Stock Markets
Stocks climbed higher for the third week in a row, oil jumped, and Treasury yields rose to an 11-week high following a surprising gain in payrolls last month. The U.S. economy added 2.5 million jobs in May, while the unemployment rate declined to 13.3% from April’s record level, suggesting that an economic recovery is under way faster than previously thought. Even though economic activity will likely take a while to return to pre-crisis levels, last week’s employment data may be laying the foundation for a long-term recovery. Following last week’s rally, the S&P 500 has now erased its losses for the year. Some uncertainties that could trigger higher volatility remain, but the recent market advance highlights the importance of staying invested, even through the most difficult times.
U.S. Economy
Driving through fog is difficult. It’s hard to see the road and even harder to see the destination. In the same sense the path from recession to recovery can be just as hard to make out. As the economy emerges from the unprecedented lockdown, investors continue to look for signs that the recovery is going in the right direction. In a week when civil protests were widespread in cities across the U.S. and geopolitical tensions between the U.S. and China continued to be elevated, the market kept its focus on economic and corporate drivers of long-term equity performance. That focus was rewarded last week by the release of the May jobs report showing that the unemployment rate defied analyst forecasts and, instead of increasing, declined to 13.3% from 14.7% in April.
The S&P 500 closed the week up 5% and just 6% from the February record high; its best week in 8 weeks. All told, the index has risen 43% from the March lows even as fundamental conditions deteriorated considerably over this time period due to the economic lockdown and shuttering of businesses. Though the path between the strength of the equity rally and the current weakness in the underlying fundamentals is still clouded in a haze of uncertainty due to the unknown next stages, three positive indicators are beginning to slowly clear the way.
Metals and Mining
Increased European stimulus and investor risk appetite weighed on the gold price this week. Slipping below US$1,680 per ounce on Friday morning, optimism that the economy is starting to rebound led to the yellow metal’s poorest showing since early May. Interest in other assets classes stalled the other precious metals, while the base metals space pulled off a broad gain. The session started with gold above US$1,730 with the metal struggling to hold above US$1,700 over the next few days. A Thursday (June 4) announcement from the European Central Bank expanding the economic stimulus package dragged prices to a 30-day low of US$1,679.97. Heightened interest in other sectors is a potential opportunity in the gold space. Despite the current price dip. After trending higher weekly in May, silver fell below US$18 per ounce this week. Though considered both a precious and industrial metal, silver has faced challenges on both fronts this week. Decreasing safe have demand, paired with logistical and demand challenges from industrial end users have weighed on the metal’s ability to lock in gains in June. A Silver Institute report conducted by CRU Group also notes that demand from the photovoltaic solar sector may have peaked in 2019 at 100 million ounces (Moz). Platinum sat flatly at the US$820 level for the last week in May, however the autocatalyst metal has experienced intense volatility for the first week of June. Starting the period at US$829, renewed mine activity in South Africa, helped the metal edge above US$846 late in the day Monday. In the days since platinum has shed 7.2 percent. Mid-week palladium fell from its weekly high of US$1,915 per ounce to US$1,772. The 7 percent slip was reversed early Friday as the price surged back above US$1,850. Platinum’s industrial troubles are also present in the palladium sector, however an existing supply crunch prior to COVID-19 closures has allowed the automotive metal to insulate some of its value.
Base metals performed well this week locking in gains across the board. Copper started the week valued at US$5,376.50 per tonne and steadily climbed higher. Economic recovery and optimism have been catalysts for the red metal which experienced its best performance in 13-weeks. Zinc also made gains this week benefiting from improved sentiment. Edging as high as US$2,025.50 per tonne on Tuesday the metal regained losses registered when the pandemic stagnated end use sectors. Nickel made large moves this week, climbing from its Monday value of US$12,418 per tonne and rocketing to US$12,812. A resurgence in stainless steel demand for electric vehicles in China is the most prominent tail wind propelling the base metal at present. While some analysts are concerned that stockpiling in the nickel sector may lead to a price slip in the future, others believe demand will quickly eat up existing surpluses and bolster the price in the long term. A decrease in lead mine production during the first quarter of 2020 has benefited prices for the metal in June. It is estimated that output fell 3.4 percent over the three-month period, which was offset by a 7.4 percent decrease in lead metal usage across the globe. Rising demand and the restarts to industrial sectors are driving the metal’s price 3.7 percent higher this week.
Energy and Oil
Oil prices jumped yet again on positive news from OPEC+ as well as a far better than expected jobs report. Brent surged by more than $2 per barrel while WTI approached the $40 mark. OPEC+ made a breakthrough in negotiations and the group is slated to meet on to sign off on the deal, which calls for a one-month extension of the 9.7 mb/d cuts. A sticking point had been the poor compliance rate from Iraq, but the Iraqi government agreed to strict compliance, although there could be a domestic backlash from doing so. The U.S. unemployment rate unexpectedly fell to 13.3 percent in May, with the return of 2.5 million jobs. Economists had expected the unemployment rate to jump to around 20 percent. The numbers led to a wave of optimism around economic recovery. In other moves, the Libyan National Army (LNA) retreated from Tripoli, ending a 14-month assault on the capital. The civil war has also become a proxy battle between other world powers. The prime minister of the Government of National Accord (GNA) traveled to Ankara to meet with Turkish President Recep Tayyip Erdogan.
So far in 2020, there have been 19 oil and gas producers in North America that have filed for bankruptcy, according to Haynes and Boone. Ultra Petroleum, Whiting Petroleum and Diamond Offshore were the three highest-profile bankruptcies. Natural gas spot prices rose at most locations this week. The Henry Hub spot price rose from $1.72 per million British thermal units (MMBtu) last week to $1.77/MMBtu this week. At the New York Mercantile Exchange (Nymex), the June 2020 contract expired last week at $1.722/MMBtu. The July 2020 contract price decreased to $1.821/MMBtu, down 6¢/MMBtu from last week to this week. The price of the 12-month strip averaging July 2020 through June 2021 futures contracts declined 1¢/MMBtu to $2.438/MMBtu.
World Markets
Shares in Europe surged as countries eased lockdown restrictions and the European Central Bank (ECB) injected fresh stimulus into the eurozone economy. The pan-European STOXX Europe 600 Index ended the week 6.91% higher. Germany’s Xetra DAX Index climbed 10.60%, the CAC 40 in France advanced 10.47%, and Italy’s FTSE MIB Index gained 10.71%. The UK’s FTSE 100 Index added 6.45%.
Core eurozone bond yields climbed on the week as the ECB increased its support for eurozone economies. In Germany, the 10-year bund yield traded at around -0.3% on Friday, up some 11 basis points (0.11%) from the start of the week. Peripheral eurozone bond yields fell markedly on the news, with the Italian 10-year yield slipping to its lowest level since March.
Equity markets in China rose for the week, aided by a thaw in U.S.-China relations. The domestic CSI 300 Index added 3.4%, and the benchmark Shanghai Composite Index gained 2.8%.
U.S. Trade Representative Robert Lighthizer said on Thursday he felt “very good” about progress under the phase one agreement with China, which he said was honoring the pact and fulfilling its commitments on structural change. Lighthizer’s comments at a virtual event held by the Economic Club of New York were seen as an olive branch toward China. However, bilateral tensions are expected to persist ahead of the U.S. presidential election in November after China’s decision to implement a controversial national security law in Hong Kong.
The Week Ahead
Important economic data being released include inflation and the Federal Reserve rate decision on Wednesday and consumer sentiment on Friday.
Key Topics to Watch
- NFIB small-business index
- Job openings
- Wholesale inventories
- Consumer price index May
- Core CPI
- Federal budget
- FOMC announcement
- Jerome Powell press conference
- Initial jobless claims
- Initial jobless claims
- Producer price index
- Quarterly services survey
- Import price index
- Consumer sentiment index
Markets Index Wrap Up
