The financial markets were generally friendly in July - despite the continued sharp rise in new corona infections and tensions between China and the USA. The rapidly increasing new infection rates in some US states as well as in Brazil and Japan were calmly accepted by the financial markets. Hopes for a vaccine, supportive measures by central banks and governments, and the assumption that politicians would hardly risk renewed lockdowns of the economy overshadowed the ongoing negative development of new infections. With the agreement on the Corona aid package, the EU states have passed the largest financial package in the history of the EU. This is a good sign for economic cooperation, which should strengthen the EU. Thanks to the reopening of the economies, macro data improved gradually and in most cases better than estimated (see FOCUS). Much revolved around the weak US dollar, which fell over 4% on a trade-weighted basis. On the other hand, commodities and in particular precious metals rose sharply, especially silver. The EUR reached 1.19 against the USD at times, after it had remained at 1.08 three months ago. On the occasion of the interest rate decision, the US Federal Reserve FED has repeatedly confirmed that it wants to support the economy with all means and continues to provide the markets with sufficient liquidity. The ECB also left the key interest rate and the existing QE programme unchanged.
Expectations for Q2 earnings are extremely low due to the exogenous corona shock. A decline in profits of over 44% is estimated for the USA and 56% for Europe. So far, companies have been able to report significantly better profits thanks to the low expectations. On the other hand, there were high expectations for technology stocks following the strong rises since the low in March. Nevertheless, some of the dominant technology giants managed to exceed these high expectations. Amazon.com and Apple shone with a record quarter despite the Corona crisis. Amazon.com even benefited visibly from the crisis as people around the world placed more orders online due to the pandemic. Alphabet, Google's parent company, suffered the first drop in sales in history, but still managed to exceed analysts' expectations. Speculative excesses can be seen in individual stocks, such as the stock of the car manufacturer Tesla. The valuation of the automobile manufacturer is inexplicable for the analyst community. Despite individual outliers, the overall market is still not overpriced in relative terms. The EuroStoxx 50 lost almost 2% and the Swiss SMI ended the month little changed. Emerging markets with a strong dependence on commodities, such as Brazil, benefited from the weak US dollar.
The capital market has not confirmed the improved economic outlook. The influence of the central banks seems to have the dominant role here. The decline in yields of the most important G10 countries was all lower. Spanish, Greek and Italian bonds benefited from the EU financial package. The yield spread between Italian and German government bonds eased considerably after the agreement on the financial package and fell to the level as at the end of February 2020. Real interest rates still remain at very low levels or even fell further into negative territory, as in the USA for example (see FOCUS).
Lowered real interest rates and a very weak US-$ caused a bull market of over 33% in silver. Gold also advanced by more than 10% and reached the psychological $2000/ounce mark for the first time, even if only for a short time. The cyclically sensitive metals such as copper and aluminum were in strong demand. The USD lost over 3% against the CHF. The EUR gained 1% against the franc and over 4% against the USD.
The economic recovery has been back on the path of a V-shaped recovery since the great Covid-19 slump. The equity markets consider this to be the most likely scenario and the bond markets are not yet able to confirm this positive view due to the strong intervention by central banks (see FOCUS). Although equities still have the best yield prospects in the medium term, they are overbought in the short term and vulnerable to negative headlines. Equities outside the US have already initiated a sharper correction towards the end of the month. Our tactical stance is more cautious, as some indicators of investor sentiment have also improved considerably. The put/call ratio, as an indicator of hedging demand, is currently at a multi-year low. As long as the established trading range is not wiped out, we will remain in a somewhat more defensive position in order to be able to profit from setbacks again.