The week that was:
Global COVID-19 cases have topped 19 million with no sign of the pandemic abating. The US, Brazil, and India have seen the largest number of infections.
Markets were torn between heightened US-China tensions, persistent virus cases in the US and elsewhere, and last week’s good results in tech earnings as well as positive mergers and acquisitions (M&A) news. The S&P moved within inches of an all-time high.
Gold exchange-traded funds (ETFs) have grown throughout the year. US financial services and bank holding company State Street’s gold ETF now owns more of the metal than the Bank of Japan or the Swiss National Bank.
ETFs make gold accessible. Some analysts consider the move toward gold ETFs to represent a “financialization of gold,” potentially leading to higher volatility. Others see the increased activity of the investment class in terms of adding transparency.
Oil reached a five-month high late on Wednesday with Brent shortly crossing the $46 per barrel threshold on the news that US crude inventories fell by more than 7 million barrels for the week ending July 31, the lowest since April. Imports of Saudi crude declined with 190,000 barrels per day to the second-lowest level on record.
Highlights from the earnings season:
Big oil reported over the last two weeks and the picture was not pretty as it reflected the worst quarter in the history of oil in terms of demand destruction and price deterioration.
Shell reported a second-quarter (Q2) loss of $18.4 billion on a post-tax impairment charge of $16.8 billion. Total reported and adjusted net income of $130 billion, representing a year-on-year decline for Q2 of 96 percent.
BP reported a Q2 loss of $16.85 billion and lowered its dividend for the first time since the Deepwater Horizon (oil spill in the Gulf of Mexico) incident. This move was widely anticipated as the company had surprised when it held the dividend constant in Q1.
Exxon reported a second quarterly loss in a row coming in at $1.1 billion. Chevron reported a loss of $8.3 billion for the same quarter and ConocoPhillips a loss of $944 million.
Earnings declined in the high double-digit percentile compared to Q2 2019 across the board. All companies adjusted the oil price assumption downward. Equinor, which had reported on July 24, was the most optimistic leaving the oil price outlook high.
The world’s two largest reinsurers also reported during the last two weeks. Insurance companies, particularly reinsurers, give a good snapshot on the state of the economy, because they are the ultimate custodians of risk as well as providing an outlook asset management.
Swiss Re reported a first-half-year (1H) loss of $1.1 billion wiping out the company’s Q1 profit of $953 million. On the positive side the world’s largest reinsurer expected the $2.5 billion worth of claims and reserves boost to represent the bulk of COVID-19-related losses.
Munich Re reported a 579 million-euro ($684 million) profit thanks to good performance of ERGO, its primary insurance arm. The company absorbed a 700 million-euro COVID-19-related loss with claims coming in lower than expected. However, the firm did not issue guidance for 2020 due to the uncertainties of the macroeconomic outlook because of the pandemic.
Allianz profits fell by 19 percent to $3.1 billion as the company was hit by the pandemic’s impact on the insurance market and the fact that active investment managers were squeezed by their passive rivals. The disappointing result came despite investment management company PIMCO ploughing 23 billion euros into the asset management arm.
Focus:
US President Donald Trump signed an executive order giving American companies 45 days to stop dealing with short-video messaging platform TikTok and its owner ByteDance, as well as with messaging platform WeChat. The ban did not extend to the latter’s owner Tencent. The news wiped $100 billion off the value of Chinese tech shares, Tencent plunging by 10 percent.
The background to the executive order is the US administration’s fears that the Chinese government could get access to the data of US citizens via the platforms. This represents a further ratcheting up of tensions between America and China, which go beyond trade wars.
This is highlighted by the White House supporting Microsoft’s acquisition of TikTok’s US business, giving rise to questions as to how much government involvement in M&A activities is proportional and adequate.
In the meantime, TikTok has given up on building its global headquarters in the US and plans to invest 420 million euros in Ireland to build its first European data center.
August 2 and 3 were the busiest days for M&A transactions since early March with a deal volume close to $40 billion. The highlights were: Siemens Healthineers will acquire Varian Medical Systems for $16 billion, combining cancer diagnostics and treatment. The Japanese owner of 7-Eleven agreed to buy Marathon Petroleum’s gas-station business for $21 billion to expand in the US. Google agreed to invest $450 million in home-security provider ADT.
Where we go from here:
Next Monday Saudi Aramco will announce its earnings.
The Black Lives Matter movement and social disparities highlighted by the pandemic put further emphasis on environmental, social, and governance (ESG) investment. Investors seem to favor ESG-compatible investments as they outperformed markets, particularly in Europe.
The number of US first-time unemployment claims were lower last week, coming in at 1.19 million. They still exceeded 1 million which they have done persistently since mid-March. On Friday morning US EDT time, the non-farm payroll unemployment rate for July came in better than expected at 10.2 percent against an expected 10.6 percent amid questions about the reliability of the data.
— Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources.
Twitter: @MeyerResources
