Union in Europe, Intel's Drop and Rise in US Unemployment

The rotation out of Tech continued through the week with the Nasdaq closing down 1.33% for the week while, the S&P 500 and Dow where down 0.28% and 0.76% respectively.

Energy and Finance sectors got bid and were up over 1%. Earnings season is well underway with IBM, Coca-Cola, Microsoft, Tesla, Intel and AT&T reporting among other companies. One underlying trend, earnings is turning out to be not as bad as many were expecting. Call it analyst management that happens every quarter, where the expectations are pushed so low that a beat becomes possible and positive for price.

Of the 207 companies that have reported from the S&P 500 Index, earnings positive surprise stands at 14.90% and sales positive surprise stands at 2.83%. But on a QoQ basis, earnings are down 16.42% while sales are down 8.82%.

Here are three charts and some data points that stood out during the forth week of July, 20th to 24th, 2020.

Historic Union in Europe

Europe reached an historic agreement on a Euro 750Bn package. After five days of intense negotiations, the package called Next Generation EU (NGEU) was agreed upon that will bind the 27 member states even closer with the issuance of collective bonds.

This the first time that EU will be issuing bonds under it's common name and the proceeds will be used to provide loans and grants to nations that need the maximum assistance to ride though the current crisis. Merkel's shift in stance is truly historic and it took a crisis for the Germans to move from being fiscal hawks to being accommodative and a catalyst in the way Europe comes together to deal with the current crisis. The haggling was for the amount of grants to be given. The initial plan was to provide 500bn euro in grants but the frugal four (Austria, Denmark, Sweden and the Netherlands) pushed that number down to 390bn euro. The 27 leaders also agreed on a multiyear EU budget of over 1tn euro that will run from 2021 until 2027.

The markets liked what they got. Italian vs German spreads are down and have come a long way from Madame Lagarde's "not here to close spreads" comment in March. Reducing spreads signal less stress in the peripherals and the ability to borrow at lower yields which is good considering the amount of borrowing required to bridge the current huge fiscal gap.

EUR/USD broke out of the 1.15 mark and has gained in 10 out of the last 11 sessions. Eurozone PMIs also came in better than expected across the board with the Composite, Manufacturing and Services PMIs all coming in better than forecasts and printing well above the 50 mark which signals expansion. On the other hand, US PMIs came in below expectations.

Euro's strength pushed DXY to it's lowest level in one year. There is a lot of talk on the street of a turn in USD's strength. DXY has moved from 77 levels at the beginning of 2010 to recent highs of near 100. The contrast between the fiscal agreement in EU and US was stark this past week. Republicans and Democrats are a full $2tn apart for the next fiscal plan and will most probably not pass a bill before the 31st July expiry of $600/week unemployment assistance.

Europe new found cooperation will only accelerate USD's weakness going forward which will have a bearing on how DM (ex US) and EM assets will perform.

Thanks for the lessons, it's time to take off!

So said TSMC! Intel fell 16.24% on the Friday after reporting a further delay in there 7-nano meter production process. Intel is already 12 months behind schedule. Q2 results were actually pretty good with adjusted EPS of $1.23 vs $1.11 expected and the revenues at $19.73bn vs $18.53bn expected.

Bob Swan, Intel's CEO said they are considering outsourcing chip manufacturing. Outsourcing means, chip manufacturing will move to Asia and most probably to Taiwan Semiconductor Manufacturing Company (TSMC). While other chip manufacturing companies had already moved out of the US, Intel held on with keeping manufacturing in the states. While Intel makes hundreds of millions of chips a year, TSMC makes a billion annually.

At a time when the US-China war is reaching new crescendos every week, the world's largest chip-maker moving out production to Asia will be a huge blow to the technological superiority of US. On the one side China is investing billions (refer the third chart in the link) to enhance it's chip making prowess and on the other, many fear, that the US is looking to outsource right into the hands of China. US is indeed giving away a bargaining chip!

Unemployment Rises

Filings for the unemployment rose for the first time since March this year. Initial jobless claims climbed to 1.42 million in the week ended July 18, up 109,000 from the prior period.

The increase comes on the back of many states imposing new restrictions on businesses such as restaurants and bars as the virus cases continue to climb across the US. Currently, one in every five american workers are collecting unemployment benefits, which is a staggering 30 million people.

While the unemployment numbers have started inching up, congress is still unable to put together the next rescue package for the unemployment benefits to roll over. Republicans are proposing a $1tr spending plan while the Democrats want a $3tr spending plan. What seems certain is a sharp drop in unemployment benefits from $600/week to about 70% of the wages workers received before they lost their job. Which would translate to $200 for a typical worker according to NYT. This will have an impact on consumption and also money that has found its way into the stock market via platforms like Robinhood.

Expect to see weaker economic data coming out of the US in the next few weeks.

Disclaimer: The views and opinions expressed, if any, are of my own and do not necessarily reflect the official policy or position of the organization I work for.