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A Breather

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Global markets are mildly lower this morning as investors assess new COVID cases and economic data.
 
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The Express | Insight Before the Bell

By Caleb Silver, Editor in Chief

& Deborah D'Souza, News Editor

 Thursday's Headlines

1. Global markets mostly lower ahead of weekly jobless claims

2. Eurozone manufacturing contracts, but may have bottomed

3. US household income takes a hit

4. What happens after bear market rallies?

 
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Markets Today

Global markets are mostly lower this morning, and U.S. futures are pulling back after Wednesday’s rally, the fourth in five days. Manufacturing data from the Eurozone showed the region’s economy contracted less in May than in April, but is still far from expansion.

 

The World Health Organization said the number of newly-reported cases globally hit a daily record this week, just as governments around the world attempt to ease lockdown measures. More economic activity, more testing and more cases is going to make this recovery very choppy.

 

Here in the U.S., another 2.4 million Americans are expected to have filed for first time unemployment claims in the past week. Over the past two months, more than 36 million workers have lost their jobs. Economic activity is picking up in some sectors, but we are in the middle of one of the worst quarterly declines in history, and trying to spend our way out of it. 2020 will be one of the most expensive years in history in terms of government spending as a percentage of GDP.

 

That’s a problem for another day.

 

Stock investors don’t appear worried with the S&P 500 Index now up more than 32% in 40 trading days. The Nasdaq had its highest close yesterday since February 21, when higher highs were in style. There are plenty of reasons for this not to continue, but none of them have stopped the trend… at least not yet.

 
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Chart courtesy: YCharts

Headlines

  • Canadian cannabis company Aurora Cannabis is entering the U.S. by acquiring Reliva, a leading hemp-derived cannabidiol retail brand. Reliva stakeholders will receive $40 million in Aurora common shares. There is a potential earn out of $45 million if Reliva achieves certain financial targets. Aurora Cannabis stock is up 24% in pre-market trading.
  • Amazon just launched its first big-budget video game, Crucible. The free, team-player shooter game is available for free on PC via Steam and is being compared to other popular ones like Fortnite, Dota and League of Legends. The company is taking pre-orders for New World,  which will be released in August. Amazon also owns Twitch, a video live streaming platform used by gamers.
  • The U.S. automotive industry has collectively borrowed $155 billion between bonds and loans amid the coronavirus outbreak. The $44 billion of bonds sold in the period is greater than the industry’s issuance in any single quarter. The $111 billion of loans raised in the period could match the sales of $133 billion seen in 2019 once about $18 billion of pending deals get completed, according to Bloomberg.
  • AstraZeneca has received more than $1 billion from the U.S. Department of Health. The funds are for the development, production and delivery of the University of Oxford's COVID-19 vaccine candidate. The British firm also said it has completed agreements to deliver at least 400 million doses starting in September and has secured total manufacturing capacity for one billion doses so far.
  • Bitcoin's price faltered yesterday after rumors spread the creator was selling his coins. Stay with us here. The true identity of the virtual currency's creator is not known, only a presumed pseudonym, Satoshi Nakamoto. When a long inactive account moved 50 coins that were mined back in bitcoin's early days to a new wallet, social media lit up. According to experts, the person behind the moves was not Nakamoto because of something called the Patoshi pattern.
  • The latest U.S. Census Bureau Household Pulse Survey gives us a look at how Americans were coping with the pandemic between May 7 and May 12. 48% said their household has seen a loss in employment income since March 13, and 37% expect a loss of income in the next 4 weeks. Around 40% have delayed medical care and a little over 10% said they could not get enough food. See chart below (Week 1 is data collected between April 23 and May 5).
 
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Image courtesy: U.S. Census Bureau

 
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Image courtesy: IHS Markit

The Big Story

PMIs Bottomed Out?

Today we got May Flash PMI data from IHS Markit for the U.K. and the Eurozone, closely watched numbers as investors look for a turnaround as containment measures are eased. While things are improving, they are still very bad and a V-shaped recovery seems fanciful at this point. The pace of job cuts in both regions remains very high.

 

The U.K. Composite Output Index was at 28.9 in May, up from 13.8 in April and a two-month high, but still deep in contraction zone below the no-change level of 50. The rate of the decline may have slowed, but it was still the second-largest monthly fall since the survey began in 1998. While business activity continued to plunge, business confidence about the year ahead edged up slightly. "The U.K. looks set to see a frustratingly slow recovery, given the likely slower pace of opening up the economy relative to other countries which have seen fewer COVID-19 cases," said Chris Williamson, Chief Business Economist at IHS Markit.

 

Similarly, the Eurozone's 19 countries are also stuck in a downward spiral, but the speed of the fall is decreasing. Flash Eurozone PMI Composite Output Index rose from an all-time low of 13.6 in April to 30.5 in May, its highest since February. For comparison, it was 36.2 at the height of the financial crisis. IHS expects restrictions to stay in place until a vaccine is found, with weak demand for a prolonged period leading to more job cuts.

 

All eyes in the European Union are now on the Recovery Fund, a stimulus program being planned for member states to recover from the pandemic. France and Germany have proposed it should be worth $545 billion, distributed in the form of grants with some requirements on economic policies and reform agenda and paid for through the EU budget. However, there is some resistance. Other countries believe the money should be loaned to needy members. Italy is opposed to any austerity measures being imposed on it.

 
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Image courtesy: LPL Research

The Big Number: 10.3%

That's the average amount stocks tend to fall after an initial surge off of bear lows, according to LPL Research who crunched the numbers. The S&P 500 has climbed over 32% since March 23 as investors shrugged off fears of second waves and focused on stimulus efforts, reopening optimism and vaccine trial results. This is more than the 20.7% average initial rally off lows and is beaten only by the 43.4% rally in March 2009 that lasted 67 days.

 

"The S&P 500 rallied nearly 21% in 30 days after all major bear markets. But once those initial rallies ended, there was a correction of more than 10% on average," said the note. "Bottoms are a process, and as impressive as this run has been, we think the odds are quite high for some type of pullback or correction over the coming months." Downside risks include higher valuations, US-China relations, weakening technicals, and the historically troublesome summer months.

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