saw a 2.2% fall in the 1st quarter, its steepest slump since the 2009 financial crisis. 2nd quarter falls will be multiples of that number. Germany’s finance minister is planning a supplementary budget which could involve $167 billion in extra debt.
  • France and Germany have called for the creation of a European Recovery Fund worth $836 billion to help the region quickly exit the crisis. There will be no quick exit for Europe.
  • Chinese data continued to remain weak but show some improvement on the previous month. Retail sales were down 7.5%, industrial production up 3.9%, fixed asset investment down 10.3, property investment down 3.3%, and unemployment rose to 6%. Not bad when you consider the little stimulus provided by the government (1.9% of GDP) versus 13.6% and 12.9% for the US and Australia respectively.
  • Chinese exports grew at 3.5% in April, coming in much stronger than expected, with almost all the improvement coming from exports to Japan, Europe, and the US. Exports to the US only grew 2.2% but it was a sharp improvement on March. Imports from the US fell, falling behind the scheduled phase 1 trade deal requirements.


Politics: 

  • The Chinese pushed ahead with their threats to slap tariffs on Australian barely (80% for 5 years), amid rumours that coal exports might be next. Iron ore is unlikely to be affected as the Chinese can’t get it from anywhere else right now given Brazil is currently being hard hit by Covid-19, and also it’s likely the Chinese are getting ready to ramp up their stimulus measures which would involve an increase in ore demand.
  • The US House saw the Democrats move to approve a new US$3 trillion economic support package. The package would pay the states north of $1 trillion whilst also expanding unemployment assistance, boost food stamps, and increase emergency grants to small businesses. The proposal is already dead, as Republicans won’t vote it through in the Senate, and even President Trump said he would veto it.
  • President Trump continued to ramp up negative China rhetoric this week. The move can be seen as a potential lead into a new round of tariffs or penalties and/or political motivations (show of strength / accountability) given the upcoming Presidential election. The White House has blocked shipments of semiconductors to Huawei Technologies from global chipmakers. China was quick to respond saying it was ready to put US companies on an “unreliable entity list”.
  • The World Health Organisation began its 2-day annual general meeting, with the meeting set to focus on the origins of and responses to the virus pandemic. Taiwan was not invited.


Author 

Chris Lioutas, Director, Insight Investment Consultants

Chris holds the position of asset consultant for Maxim Advisors and is a current sitting member of Maxim's investment committee. 

With permission of the author, this article is presented by Maxim Private Clients Pty Ltd ASFL No. 511972


Maxim Private Clients Pty Ltd ABN 47 611 614 398 AFSL No. 511972

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