Technology wave sweeps across markets

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This week, equity markets continued to develop positively. Markets do not seem to be concerned (yet) about the rising number of corona infections in some parts of the world, mainly in the Americas. With regard to equities, the two well-known abbreviations TINA (there is no alternative) and FOMO (fear of missing out) still seem to be valid. Once again, technology-related stocks were most in demand. As a result, the tech-heavy Nasdaq Index reached a new all-time high.

If we can learn anything from history, it is that pandemics do have a severe and long-lasting effect on the economy. But also that human innovativeness and adaptability will march on. The coronavirus caused many businesses to shut down and forced many people to work from home. It also accelerated the adoption of technology. This trend will continue, even if there is a vaccine for the coronavirus. And it will remodel society for years to come, and in many ways. Technology-related companies are in the driving seat to benefit from these developments.

The digitalisation trend will continue within every sector, with data, cloud computing, internet speed and cyber-security becoming even more important. The coronavirus caused us to use video conferencing tools. Zoom and Microsoft Teams, for example, saw a huge increase in daily users during the lockdowns. Online shopping and ordering became increasingly popular, which made the share price of Amazon surge. Cyber-security companies see demand for their products growing, as the number of cyber-attacks increased sharply during the last three months. Next to that, demand for equipment (including 5G equipment and sensors) and for robotics (artificial intelligence, surgical robots and industrial automation) continues to increase.

Most technology-related stocks have performed quite well recently. The question is whether these stocks can maintain their current levels and rise even further? In the coming weeks, we will probably get an answer as the earnings season is about to kick off next week.

This week, Alibaba and SAP performed very well. Alibaba announced plans to list its fintech arm Ant Group on the Hong Kong stock exchange. Alibaba wants to sell 5-10% of its shares in the IPO. The share price of Alibaba rose significantly on this news. In Germany, technology company SAP presented its preliminary second-quarter results. These were better than analysts had expected. Cloud revenue grew by 20%, while software licences revenue declined less than expected and even showed some recovery in the Asian markets. Investors reacted enthusiastically to these results.

Bonds: a fairly calm week

European bond markets did not move much this week. Bond investors appeared to ignore both the risk-on mood in equity markets at the beginning of the week and the uncertainty around Covid-19 developments in the US and South America, where infection numbers accelerated.

Especially yields on core government bonds, such as 10-year German Bund yields (hovering around -0,43%), resisted market developments. Sovereign bonds of the European periphery performed better than their core country peers. Last week, Italian government bonds came under pressure following statements by Klaas Knot, the president of the Dutch central bank, who warned that governments should not rely too much on monetary policy measures. However, the risk-on mood and statements by ECB President Christine Lagarde, who reconfirmed that the ECB maintains its loose monetary policy, allowed Greek and Italian government bonds this week to tighten their spreads versus Bunds. The updated forecast of the European Commission concerning economic development, unemployment and price development did not have much impact on bond markets, since investors already expected a further deterioration of the outlook. The Non-Manufacturing ISM, an important economic indicator based on surveys of more than 400 non-manufacturing firms, came in stronger than expected. This led to a temporary increase in US Treasury yields. However, a significant rise of the number of daily new infections in the US fuelled uncertainty concerning the economic impact of Covid-19. As a consequence, US Treasury yields fell.

Looking forward, we believe that the bond market will continue to be driven by pandemic-related news and, especially in the European Union, by the question if the member states will find an agreement on the proposed reconstruction fund. This fund would aim to support those countries that were hit the hardest by the pandemic. Leaders in Austria, Denmark, the Netherlands and Sweden are opposed to the current idea of support in the form of grants. Instead, these countries would prefer to provide support by means of loans. A failure to find an agreement would certainly slow down further spread tightening in the peripheral countries, although peripheral debt is supported by the ECB’s purchase programmes.

We remain confident about our overweight position in corporate bonds and emerging market debt (EMD). Our preference for EMD over high-yield bonds is supported by the more attractive diversification benefits offered by EMD. High-yield bonds are highly correlated to equity markets.

Looking ahead to next week: markets are eagerly awaiting the release of industrial production numbers in the US, the EU and China, as well as CPI data that will be published in the US and Germany. It will be interesting to see to what extent next week’s data releases confirm the weak data recently issued in the EU, including disappointing German export/import data. Going forward, investors will be eager to find out how the recent strong rise in Covid-19 infections in the US will impact the country’s economy, and if China – where recently published CPI data were encouraging – can serve as a blueprint for other regions.