Market Update - August 17th, 2020

Economic data for the week included further gains in retail sales, and industrial production, among other measures. Consumer sentiment and jobs results also showed improvement, all of which look to a stronger showing for the third quarter over the second.

Global equities experienced gains last week as investors look ahead to economic growth beyond Covid, especially as prospects for a vaccine improve (and Russia approving a vaccine). Bonds fell back, however, as interest rates crept up along with this same news. Commodities gained, with price increases for agriculture and natural gas, and less so for crude oil, which has been more stable as of late.

U.S. stocks gained last week, with the S&P again nearing prior highs from February. This movement appeared to coincide with stronger economic results, including reports about dramatic improvements in air travel numbers, as well as continued optimism over progress towards a Covid vaccine. This seemed to offset continued uncertainty over legislative action towards further fiscal stimulus, as well as Chinese retail sales data that fell short of expectations that assumed continual recovery. By sector, cyclical groups industrials and energy led with gains of several percent, while defensive utilities lagged with declines of an equivalent amount.

Foreign stocks experienced stronger gains than domestic, led by Japan, and more tempered results for emerging markets. The positivity in equity results echoed that in the U.S., despite rising virus numbers in several European locations and enhanced travel restrictions. Chinese retail sales fell far short of expectations for July, bucking improvement elsewhere, so served as a disappointment to global investors looking to the nation as a ‘template’ for a V-shaped pandemic recovery. Reports of an approved Russian Covid vaccine helped sentiment in that region.

U.S. bonds fell last week as interest rates ticked higher along the longer end of the yield curve, with economic data showing improvement. Such a speeding up of expectations for stronger economic growth sooner also raise the probabilities of interest rates moving up sooner as well (although ‘soon’ in this case is certainly relative). U.S. government bonds fared slightly better than corporate ones, as both investment-grade and high yields spreads widened, while bank loans showed positive results in keeping with the higher rates. Foreign bonds were similarly flat to down on net.

Commodities gained a bit across the board, led by agriculture and energy, while precious metals fell back by nearly -4%. The price of crude oil rose by about 2% to around $42/barrel, continuing in a recent trading range, as inventories fell a bit—tempered by continued weak demand. Natural gas prices gained over 5%.