Market Commentary: Week to 1 September 2020

1 September

Market Commentary: Week to 1 September 2020

 

Market News

As expected, the Federal Reserve Bank rewrote its own mandate last week, putting more emphasis on supporting the US labour market and less on worries about potential inflation. The new policy is essentially another commitment to lower interest rates for longer, this time dressed up as an attempt to address inequality through support for full employment. According to Federal Reserve Chairman Powell, the new policy “reflects our appreciation for the benefits of a strong labour market, particularly for many in low- and moderate-income communities, and that a robust job market can be sustained without causing an unwelcome increase in inflation”. It also promises to aim for 2% inflation on average, so that periods of too-low inflation would likely be followed by an effort to lift inflation “moderately above 2% for some time.” It’s no surprise that the Fed wants to support the economy and capital markets, but so openly welcoming inflation is a new tactic, and the role of champion for social equality is also new. Equity markets appear to have been supported all week by the news, which had been well-telegraphed in advance. The US dollar continued its recent decline following the speech, especially against the Euro and Sterling. Longer-term US government bond prices fell on the news, but few analysts think that there is any real chance of inflation getting to the Fed’s target and, in any case, the Fed has enormous firepower at its disposal should it need to prevent a significant decline in prices.

Tesla and Apple adding another combined $94 billion in market value in the first 90 minutes of US trading yesterday, but that is nothing compared to the speculative fervour that has seized the Chinese technology sector. Following the removal of trading limits for debutants on Shenzhen’s ChiNext technology-orientated stockmarket, the 18 firms that listed last Monday gained an average 212% by the close of trading. Shares in Contec Medical Systems surged 2,932% from its IPO price before falling precipitously, ending the day up a mere 1,061%. Automotive cable maker Ningbo KBE Electrical Technology closed up 743% on its IPO price.

It is inevitable that governments will eventually turn to addressing the government deficits caused by pandemic rescue programmes, and the UK government was reported to be drawing up plans for a £30 billion tax increase on the wealthy, businesses, pensions and foreign aid, including plans to raise both capital gains tax and corporation tax. In the US, meanwhile, twenty Republican senators are blocking their own party’s attempts to agree a new stimulus programme with the Democratic majority in Congress, though they are unlikely to succeed. The offer of a $1.3 trillion package by the Republicans was rejected by Democrats last week, who are seeking in the order of $3 trillion. The fear among economists is that premature fiscal consolidation could derail the nascent recovery, especially as the economic damage looks set to persist for longer than they imagined when the rescue programmes were first launched.

Japanese stockmarkets fell roughly 2% immediately following the announcement of Prime Minister Abe’s imminent resignation, but they soon recovered the lost ground. Abe will step down in the coming weeks, as the chronic disease which forced him to curtail his first stint at the helm in 2007 has resurfaced. A leadership transition had already been expected, as it was widely accepted that Abe wouldn't seek a fourth term as the Liberal Democratic Party's president. Abe’s policies are likely to survive his long tenure as prime minister, partly because the demands of the economic collapse caused by Covid have pushed back the discussions over the shape of post-Abenomics Japan.

Stock focus 

More than 200,000 job cuts have been announced over the past couple of weeks by MGM Resorts International, Coca Cola, Salesforce.com, American Airlines, Bed Bath & Beyond, Estee Lauder, Boeing and Raytheon Technologies. Ford is rumoured to be next. Share prices have tended to jump after the announcements, as investors applaud the improved bottom lines.

The Federal Aviation Administration has given Amazon.com Inc. approval to establish a fleet of drones and will begin limited tests of package deliveries to customers in the US. Although key hurdles remain before widespread use of the technology will be allowed, this approval represents a key milestone in Amazon's push to use unmanned aircraft to deliver packages to consumers.

The retail giant Walmart Inc. is to launch Walmart+ on September the 15th in a hope to rival Amazon Prime. The $98-a-year membership includes free grocery delivery, a discount on fuel from Walmart parking lots and the ability to check out via a mobile phone in stores. It will allow members to get free home delivery on some of the roughly 130,000 items sold in Walmart stores. However, it doesn't include free delivery from Walmart.com, which offers free shipping on most web orders above $35.

Berkshire Hathaway Inc. has disclosed investments of 5% in the Japanese companies of ItochuCorp., Mitsubishi Corp., Mitsui & Co., Sumitomo Corp. and Marubeni Corp. CEO of Berkshire Hathaway Warren Buffett has been relatively quiet during the pandemic, despite having a $146.6 billion cash pile (as of the end of the second quarter) at his disposal. All five companies are 'trading companies', but are better thought of as investment banks or private-equity firms. In what has been described as a classic Buffett move, the shares have been purchased when the companies were trading at low price to book value multiples and paying health dividends.

 

Important information

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Market Commentary: Week to 1 September 2020

Important note

No news or research content is a recommendation to deal. It is important to remember that the value of investments and the income from them can go down as well as up, so you could get back less than you invest. If you have any doubts about the suitability of any investment for your circumstances, you should contact your financial advisor.

Investors should be aware that past performance is not a reliable indicator of future results and that the price of shares and other investments, may fall as well as rise and the amount realised may be less than the original sum invested.


Walker Crips Group plc (Old Change House, 128 Queen Victoria Street, London EC4V 4BJ), registered in England, registered number 1432059, incorporates the following companies which are authorised and regulated by the Financial Conduct Authority: Walker Crips Investment Management Limited registered in England number 4774117 member of the London Stock Exchange, Walker Crips Wealth Management Limited registered in England number 3790291, Ebor Trustees Limited registered in England number 3514268, Barker Poland Asset Management LLP registered in England and Wales number OC341149.