Weekly Market Insight

Latest Economic & Market Update 15th July 2020

15th July 2020

Good afternoon, it is July 15th 2020 and here is your economic and market update from BlackBee. 
Today’s focus:

  • US stocks move higher in a day of mixed earnings reports.
  • “The recession is coming” – the message from US banks’ quarterly reports.
  • Lending will tighten in Eurozone without state guarantees.

US stocks climbed on Tuesday as mixed quarterly earnings were released. The Dow Jones closed 2.13% higher and the S&P500 closed 1.34% higher for the day. European stocks caught up with US stocks decline on Monday as the Euro Stoxx 600 closed -0.84% lower. Early trading in the US had seen stocks swing between gains and losses as investors evaluated companies earnings reports and also considered the rising number of coronavirus cases. The US 10-year treasury yield declined to 0.6% as investors continue to move into safe havens due to growing caution about the rally in stocks.

The recession is coming – that is the message that JP Morgan Chase & Co, Citigroup Inc and Wells Fargo & Co quarterly reports tell us. For now, government stimulus and FED support have prevented mass loan defaults, however, this is likely to eventually catch up as stimulus tapers down. The three above mentioned US banks have set aside $28 billion in provisions for loan losses during Q2. The Q4 2008 was the only time a higher amount was set aside by banks for bad debt. All three banks have also stated that their outlook on the economy had deteriorated as the crisis plays out. Payment deferrals offered from banks and stimulus providing income to households that have become unemployed since the start of the crisis have helped stave off defaults on loans so far, but this won’t last forever. If the paycheck stimulus comes to an end, we could see a wave of defaults due to the large number of people unemployed and the economy not performing to levels anywhere near pre-crisis. The $28 billion that was set aside last quarter by the above three banks, combined with the amount set aside in Q1 totals $47 billion. This is more than what was set aside in the last three years combined

The ECB’s quarterly survey revealed that banks in the Eurozone will reduce the credit available to Eurozone businesses based on banks anticipating that governments will wind down loan guarantee schemes in Q3 2020. Since the start of the crisis, to support the economy, the ECB has boosted the supply of credit and governments across the Eurozone have guaranteed loans. According to the report, demand for loans hit a record high in Q2. If lending reduces, which the ECB survey suggests, this will be another blow to businesses trying to survive the crisis and is likely, in turn, to affect the unemployment rate and growth in the economy. The significance of state guarantees is highlighted in the report with the rejection rate for loans to businesses fell by 12%.

Best & Worst Performers of Large Cap US Stocks on Tuesday
Click the image to enlarge

Global Market Update
(as at close of markets 14/07/2020)