In a week which saw warnings that the price of bread could skyrocket after the previous year’s record breaking rainfall and dry patches, there was little need to panic for investors who toasted better than expected European data as well as a cooling in US-China tensions.
It was European bourses and the common currency that were really on a roll during the beginning of the week as data showed that German business morale improved more than expected in August, boosting hopes that companies in Europe’s largest economy are recovering from the coronavirus shock. The Ifo institute said its business climate index rose to 92.6 from a downwardly revised 90.4 in July, making it the fourth monthly increase in a row and coming in better than economists’ expectations for 92.2.
Stocks were also on the rise across the pond as news broke that the US and China had held a constructive phone call, confirming their commitment to a trade deal which had appeared on shaky ground because of a slew of issues rattling bilateral ties, including Beijing’s new national security law imposed on Hong Kong. The news was enough to see both the tech-heavy NASDAQ and the broader S&P 500 hit record highs. Added risk-on sentiment also sent safe haven assets such as gold falling, a theme throughout the week, although they stayed within reach of record highs.
As the end of the week approached, the momentum, particularly behind domestic stocks, started to sour as a slew of poor earnings reports showed the impact COVID-19 has had on UK companies. Engine and aerospace manufacturer Rolls-Royce bore the brunt of selling, tumbling 7.3% to a more than three-week low after reporting a first-half underlying loss before tax of £3.2 million.
However, US markets failed to go stale and were lifted once more as the US central bank, the Federal Reserve, said it would roll out an aggressive new strategy which aims to boost employment and allow inflation to run faster than in the past. Yields also rose on longer-dated government bonds as Fed Chair Jerome Powell laid out a policy that will seek to achieve inflation averaging 2% over time to offset the -2% periods with higher inflation “for some time.”
As August draws to an end, we have a shorter working week to look forward to due to the Summer Bank holiday. Coming back to the office, home or otherwise on Tuesday, it will be the first day of September and the beginning of meteorological Autumn, a sobering thought indeed.
With a bounce back in global economic data from March’s COVID-19 induced nadir, many economists will be hoping that the new season doesn’t bring a fresh fall in markets. The tone for the week could be set early as China, the bellwether for the global recovery, releases its Manufacturing data. With the previous few readings being over 50, a sign of expansion, many economists will be hoping this trend continues as cases of the virus start to make resurgence in the emerging world.
The data is regarded as important due to it acting as a leading indicator of economic health - businesses react quickly to market conditions, and their purchasing managers hold perhaps the most current and relevant insight into the company's view of the economy. The survey is also extremely comprehensive, with a sample size of 500 purchasing managers, asking respondents to rate the relative level of business conditions including employment, production, new orders, prices, supplier deliveries, and inventories
Later in the week, we should gain some insight into the state of the oil market as the US Energy Information Administration releases its oil inventory figures. The number will detail the change in the number of barrels of crude oil held in inventory by commercial firms during the past week and should help us evaluate if the glut of oil that built up during the second quarter of the year is eventually starting to subside. The data release usually has a profound impact on the oil markets, causing an indirect effect on the oil-heavy FTSE 100.
The first Friday of the month wraps up the week as always with US Non-Farm Payroll data, which includes a key piece of information when determining the US central bank’s next rate move, the employment data. The numbers will be accompanied by Average Hourly Earnings allowing us to gauge how inflation may manifest in the world’s largest economy. With the Fed stating that it will allow inflation to “run hot” over the coming period, it will be interesting to see if there is anything manifesting.
The information in this blog or any response to comments should not be regarded as financial advice. If you are unsure of any of the terminology used you should seek financial advice. Remember that the value of investments can go down as well as up, and could be worth less than what was paid in. The information is based on our understanding in August 2020.