Launch Pad
Daily market commentary


Friday, August 14, 2020
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North American futures are a tad lower this morning ahead of a release in U.S. retail sales data for July.  European markets headed decidedly lower as the U.K. introduced more restrictive quarantine rules; Asian equities, meanwhile, were mixed despite Chinese economic data missing forecasts.  The greenback traded relatively flat while buying activity remained strong for Treasuries, driving yields lower.  Oil (Brent) edged below US$45/bbl while spot gold fell below US$1,950/oz. 

Forecasting isn’t easy.  Just look at Q2 earnings season: without company guidance, the variance in analyst estimates for individual company earnings was the widest we have seen with data going back a few decades.  When the results ultimately came in, analysts proved too pessimistic, leading to one of the largest surprises in magnitude.  So, how do you think strategists make out forecasting the S&P 500?  Sadly, the index does not provide any guidance to help them along.  The average miss for consensus strategist year-end target on Jan 1 and where the S&P 500 finishes is 16%.  Meaning they expect a 10% rise and it comes in at 26% or -6%.  Now, there are a few big misses that skew the average such as in 2008 the forecast was for a 1,577 S&P at year end but it ended at 903. 

So where are we today?  Well, at the start of the year forecasts for year end were 3,231.  I would say that is pretty good; we are a bit ahead of that but still have a few more months to go.  Keep in mind, nobody forecast a visit to S&P 500 2,200 along the way in 2020.   In fact, the divergence in forecasts is very large.  The Chart of the Day breaks down the forecasts as of last month’s survey.  Clearly, it remains anyone’s guess as to where this year will end up.

Formal U.S.-China talks are poised to begin soon, and right out of the gates both parties have taken a hostile approach.  China’s most recent statement was rather pointed, with a Foreign Ministry representative stating that “[China] hopes the U.S. can stop its restrictions and discriminatory measures on Chinese companies.”  Agricultural activity between the two nations will likely remain strong; U.S. farmers are seeing some of the largest orders.
On the stimulus side – a pain spot for market participants as of late – Trump backtracked on his strong rhetoric, now saying he won’t veto a proposed bill even if it contains funds for the USPS.  Still, no deal or strong bipartisan agreement was in sight congress called a recess. 

Travel stocks took a hit today as a surge in European cases have led to travel curbs and further restrictions. Germany added the highest reading of new cases since May, infections rose in Spain, and the U.K. government has imposed a 14-day quarantine on travelers from six countries, most notably France and the Netherlands. Greece has been hit the hardest, registering the highest daily increase of cases since the pandemic began.

Progress is slowly being made on the vaccine front as the EU Commission is set to sign a deal to buy 300 million doses of AstraZeneca’s Covid-19 vaccine on behalf of EU member states, with an option to purchase more once the vaccine is proven to be safe. The U.K. signed two more deals to purchases doses of experimental vaccines, ordering 60 million doses of Novavax’s (NVAX) late-stage option, and 30 million units of Johnson & Johnson’s Janssen unit (JNJ). Despite these constructive steps in the right direction, an uptick in cases across Europe looks to be creating renewed pressure on Europe’s economy which could continue for quite some time – at least until warnings of a second wave have diminished.

Diversion: A New reality show is set to debut on Amazon tonight, Bear Grylls has mashed up Survivor and The Amazing Race to create ‘The World’s Toughest Race’.

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Company news

Brookfield Asset Management posted a US$1.49 billion loss in 2Q20, driven in large part by a write down in the market value of a number of its businesses.  Still, the company expects the balance of the year to be better as their portfolio companies begin to recover.  Cineplex reported a C$98.9 million loss as theatres remained closed for nearly a full quarter.  For context, revenue came in around C$22 million, compared with C$438.9 million for the same period last year.  Theatres are continuing to reopen; however, the company is still dealing with the fallout of Cineworld Group’s decision to walk away from buying them out on June.  Elsewhere, SoftBank is pumping another US$1.1 billion in senior secured papers into WeWork.  It’s “membership” base dropped -12% last quarter, but WeWork’s CFO pointed to progress being made on reducing its cash burn.


Oil prices are relatively steady this morning. At the time of writing NYM WTI Crude futures are down -14 bps to US$42.18/bbl. ICE Brent Crude is similar, down -18 bps to US$44.88/bbl. The pandemic continues to spark doubt in the future demand for oil. OPEC followed the IEA yesterday in forecasting a lower 2020 oil demand this week. At the same time, they are turning their taps back on this month as we speak. The organization will meet next week but nothing is expected to come of it. Prices were lifted this week on impressive inventory draw numbers from last week but the future negative outlook seems to be too much to keep that trend going.
Gold Spot is also down this morning. At the time of writing, the yellow metal is down -0.34% to US$1,946,45/bbl. A weaker U.S. dollar and a rise in U.S. treasury yields are the main cause for the dip in gold this morning. As yields rise, the opportunity cost of holding a commodity that is non-yielding rises. If gold finishes the day in the red, it will be the first negative week for the precious metal since early July.

Fixed income and economics

A fairly quiet start in markets on this mid-August Friday with Treasuries nudging up slightly and equity futures a smidge lower ahead of the open. Nothing really driving direction quite frankly with the continued $1 trillion impasse in Washington further prolonging stimulus payments to Americans (just a question of when and not if U.S. Congress will pass a major stimulus bill worth around $2.5 trillion). Ahead of this we have economic data to focus on in the form of retail sales just released that saw July disappoint with a gain of just +1.2% on the headline versus +8.4% June and +2.1% consensus. Excluding autos and gas, the gain was +1.9% vs. 8.3% revised-June and +1.3% anticipated. The all-important control group outpaced expectations at +1.4% MoM in July vs. +6.0% June and +0.8% consensus (though the upward revisions to June helped offset some of the disappointment in July's pace). That being said, headline aggregate retail sales are now +1.2% higher than the January peak despite just 9 of 13 categories rising last month (versus 11 in June and all 13 in May). Consumption should stay fairly flat for now as the economy opens up but we’ll see how that fares as students go back to school and we look ahead to the ominous winter months. Preliminary Michigan Confidence figures are out after the bell and are expected to drop from prior.

Chart of the day


Quote of the day

Everything in moderation, including moderation.

- Oscar Wilde

Contributors: C.Basinger, D.Benedet, C.Kerlow, D.Mak, A.Tjiang, D.McDonald, B.Gustafson

Charts are sourced to Bloomberg unless otherwise noted.

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