Weekly Wrap by Pythagoras Investing: World Markets and Vaccines

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Chinese Trade

Whilst analysts had expected exports from China to fall by 0.6% for July they actually rose 7.2% due to demand for medical goods and automobiles as COVID-19 restrictions relaxed around the world.  This sort of strength means Australia’s raw materials are being consumed.  Imports into China showed double-digit percentage growth in the first seven months of the year for crude oil, iron ore and copper.  Coal, refined oil products and natural gas volumes were also up on the same period a year earlier.

China is powering up.  China is a powerhouse of the region.  We are intrinsically linked to it.  Australia (excluding Victoria) is a matter of 2-3 months behind. 

US China Trade Talks

There appears to be no chance that China will achieve its agreed purchase targets from the USA for 2020.  This could prove a problem as negotiators prepare to reconvene for high level trade talks in the next week.  Starting new talks is not good news.  The way Trump behaves (and may feel compelled to behave in advance of the election) brings tensions to these talks which rarely means good news.

US Stimulus

Our markets responded to Trump extending stimulus payments to individuals.  He did this after US politicians failed to strike an agreement on the next round of US stimulus measures.  Trump used his executive powers to extend unemployment benefits, suspend some payroll taxes, defer student loan payments and temporarily freeze evictions. As it isn’t within his “normal powers” it may not stick. 

US Reporting Season
Profit forecasting for company earnings has been extremely challenging.  Analysts have opted to be cautious.  The result is that 8 out of 10 US companies have beaten analyst’s estimates.  It doesn’t mean the earnings were good – they weren’t.  They just weren’t as bad as analysts had expected.  The importance of this is stocks were priced for worse results than were delivered.  Therefore, less bad is good.  Company management are still generally reluctant to offer guidance.  Therefore analysts will use this lack of guidance to be cautious again. It is not an easy environment to predict.

Australian Reporting Season
It is still early days in the Australian reporting season.  But the consumer discretionary sector has been on fire in Australia – especially with the current economic climate.  It appears that those who had funds set aside for “holidays” are enjoying it at the shops.  Homewares, furniture, electronics, and tech have all done well.  The Government stimulus must have also played a part – including the early withdrawal of super. Government support for people and our economy has to remain for the foreseeable future.

Mostly share prices have recovered from their March lows. Earnings have declined.  Commentaries about expectations of future growth are critical to assess fair value of share prices and give direction to the market. 

Much excitement is always created around vaccine news.  If achieved, news of a vaccine would lead to confidence in a quicker earnings recovery and therefore cause the market to surge.  It’s easy for the market participants to feel confident under these circumstances. According to Russia’s Putin they have a vaccine they will administer to their people – if real, it will cause a reaction.  But it has only been tested on 138 people and no details have been released to the WHO to assess.