Global Weekly: US markets at record levels

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Equity markets had a positive week as the US S&P 500 Index is flirting with all-time highs. Market-related news this week continued to be dominated by the second-quarter earnings season and rising US-China tensions. In general terms, company results have been surprising positively, although the bar for revenues and profits was set low. In the run-up to the earnings season, analysts had been trimming estimates, as the second quarter was supposed to be the earnings low point following the corona virus disruption.

With restaurants closed or running at limited capacity due to covid-19 containment measurements and reduced demand due to social distancing, food delivery is strongly increasing. This accelerated growth was clearly visible in the results of the European market leader Just Eat Takeaway. As more restaurants are joining the ordering platform, Just Eat Takeaway’s service offering is becoming more valuable, which attracts more clients.

Moreover, an expanding client base with rising order rates and order sizes, triggers even more restaurants to join the platform. This positive interaction between buyers and sellers in a marketplace is often called a network effect. In the first half of 2020, all these aspects of the network effect worked in Just Eat’s favor. The company’s revenues base grew by more than 40% and earnings before interest, taxes, depreciation, and amortization over the period more than doubled, despite accelerated investment In logistic capabilities.

In the run-up to the US presidential elections in November, there is increased tension between the US and China. US President Donald Trump issued two executive orders that bar Americans from carrying out transactions related to Tencent’s popular platform WeChat and Bytedance’s social-media app TikTok.

The justification for the executive orders is based on the threat to national security if Chinese companies obtain detailed personal information of US citizens and companies. Currently there is a lot of uncertainty about the details of the executive orders, but it is certain that the willingness of Trump to block popular Chinese social platforms will not improve the relationship between the US and China.

Bonds – Diverse market drivers

The announcement of Russian President Vladimir Putin that the country’s ministry of health approved a corona virus vaccine has to be treated with caution and the approach is criticized by experts globally. It did, however, fuel hopes that a vaccine might be available in the near term. In combination with stronger than expected US Producer Price index data and the German ZEW-Index, which showed improving economic expectations, as well as significant auction pressure on US Treasuries and German Bunds, the yields of European sovereigns and US Treasuries rose. But US inflation fears also put yields under pressure. If US inflation would rise by more than expected, it could possibly lead to central banks becoming less expansive and therefore buying fewer sovereign bonds. At the same time, bonds would become less attractive due to decreasing real yields. Supported by the purchase programmes of the ECB, the agreement for a recovery plan and investors looking for carry, European peripheral sovereign bonds outperformed their peers from core countries.

European investment-grade corporate bonds continued their rally and profited from investors searching for yield. Although spreads significantly tightened from their April highs, they are still well above pre-corona levels.

We believe that bond markets will continue to be driven by pandemic news and the tensions between the US and China, as well as a possible further US aid programme. The development of peripheral bonds should continue to be supported by their higher yields. Regarding Italian sovereign bonds, we think that volatility may increase, due to various regional elections in September, which will test the stability of the current government coalition. We therefore retain a neutral position in Italian government bonds and prefer Spanish government bonds instead.