Strong Q2 earnings for ‘gang of four’

Major League Baseball may be struggling to get past the complications of playing matches during a pandemic, but big tech is suffering no such issues. The “gang of four”, Alphabet, Amazon, Apple and Facebook all hit match-winning home runs with the release of their Q2 earnings in after-hours trading. Of the four, only Alphabet suffered a sales drop, and even that was less than expected. The other three showed impressive gains and blew forecasts out of the water.

Unsurprisingly, that has also lifted the S&P 500 and Nasdaq in after-market trading, with the Nasdaq 100 up 2.35%. That has taken the edge of a torrid overnight Wall Street session, with markets nerves frazzled after a horrific US GDP print.

Once again, the y-axis on yet another data chart had to be redrawn in 2020, as US GDP shrunk 32.90% in Q2. The number itself was slightly better than consensus but gave markets a slap of reality across the face. As a known unknown, stock markets only wobbled, but mostly held their own, but oil packed up its bags and went home early. Over in currency markets, the US dollar sell-off continued as the GDP data confirms the FOMC outlook of lower for longer on the rates front.

If nothing else, it emphasised just how many torpedoes have struck the real economy below the waterline. The real economy is energy’s natural habitat, and it is no surprise prices sank overnight. I will note, though, that a falling around 2.0% isn’t that bad a result. Equities live in their own v-shaped universe and have been in a parallel reality since mid-March. Thus, the modest fall-out was unsurprising as the FOMO gnomes can easily say the next quarter will be better, and it’s all going to plan. On this point, they are probably correct.

The GDP data has knocked negotiations over the next round of fiscal stimulus off the front pages. With all the noise surrounding an agreement between the White House and Senate Republicans, two salient points have been overlooked. The Senate package is a paycheck cut, and not a paycheck protection package. That’s not very stimulating in my mind.

Secondly, appropriation bills must be originated in the House of Representatives, and the Democrats control that. Both sides appear to be far distant, by my rough calculations, three trillion versus one trillion dollars. Although a lack of agreement is a definite risk factor that may come back to bite markets if no deal is reached, I still believe that with an election so close, some sort of acceptable deal by both sides will be cobbled together. Neither party wants to be labeled the one that initiated the double-dip recession.

Despite a slew of holidays across Asia muting trading volumes today, with Singapore, Indonesia, Malaysia and the Philippines all away, the data calendar has been quite busy for the region. Australian PPI underperformed, emphasising that deflation, and not inflation, is the enemy at the moment. South Korean Industrial and Manufacturing Production were both negative, but only modestly so for June. What is important is that both made massive gains over May’s numbers, implying a slow, but steady recovery is on track. Even in Japan, June Industrial Production managed to show a MoM gain.

By far and away the most important, though, was China Manufacturing and Non-Manufacturing PMI’s for July. Manufacturing crept higher to 51.1, while Non-Manufacturing fell 0.2 to 54.2. Most importantly, both remain comfortably in expansionary territory.

The data shows that Asia’s recovery remains on track, albeit unevenly. Combined with the big-tech results this morning, that should combine to limit the fall-out from the fiscal stalemate in Washington DC and the nightmare US GDP collapse.

Although Europe posts an avalanche of retail sales and GDP data today, it will be the US Personal Income and Spending data for June that will hold the market’s attention. Given the acceleration of Covid-19 across the United States in July, the June data has become somewhat irrelevant. Wall Street’s focus will remain fixated on the virus-proof business models of US technology companies. Unless PCE data fits the herd’s narrative, it will be quickly dismissed.