Market Update – 15th July 2020.

This week’s equity market moves provide a perfect illustration of the tug-of-war that has dominated recently. Yesterday evening, US equity markets rebounded strongly from Monday’s late sell-off, as rising new coronavirus infections, escalating geopolitical tensions and mixed earnings reports from the banks were offset by encouraging coronavirus vaccine developments. News emerged that in Moderna’s initial trial, their vaccine produced coronavirus antibodies in all patients – and of course, a vaccine will allow economies to fully reopen and thus speed up the economic recovery.

As a result, the UK equity market has opened stronger this morning, with the FTSE-100 currently trading up around 50 points, or 0.80%.

While the US banks, JPMorgan and Citigroup posted better than expected Q2 profits, this was due to their trading operations, whereas Wells Fargo (which lacks a significant trading presence) reported its first quarterly loss since 2008.

Interestingly, Jamie Dimon, the JPMorgan CEO, having previously said he saw a severe downturn and a quick recovery, is now expecting a slower improvement – and this was reflected in its $10.5bn loan-loss provision (its biggest ever provision).  Similarly, Citigroup set aside $7.9bn for bad loans.

These provisions represent the bank’s estimates of how much money they will lose on loans they have already made.  However, we believe that there is a good chance the banks are being too cautious and are potentially ‘kitchen sinking’ as everyone expects some bad-debt losses and so getting a large number in now stops any slow drip of provisions over the next few years – additionally, JPMorgan’s view on the economic outlook is far worse than its own investment bank economists are forecasting!  As a result, these provisions could be next year’s profits if these bad-debt losses don’t fully materialise.

Moreover, it is important to see the difference between perception and reality as this is not like a normal recession:  savings have increased (as shops and restaurants have been closed), as are house prices and salaries.

As a result, a large share of JPMorgan’s customers continued to repay their debt (including those who asked for lending relief) – which shows how well consumers are weathering the downturn.

Furthermore, the credit bureau Equifax, recently said that less than 0.70% of all US consumer debt was overdue by 60 days or more (i.e. delinquent) – which is low.

Looking ahead, our attention is now on the Empire Manufacturing Survey and the Fed’s Beige Book (both data releases are due out later today) and tomorrow morning’s Chinese Q2 GDP, for further insights into the economic outlook.

Investment Management Team

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