“The S&P Closed at Record High…”

The S&P 500 closed at record high on Tuesday rebounding from huge losses triggered by the coronavirus pandemic and resulting in a quick recovery in the index’s history.  Trillions of dollars in fiscal and monetary stimulus filled Wall Street pushing yield-seeking investors into equities. Consumer discretion rose the most among major S&P sectors amid strength in Amazon while technology stocks provided another major support to the benchmark index. Growth related stocks have been viewed as the most reliable to rise out of the crisis. The S&P record, Wall Street’s most closely followed index, entered a bull market after hitting its pandemic low on 23 March. Since then it surged about 55 percent. Meanwhile on Thursday the S&P 500 and the DOW slipped further, after an unexpected rise in the weekly jobless claims climbed back above the 1 million mark last week. The benchmark index retreated from a record level a day earlier after minutes from the Fed’s latest policy meeting showed the labour market’s rebound in May and June had likely slowed and that policymakers will stick with aggressive stimulus measures for a much longer period.   

Jobless Claims Climb

Weekly jobless claims rose unexpectedly back above the 1 million mark last week, supporting the Federal Reserve’s view of a difficult road to economic recovery. The number of Americans filing for a new claim for unemployment benefits rose to 1.106 million in the week ending 15th August after slipping below the 1 million level for the first time since the start of the pandemic in the prior week. 

Account of the 16th July Policy Meeting

European Central Bank policymakers last month discussed the extent of their flexibility in conducting emergency bond purchases, with some cautioning against a further increase in buying, showed the official account of their July meeting on Thursday. Last month the ECB left the policy unchanged and provided a slightly more optimistic view on growth but said it is likely to use up all of its already approved stimulus to tackle the economic collapse. The account of the meeting suggests that some policymakers are not keen for another increase in the ECB’s Eur 1.35 trillion Pandemic Emergency Purchase Programme (PEPP) and even see room for the bank to hold back some. The account of the 16 July policy meeting published by the ECB on Thursday said, “the argument was also made that the flexibility of the PEPP suggested that the net purchase envelope should be considered a ceiling rather than a target.” “The point was made that incoming data had surprised on the upside and some of the downside risks surrounding the outlook had receded, increasing the possibility that the envelope might not have to be deployed fully.” With the eurozone economy expected to shrink by around a tenth this year because of the coronavirus pandemic, the ECB is buying record amounts of debt to help governments cope with the extra spending. Economic data over the summer is suggesting that a recovery is well underway and could be faster than expected, but the resurgence in the numbers are raising fears that further restrictive measures may be needed to contain the pandemic. Meanwhile, some government subsidy schemes aimed at supporting jobs are due to run out over the next few months, suggesting that unemployment is now artificially low and will tick higher, putting a strain on the recovery. The next ECB meeting will take place on 10th September.   

US and China

US President Donald Trump on Monday promised tax credits for firms who relocate manufacturing facilities to the United States from China. The Trump administration also stated that it will further tighten restrictions on Chinese telecommunications firm Huawei. The US Commerce Department actions extend restrictions announced in May aimed at preventing the Chinese telecommunications giant from obtaining semiconductors without a special license, including chips made by foreign firms that have been developed or produced with US software or technology.  Huawei did not immediately comment. Existing U.S. restrictions have had a heavy impact on Huawei and its suppliers. The restrictions announced in May do not fully take effect until Sept. 14. China is living up to its end of the trade deal that the US and China signed in January according to U.S. President Donald Trump even though the nation has fallen short so far of promised purchases of U.S. products. On Tuesday, White House Chief of Staff Mark Meadows told reporters that no new high-level trade talks have been scheduled between the US and China but the two sides remain in touch about implementing a Phase 1 deal. Earlier US President Trump told reporters that he had postponed a review, that was to be carried out on 15th August, of the trade agreement signed with China in January given his frustration over Beijing’s handling of the coronavirus pandemic. He praised the record purchases by Beijing of US farm products. China’s imports of US farm and manufactured goods, energy and services are well behind the pace needed to meet a first-year target increase of $77 billion over 2017 purchases. But its purchases have increased as China’s economy recovers from the lockdowns. 

S&P warns of rising Risk to China’s Recovery

Rating agency S&P Global warned on Tuesday that China’s economic recovery from the pandemic could be at risk as the combination of rising interest rates and slowing inflation pushes real rates higher. According to S&P economists Shaun Roache and Vishrut Rana, an unbalanced recovery, weak private demand and excessive market optimism have together driven real rates up, increasing debt-servicing burdens even as financial conditions tighten. Robust industrial production and surging exports have contributed to hopes for a sustained recovery in the world’s second-largest economy. They further added that these have relied on “extraordinary policy support” and that consumer activity, the service sector and private firms were lagging. Also, although there was a pickup in headline consumer inflation figures, core inflation remains persistently low, rising 0.5 percent in July and producer prices have continued to drop. The People’s Bank of China (PBOC) has avoided engaging in broad easing measure to tackle the economic effects of the pandemic. 

Inflation in the UK

Annual consumer price inflation climbed 1 percent in July from 0.6 percent in June, said the Office for National Statistics. It climbed unexpectedly to its highest rate since March as clothing stores did not turn to the usual summer discounts as they reopened after the lockdown. Clothing and footwear prices were the biggest contributor to the rise in inflation according to the ONS. Furthermore, the ONS said that higher petrol prices and greater costs for haircuts, dentistry and physiotherapy also contributed to higher inflation.  Core inflation that excludes volatile energy, food, alcohol and tobacco prices rose to its highest in a year at 1.8 percent from June’s 1.4 percent. The ONS said that July’s inflation number was based on near-complete coverage of its standard basket of goods and services.   


Gold prices on Monday climbed with further impetus from Warren Buffett’s Berkshire Hathaway buying a stake in major gold minor Barrick Gold Corp.  Gold prices climbed on Tuesday on the back of a weaker dollar, however the gains were capped by a rally in US equities and signs of a recovery in global economic activity.  Spot gold climbed 0.1 percent to $1,987.51 per ounce. On Thursday spot gold rose 0.82 percent to $1,945.43 per ounce recovering from a 3.6 percent tumble on Wednesday as a cautious mood boosted demand for safer assets. 


Oil prices settled higher on Monday as OPEC+ producers almost fully complied in July with their global production cut. US officials said China is in compliance with the first phase of the trade deal. Brent crude settled 1.3 percent to $45.87 a barrel and US West Texas Intermediate crude climbed 2.1 percent to $42.41 a barrel. On Wednesday OPEC and its allies, known as OPEC+ said that the pace of the oil market recovery appeared to be slower than anticipated with growing risks of a prolonged second wave of the pandemic. Oil prices dropped on Thursday amid concerns over demand and the cautious views from OPEC+ producers and the US Federal Reserve regarding economic recovery from the coronavirus pandemic. Brent Crude was 1 percent down at $44.91 a barrel while West Texas Intermediate (WTI) US oil dropped 1 percent to $42.50 a barrel. Oil prices have been trading in a range since mid-June with Brent trading at $40 to $46 per barrel and WTI between $37 and $43.   

FED Minutes

The FED minutes were vague merely saying a number of committee members thought it would be helpful to make a revised statement on its policy strategy at some point, without providing details or timing. Several Federal Reserve policymakers say that the US Central Bank needs to ease monetary policy further to help nurse the economy through the coronavirus pandemic, showed the minutes from  last month’s policy meeting. The FED has already cut interest rates to zero and bought trillions of dollars of bonds in response to the economic crisis spurred by the virus.  These actions have boosted jobs and spending. According to the readout of the 28-29 July policy meeting, the members of the rate-setting Federal Open Market Committee saw the rebound in employment already slowing and additional “substantial improvement” depending on a “broad and sustained” reopening of business activity. The minutes from the meeting further said that, “Noting the increase in uncertainty about the economic outlook over the intermeeting period, several participants suggested that additional accommodation could be required to promote economic recovery and return inflation to the Committee’s 2 percent objective.  Policymakers further discussed a range of possible approaches that could be appropriate “at some point” including promising to keep interest rates low until certain economic benchmarks are met or until a particular future date. The minutes also showed that policymakers were nearing agreement on changes to the FED’s policy framework including its periodic “Statement of Longer-run Goals and Monetary Policy Strategy,” that could result in the US central bank sticking with aggressive stimulus measures far longer than previous wording. 

Market Wrap

European shares dropped on Monday as investors focused on the economic risks from the increase in the coronavirus cases in the region. The pan-European STOXX 600 index dropped with travel stocks continuing to slide after the UK added France and other countries to its quarantine list last week. European miners climbed 0.9 percent while Shanghai markets were boosted after the central bank injected fresh funds in the financial system.  Markets seemed to be holding a pattern ahead of the August business activity data later in the week, that could put light on the economic recovery, while the US Federal Reserve Policy minutes were also due on Wednesday. London FTSE 100 climbed for the first time in three sessions on Monday amid higher commodity prices such as mining stocks. The mid-cap FSTE 250 however dropped due to pressure from travel and leisure stocks.  Meanwhile US Treasury yields fell on Monday, retreating from last week’s high levels as the market awaited fresh stimulus to overcome the fallout from the coronavirus pandemic. The benchmark 10-year yield was down 2.6 basis points at 0.6833 percent. A closely watched part of the US Treasury yield curve that measures the gap between yields on two-and 10-year Treasury notes which is viewed as an indicator of economic expectations, stood at 53 basis points, about 3 basis points lower than Friday’s close. On Tuesday European shares pared losses as travel stocks rebounded however the increased tensions between the US and China weighed on sentiment. Meanwhile other defensive stocks that are considered more stable in times of economic uncertainty, such as real estate, telecoms and utilities, climbed more than 04 percent. Investors’ mood was cautious after the Trump administration’s plan to tighten curbs on China’s Huawei Technologies ratcheted up tensions with Beijing. Asian shares made cautious gains on Tuesday as the increase from Wall Street’s tech-fuelled rally was checked as investor’s showed concerns about Sino-US tensions. On Wednesday European stocks slipped failing to be influenced by the record gains reached by the S&P 500 the day before, reflecting investors’ concerns over resurgence in coronavirus cases. The pan-European STOXX 600 index dropped with utilities, mining, oil and gas lead the losses. The Dow Jones Industrial Average fell 0.24 percent, the S&P 500 gained 0.23 percent and the NASDAQ Composite added 0.73 percent to 11,210.84. Adding further to market optimism is data on Tuesday that showed US homebuilding accelerated by the most in nearly four years in July in the latest sign that the housing sector is emerging as one of the few areas of strength in the economy.  Asian equities and US futures fell on Thursday amid the cautious view of the economy by the US Federal Reserve, tensions with China and the resurgence of infections. Market Sentiment had been bullish up until the Fed policymakers’ comments that highlighted uncertainties over the US recovery, with the S&P 500 and the NASDAQ hitting an all-time high driven by Apple Inc. Apple’s shares climbed 1.4 percent to make it the first publicly listed US company to reach the $2 trillion in market capitalisation, while strong results from retailers Target and Lowe also lifted sentiment. MSCI broadest index of Asia-Pacific shares outside Japan dropped 1.79 percent, the biggest decline in five weeks. US stock futures dropped 0.55 percent.  Shares in China dropped 1.28 percent due to dwindling expectations for additional monetary easing after the People’s Bank of China kept a benchmark lending rate unchanged on Thursday. Japanese stocks dropped 1.06 percent whilst South Korean Stocks tumbled 3.26 percent, the biggest daily decline since 15 June.  Meanwhile, Euro Stoxx 50 futures were down 1.36 percent, German DAX futures dropped 1.31 percent and the FTSE futures was off 1.27 percent. Benchmark German yields on Thursday held close to the one-week lows reached the day before.  The German 10-year Bund yield was last steady at -.46 percent after falling to -.49 percent the day before, whilst Italian 10-year BTP yields were flat at 0.98 percent. 

Currency Roundup

The US Dollar dropped against a basket of major currencies for a fifth consecutive trading day on Tuesday, approaching its lowest level in two years amid pressure from low yields and not so promising economic data in the US. The dollar has experienced many years of gains, however the coronavirus pandemic has hit the world’s largest economy hard, leaving investors looking for alternative growth opportunities. The Chinese yuan firmed to 6.9192 per dollar in the offshore trading, a level not seen since 9 March, despite the Trump’s administration flagging further tightening of restrictions against the Chinese tech maker Huawei. Amongst the G10 currencies, the kiwi was the laggard due to expected future monetary easing that weighed on the currency and as New Zealand remained under lockdown. The yuan hit a more than five month high against the easing dollar on Tuesday as investors were relieved that the US-China Phase 1 trade deal was still on track. A review of the agreement over the weekend was postponed to give China more time to ramp up its purchases of US goods. Meanwhile as Britain and the EU restart talks to try to agree a trade deal before the end of 2020, traders are expecting a new round of volatility for the pound that could end the currency’s recent higher levels.  Since 29 June sterling is up 6.4 percent against the dollar trading close to $1.31 despite the risk that Britain would move away from the EU without a trade agreement in place. Against the euro the pound has performed more solidly, but a 1 percent gain since June is still note-worthy considering the deadlock between the UK and the EU. Many fear Britain will leave without a deal, significantly damaging the economy. Sterling edged lower on Monday against a stronger dollar,  trading at $1.3075 on the day and was distant from the eight-month high of $1.3276 it touched on Tuesday. Against the euro sterling dropped 0.1 percent at 90.44 pence. On Thursday the dollar climbed pulling away from a two-year trough after less dovish than expected minutes from last month’s US FED meeting. The increase in the dollar was the biggest single-day rise since June following the release of the FED minutes. 

Malta:  Inflation

A news release from the National Statistics Office showed that in July 2020 the annual inflation rate, measured by the Harmonised Index of Consumer Prices, was 0.7 per cent, compared to 1.0 per cent in June. The twelve-month moving average rate for July stood at 1.2 per cent. The largest upward impact on annual inflation was measured in the Food and Non-Alcoholic Beverages Index (+0.39 percentage points) due to higher prices of milk. The second and third largest were in the Restaurants and Hotels Index (+0.28 percentage points) and Miscellaneous Goods and Services Index (+0.16 percentage points) due to price increases in restaurants (including cafés, etc) and hairdressing services. The largest downward impacts were recorded in the Transport Index (-0.20 percentage points), the Education Index (-0.20 percentage points) and the Furnishings, Household Equipment and Routine Household Maintenance Index (-0.07 percentage points), mainly reflecting lower prices of sea transport, private school fees and furniture.

Compared to other Euro area countries, the annual rate of change registered by the Maltese HICP All-Items Index (in June) was 1.0 per cent. This was 0.7 percentage points higher than the 0.3 per cent registered for the euro area as a whole. The annual rate of change for the Maltese All-Items HICP (excluding energy and unprocessed food) was 0.8 per cent, 0.3 percentage points lower than the 1.1 per cent registered for the euro area.

Antonella Mercieca

Client Relationship Manager


Reuters, https://nso.gov.mt/


August 21st, 2020

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