25 May 2020

US Markit Services PMI Indicates A Rebound In Activity

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All major indices rose during the week and the S&P500 reached its highest level since March 6. Small capitalisation stocks outperformed and value stocks rose more than their growth counterparts. The communications segment was boosted by a gain in the shares of Facebook and the discretionary sector benefitted from a rebound in the shares of travel related companies. In the fixed income space, treasury yields started the week on the front foot and foreign buyers boosted investment grade bonds.


A large part of the rise in indices was attributable to an announcement by Moderna Theurapeutics that its covid-19 vaccine candidate based on mRNA technology was successful in a first stage clinical trial which had started in March. The US Dept. of Health also announced an order of vaccines currently under development by scientists at Oxford University which will be produced by AstraZeneca. On the economic data front, the IHS Markit Services surprised on the upside (chart above) and mortgage application for May rebounded from multi year lows. A confirmation of this trend will indicate that lower interest rates are having an impact.


However rising tensions between the US and China affected investor sentiment towards the end of the week. The White House announced restrictions on Huawei Technologies on the use of US semiconductors and the Senate passed a bill to restrict the listing of Chinese companies in the US by using ADRs (American Deposit Receipts). A lack of reaction by Chinese investors might indicate they view this as political posturing ahead of the US elections.


In Europe, ECB chief Christine Lagarde reaffirmed that the central bank would continue its bond buying program. This, in spite of the judgement by Germany’s constitutional court which ruled that the bank was outside of its mandate. She argued that the EU’s top court had ruled in favour of the bank which would continue to support economic recovery.

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