Market news 10 August 2020

Bank of England meeting produces no major changes

• The Bank of England announced that rates will be left on hold at 0.10% and QE will be left unchanged following the MPC meeting on Thursday. To date, the BoE have committed to a target of £745bn in asset purchases, expected to be reached by the end of the year.
• The Bank also revised up its 2020 GDP forecast to -9.5% for the year (previously forecast -14.0% in May).
• For the first time, Governor Bailey explicitly stated that negative rates are part of the BoE toolkit, whilst taking pains to push back on the idea that their deployment is imminent.

European PMIs return to expansion

• The European composite PMI jumped to 54.9 in July, moving into expansionary territory for the first time since February (June: 48.5). The manufacturing PMI came in at 51.8, marking the first month of expansion since the beginning of 2019. The services PMI reading was 54.7, marking the sharpest recovery on record (the trough in April was 12.0).
• Among the sub-indices, new orders and production returned to growth, with some support from a pickup in export demand. However, across both sectors the employment sub-index continued to trend downwards.

US labour market presently healing somewhat faster than anticipated

• Initial jobless claims in the US totalled 1.2m last week (previous: 1.4m, consensus: 1.4m), continuing the gradual trend downwards since the 6.9m in weekly initial claims made at the peak of the crisis in April. This takes the number of Americans currently filing for unemployment benefits down to 16.1m from a peak of 24.9m in May.
• Nonfarm payrolls increased by 1.76 million in July, ahead of consensus 1.48m, for a total gain of circa 9.3 million over the last three months. The services sector added 1.42m jobs in July, but it still accounts for ~80% of the ca 12.9m jobs lost since February, while the goods sector, which added 39k jobs, accounts for just 10% of the jobs lost. In the US, as in other developed economies, a much greater recovery in the dominant services sector will be required to return overall GDP to pre-Covid levels. 

Equities rallied despite rising Sino-US hostility

• US equities continued to press to fresh post-Covid highs (all-time highs in the case of the tech-heavy Nasdaq index), whilst ex-US equities arrested the declines of the last 10 days of July. This was despite the announced visit of the US State Secretary of Heath and Human Services to visit Taiwan, ostensibly to discuss the battle against Covid. The visit, including a meeting with the Taiwanese President, represents the highest-level official meeting since the US severed formal diplomatic links with Taiwan in 1979.
• Additionally, President  Trump signed executive orders banning US residents from using the TikTok and WeChat apps beginning 45 days from now, citing national security concerns.
• Precious metals surged to record levels despite the pause in the recent decline of the US dollar. The stabilisation of USD derived from in part from improved US economic data relative to other G10 countries and also from the increase in geopolitical tensions.