Overview: Stock markets in the U.S. and in international developed countries were higher last week, while emerging market stocks retreated. All major global indices are now up between 4-6% for the month of July. Optimism surrounding vaccine testing, and strong earnings from the banks and financial sector pushed U.S. stocks higher over the week. The S&P 500 index was up about 1.3%, as early earnings releases for the second quarter kicked off on a positive note for banks. Markets will absorb a heavy earnings calendar this week, along with evaluating challenges from rising COVID-19 cases, timing of the European Union’s recovery fund, and ongoing U.S.-China tensions. Surging viral spread in the U.S. continues to threaten both the economic reopening and recovery, leading investors to turn to safe-haven assets over the week. The 10-year U.S. Treasury yield closed flat at a 0.63% yield, continuing to trade in a tight range near record low interest rates.
Economic news: U.S. core CPI edged 0.2% higher in June, ending three consecutive months of contraction. Annually, core CPI printed at 1.2%, up 0.2% due to price increases from apparel and healthcare sectors. This modest uptick in inflation still fell short of the Fed’s inflation target level. This will be a quiet data week, with investors looking forward to next week with the next Federal Reserve meeting (July 28-29), and the first estimate of second quarter gross domestic product (GDP), due to be reported on Thursday, July 30.
From JP Morgan, a note on earnings: Last week, second-quarter earnings results for Wall Street’s banks provided investors with some clarity on how financial companies are managing through the pandemic. While at the sector level earnings for financials are still expected to fall roughly -57% in the second quarter of 2020 relative to a year ago, earnings releases suggests banks with more diversified revenue streams are performing better than expected. The diversified banks generated half of their revenue in the second quarter through fee-based channels like banking and trading services, all of which improved noticeably as market volatility boosted trading activity and robust corporate borrowing boosted underwriting revenue. On the other hand, smaller regional banks generated most of their revenue from traditional lending, making their earnings much more sensitive to the low interest rate environment. It should also be noted that while many banks reported large increases in loan loss provisions – an expense set aside for uncollected loans and loan payments – in order to weather the expected increase in defaults caused by the pandemic, they are well capitalized and therefore able to bolster these positions. The prospect of additional fiscal stimulus and monetary support suggests the loan loss build seen over the past two quarters should prove to be sufficient.
Weekly Returns and Data
Sources: Goldman Sachs Asset Management, JP Morgan Asset Management, Bloomberg
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