Stock Markets
Stocks extended the previous week’s gains, while the Nasdaq set another record on better-than-expected economic data and improved trends in U.S. coronavirus cases. Business activity for the services sectors expanded, and the U.S. economy added 1.76 million jobs in July, beating estimates. The continuing, yet moderating, gains in employment show that the recovery in the labor market and the economy is on track, but there is still a long road ahead.
US Economy
As seen in restaurants and retail stores across the country, change is hard to come by. In fact, the U.S. is experiencing a coin shortage — just another effect of the coronavirus pandemic that has reduced the number of coins in circulation due to dampened consumer spending and limited supply. Coins are not the only form of U.S. currency currently under pressure. Though the U.S. dollar rallied a bit last week from the two-year low reached in late-July, the economic downturn, higher levels of government spending, and near-zero interest rates are likely to continue to push the dollar lower relative to a basket of global currencies.
A path of the U.S. dollar has a mixed effect on the economy. A weak dollar makes imported goods from other countries more expensive for U.S. consumers, but it also makes domestic exports more competitive abroad, which boosts profits for multinational U.S. firms. With the U.S. dollar being the world’s primary reserve currency, investors pay close attention to it because its path is a key driver of returns across financial markets, from stocks and bonds to commodities and precious metals. Trends in the U.S. dollar also impact interest rates and inflation, shaping what investors can expect from asset returns in the future.
Metals and Mining
Gold’s historic rally continued this week, taking the metal into new record-setting territory. It topped US$2,070 per ounce on Thursday, pulling back overnight as the US dollar gained. The greenback strengthened from a two-year low due to heightened purchases amid growing animosity between Washington and Beijing. Despite the renewed momentum, investors continue to choose safe haven gold as COVID-19 cases increase globally. The yellow metal’s run past US$2,000 marks its ninth straight week of gains. Since March, the price of gold has climbed 36 percent. Silver was also on track for its sixth consecutive week of gains, adding as much as 27 percent to its value. It edged close to US$30 an ounce on Thursday, a seven year high for the white metal. After ending July under price pressure, platinum saw a week of steady gains. Starting the session at US$902 per ounce, the metal moved as high as US$995 before pulling back to US$965. Platinum’s recent price growth is likely linked to tight supply stemming from mine shutdowns and curtailments in H1. An ounce of platinum was valued at US$952.50 as of 11:45 a.m. EDT on Friday. Palladium prices also trended higher this week, fortifying above US$2,000 per ounce. Current supply and demand fundamentals have contributed to palladium’s positive performance, but the metal was already experiencing a prolonged run prior to the pandemic. 2020 mine supply challenges have been less impactful on palladium compared to platinum’s woes. On Friday, palladium was moving for US$1,993.
The base metals also gained broadly, edging higher throughout the week. On Monday, copper was priced at US$6,441 per tonne, a range unseen since April 2019. After slipping to a year-to-date low in March, the red metal has clawed back 39.7 percent. Copper was trading for US$6,453.50 on Friday. Zinc also made gains this period, braking past US$2,300 per tonne for the first time since January. Some of zinc’s growth may be associated to a decrease in Shanghai stocks of the metal, which recorded a 4.4 percent decrease this week amid growing demand. On Friday morning, zinc was priced at US$2,377.50. Nickel has spent the first part of August rocketing higher after a slight slip at the start of the month. On Monday, nickel was sitting at US$13,683 per tonne, but it had climbed 5 percent by Thursday. This week’s gains could be the result of Tesla’s Elon Musk making public calls for more nickel production. The metal is a key component in electric vehicles, a sector where Tesla is a dominant player. To end the week, nickel was selling for US$14,381. Lead also squeezed out a gain this for the first full week of August. Prices faced pressure mid-week, slipping below US$1,860 per tonne. The metal quickly recovered and climbed back above US$1,880; by week’s end, lead was valued at US$1,913.
Energy and Oil
Oil prices rallied to multi-month highs mid-week on stronger EIA data. But the market narrative remains the same – tightening fundamentals set against a weak macro backdrop has kept oil prices stuck in a narrow trading range. On Friday, prices fell back, erasing some gains. Giant BP announced more details earlier this week on how it plans on transitioning into a low carbon energy company, which notably included an expected 40 percent decline in production by 2030, or 1 mb/d. However, the plan apparently relies heavily on selling assets. “It is a simple calculation of natural production decline and planned divestment,” a BP source told media sources. In a securities filing, ExxonMobil said that 20 percent of its oil and gas reserves are at risk of getting wiped off the books because of low oil prices, although the company won’t offer an update until the end of the year. Exxon singled out its Kearl oil sands project in Canada. At least three major Asian refiners are planning to buy less oil from Saudi Aramco in September, potentially a sign of softer demand. In the U.S., shale drillers are not prepared to add rigs back into the field for the remainder of the year and will likely use any increase in cash flow to repair balance sheets rather than return to growth. As a side note, prices of cobalt, a key element in EV batteries, have lately been surging as Covid-19 lockdowns in southern Africa have created severe supply chain bottlenecks. Natural gas spot prices were mixed at most locations this week. The Henry Hub spot price rose from $1.75 per million British thermal units (MMBtu) last week to $2.18/MMBtu this week. At the New York Mercantile Exchange (Nymex), the August 2020 contract expired last week at $1.854/MMBtu. The September 2020 contract price increased to $2.191/MMBtu, up 26¢/MMBtu from last week to this week. The price of the 12-month strip averaging September 2020 through August 2021 futures contracts climbed 9¢/MMBtu to $2.714/MMBtu.
World Markets
European shares rose on signs that an economic recovery may be gaining traction and hopes for more U.S. stimulus. However, escalating tensions between the U.S. and China and fears that Europe could suffer a resurgence of coronavirus cases curbed equity markets’ gains. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 2.03% higher, Germany’s Xetra DAX Index rose 2.94%, France’s CAC 40 gained 2.21%, and Italy’s FTSE MIB climbed 2.22%. The UK’s FTSE 100 Index advanced 2.28%.
Eurozone business activity strengthened in July, signaling the fastest growth rate in two years, according to final data based on surveys. The composite index, which combines manufacturing and services output, rose six points to 54.9. However, firms operated with considerable spare capacity and continued to shrink their headcounts. German industrial production continued to recover in June, rising 8.9% on the month, compared with 7.4% in May. On a year-over-year basis, the country’s industrial output declined 11.5%.
Mainland Chinese markets rallied after data lifted confidence in the economic recovery. The large-cap CSI 300 Index and benchmark Shanghai Composite Index each posted solid gains, even after declining on Friday on news that the Trump administration tightened restrictions on Chinese social media networks TikTok and WeChat in the U.S. In another sign of the growing tech rift between the U.S. and China, San Jose-based video conferencing company Zoom, which gained popularity during the pandemic, said that it would halt direct sales to China and only provide video conferencing services through third-party partners.
The Week Ahead
The second-quarter earnings season will start to wind down with less than 3% of companies in the S&P 500 reporting results. Economic data being released in the U.S. include inflation on Wednesday and retail sales along with consumer sentiment on Friday.
Key Topics to Watch
- Job openings
- NFIB small-business index
- Producer price index
- Consumer price index
- Core CPI
- Federal budget
- Initial jobless claims (regular state program, SA)
- Continuing jobless claims (regular state program, SA)
- Continuing jobless claims (federal & state, NSA)
- Import price index
- Retail sales
- Retail sales ex-autos
- Productivity Q2
- Unit labor costs
- Industrial production
- Capacity utilization
- Consumer sentiment index
- Business inventories
Markets Index Wrap Up
