The week that was:
On Tuesday the S&P 500 reached a record high at 3389.78, marking the fastest ever recovery from a slump exceeding 20 percent. The rally was largely driven by big tech or the so called FAANGs (Facebook, Amazon, Apple, Netflix and Google/Alphabet) & Co. (We discussed this in this column’s Focus last week) All other global stock markets lag behind the Nasdaq and the S&P 500.
Apple became the world’s most valuable company on Wednesday reaching a $2 trillion market cap. It took the company a little over 38 years after its 1980 IPO to hit the $1 trillion mark and just two years to reach the $2 trillion valuation, in another sign of how the pandemic accelerated the rise of tech. Apple has achieved this goal by being a superb innovator. This tech rally is substantially different from the tech bubble of the late 1990s, because the companies are profitable and created intrinsic values, offering a suite of products and services for the future.
The Joint Ministerial Monitoring Committee (JMMC) of OPEC+ held production cuts steady, according to the schedule agreed in April. September cuts stand at 7.7 million barrels per day (bpd). Compliance was the issue and laggards (mainly Nigeria and Iraq) were asked to fully compensate for past overproduction by the end of September. Oil prices kept more or less stable after the meeting. They took a dip when US first-time jobless claims rose above 1 million on Thursday but recovered swiftly afterwards. Oil markets achieved a tenuous balance since the historic drop in April thanks to the supply side interventions of OPEC. The way forward will depend on how quickly economies recover from second quarter lockdowns and whether we see second waves of the pandemic.
European PMIs (Purchasing Managers’ Index) came in mainly above 50, which denotes growth, but below forecasts: Eurozone manufacturing and services PMI stood at 51.7 and 50.1 respectively. The figures for Germany came in at 53 and 50.8, and for France at 49 and 51.9. The August numbers came in well below those for July for Europe’s two largest economies.
Fitch adjusted Oman’s credit rating to BB- with a negative outlook, leaving the country in the sub-investment grade category with negative outlook for all three rating agencies.
The earnings season is nearing its end. This week some big retailers’ exponential growth of e-commerce was in the spotlight:
Walmart’s 2Q online sales shot up 97 percent and instore sales increased by 9.3 percent. Net income stood at $6.8 billion and EPS at $2.27. The company did not issue guidance, reflecting economic unpredictability.
Target Corp online sales reached a peak increasing by 24.3 percent for the 3 months ending Aug. 1. Curbside pickups increased by a whopping 700 percent. The company picked up 10 million new customers on its e-commerce platforms. Profits stood at $1.7 billion up 80.3 percent.
Alibaba is the largest e-commerce retailer in the world. Its Q2 earnings stood at $6.57 billion for the quarter, which represents a 135.5 percent increase compared to the same period a year ago.
Focus:
US-China relations deteriorated a notch over the past few weeks. Trade negotiators failed to meet last weekend but are expected to meet soon to review the phase 1 of the trade deal, where China has not been complying with its commitments to purchase US goods and services.
On Monday the US announced new export controls over the sale of US-made microchips to Huawei, which was widely dubbed a death sentence for the company. Asian chip makers’ stocks plunged in the aftermath of the announcement. Taiwan’s Mediatec fell 9.9 percent on Tuesday. Others affected were AAC Technologies and Sunny Optical.
The race over who will buy TikTok’s operations in the US has expanded, Microsoft remaining the front runner, but Oracle and others having entered the fray. In the meantime, US secretary of state Mike Pompeo asserted that the Treasury department should get a cut of the sale. As with Huawei, the US administration has based its quest to sell the US Operations of TikTok on the fear that the Chinese government could get access to US users’ data.
While the Chinese economy has recovered faster from the COVID-19 pandemic than other countries, heightened tensions between Washington and Beijing, put China’s unfettered access to export markets into question, which weighs on an export-driven economy.
To make matters worse, earlier this month the Trump administration issued recommendations to ban Chinese companies that did not comply with US accounting standards from listing on American stock exchanges. This could potentially affect 230 companies with a combined value of around $1.8 trillion, according to the Peterson Institute for International Economics.
At the same time several Chinese companies such as Alibaba continued to soar. Its founder Jack Ma envisages listing his payment juggernaut Ant Group on the Hong Kong and Shanghai stock exchanges, aiming at a valuation of $225 billion – a move which could raise $30 billion.
All in all, the US China relationship is deteriorating at an unpredictable rate, which will have ramifications for Chinese economic growth down the road, given that China has an open, export oriented economy.
Where we go from here:
The Democratic Party chose vice president Joe Biden and senator Kamala Harris as their ticket in November’s US presidential race. Voters will have to evaluate the risk of higher corporate tax rates under a Democratic ticket to the unpredictability of trade and economic policies under the incumbent administration. Both candidates will be tough on China, while Biden/Harris may stand for more stimulus.
Brexit talks seem to have hit another roadblock with EU chief negotiator Michel Barnier warning that a trade deal looks increasingly unlikely — the key sticking points being fisheries and the “level playing field” rules.
— Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources. Twitter: @MeyerResources
