New World Records

WHAT’S NEW - First record: the Citi economic surprise index for the United States reached an all-time high. What does this mean? Economic data out of the United States have surprised positively versus market expectations.

WHAT’S NEW - First record: the Citi economic surprise index for the United States reached an all-time high. What does this mean? Economic data out of the United States have surprised positively versus market expectations. Such a high level of surprise is not unexpected given the period of depressed sentiment - and therefore of low expectations - we have just witnessed. Note that it is not a global trend as Europe remains a laggard. Second record: The latest Merrill Lynch Fund Manager Survey reports that a net 78% of investors believe the equity market to be the most overvalued ever. The previous highs were at the end of 2017 and 1999.

OUR TAKE - Consistent with the positive economic surprise indices, markets are now pricing a certain recovery in economic and profit growth over the next few years. Investors believe valuations are not cheap, which is understandable after a 40% rebound in equities and uncertainty still high. However, we believe forecasters after periods of stress tend to be overly conservative, just like they tend to turn too optimistic in euphoric times. We note that 3-year forward earnings growth expectations have been revised the most since the Great Financial Crisis, by a cumulative -16% in Europe, -10% in the US and -7% in emerging markets and Japan.

WHAT’S NEXT - While markets in the long run can easily grow into rich multiples from lower initial growth expectations, they remain more vulnerable to shocks from higher valuation levels. Markets have become more volatile recently with signs of another virus wave in several key US states by GDP and employment, such as California, Texas and Florida. Developments worth watching, but for now policy remains the main market driver as witnessed during the intraday equity rebound yesterday in the US. A rebound driven by 1) the Fed announcing the purchase of corporate bond securities (not news) and 2) reports of a USD 1 trillion infrastructure package being worked on by the White House.

MARKET REVIEW

EUROPE - European indices ended mostly lower on Monday. Risk aversion was in play amid concerns that fresh outbreaks of the coronavirus could hold back the global economic recovery. On the Brexit front, a joint UK-EU statement was issued, with both sides agreeing that a new momentum is required in talks. Prime Minister Johnson was also reported to have said he wants a deal by autumn, which has also been flagged by the EU to allow time for ratification of any deal. Meanwhile, UK non-essential shops reopened yesterday for the first time in almost three months. European countries started easing border controls. French President Macron lifted most of France's remaining coronavirus lockdown restrictions. On the earnings front, H&M ended little changed after the company reported second-quarter sales. AstraZeneca announced it will supply Europe with up to 400 million doses of Oxford University's Covid-19 vaccine at no profit.

USA - US equities were higher in Monday trading. This followed stocks selling off sharply last week, snapping a big three-week winning streak. Treasuries were a touch weaker across the curve. The dollar was vs the euro, little changed on the yen cross. Gold finished down 0.6%, off worst levels. WTI crude oil settled up 2.4%, well off its early weakness. Stocks hit best levels after the Fed announced it would buy a broad portfolio of corporate bonds. The Fed earlier announced lending from the Main Street programme would begin immediately. On the economic front, the June NY Fed Empire manufacturing survey came in much better than expected.

ASIA - Asian equities rallied on Tuesday. The Fed'scorporate bond buying plan has been cited for a broad risk-on move. A recent spike in Chinese infections played into second wave fears. Beijing has re-imposed restrictions on indoor gatherings and locked down several communities as authorities attempt to stem the outbreak related to the Xinfadi food market. The Bank of Japan left policy settings unchanged as expected. Economic commentary remained bearish, noting Japan has been in an extremely severe situation due to coronavirus effects at home and abroad.

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