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Sat 11 Jul 2020 01:38 PM

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Equities continue to climb the wall of worry

Tech giants Amazon, Apple, Microsoft and Netflix all recently made new all-time highs

Equities continue to climb the wall of worry

Hussein Sayed, chief market strategist at FXTM.

Reflation of the global economy is ongoing as the ‘big-tech’ companies continue to account for an ever-larger slice of corporate wealth than they did before the pandemic.

With their share prices soaring, a clear negative correlation has formed between equities and the dollar. We now approach the traditional quiet summer, with half an eye on the troubling increases in virus cases, earnings season and the gradual build up to the US Presidential elections in November.

The record performance of US stock markets in the second quarter was driven particularly by the tech titans and it seems this narrow market breadth is leading indices again with Amazon, Apple, Microsoft and Netflix all recently making new all-time highs.

The uneven nature of the equity rally has continued at the start of the third quarter, aided by rallying calls from front-page Chinese editorials calling for a ‘healthy’ bull market to help the country rebound from the coronavirus. Much attention now focuses on the Yuan’s appreciation and the authority’s tolerance for a stronger currency.

The famous ‘FAANGs’ (Facebook, Amazon, Apple, Netflix and Alphabet - formerly known as Google) are up over 15 percent from their lows in just five trading sessions and this rocket-fueled performance has prompted some to comment about ‘upside panic’ around their ever-advancing price action.

It is certainly instructive that the market cap of four of the well-known tech giants has increased more than 17 times in just over ten years to roughly $5.77 trillion. Can the market sustain this top-heavy outperformance, while stocks in sectors that depend on economic recovery, like energy and financials, remain well below where they started the year?

Of course, it is the liquidity unleashed by the US Federal Reserve that has in many ways killed price discovery by backstopping every conceivable asset. They have made it clear that rates will stay low for a long time which means the bar to buying risk assets is pretty low right now.

Yet, there is still an obvious concern in some quarters about a resurgence in virus infections. The daily increase in US cases is largely being ignored by markets but this could lead to a spike in fatalities, and if that proves to be the case, for sure the economy will be moving towards a wider re-lockdown scenario.

The positive economic momentum caused by re-openings may then run out of steam and give a jolt to markets. Certainly, although the headlines in the recent US labour market report were again blockbuster, under the hood, smaller firms are still struggling, and continuing unemployment claims have drifted higher recently. Let’s not forget that the 7.5 million jobs created in May and June in the US has recovered only a third of the job losses of March and April, with unemployment still above 11 percent.

Oil continues to trade in a range-bound manner as this market too, is shrugging off the surge in Covid-19 cases in the US. Tighter restrictions in several states may have an impact on demand but data for several affected cities is not currently showing up in traffic flows.

Saudi Arabia recently raised its prices on the US and Asian markets so they remain upbeat on a recovery in global oil demand, while on the supply side, all focus will be on the OPEC+ meeting set for mid-July with output cuts due to be eased from the start of August.

Further out, the prospect of a Biden presidency is growing and so an increased focus on his potential policies and their impact on markets. It will not come as a surprise that the Democratic candidate would like to roll back most of Trump’s support for the US fossil fuel industry. Indeed, the differences in energy policies between the two opponents is glaring and will be critical for oil going forward.

Hussein Sayed is chief market strategist at FXTM

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