Week in Review: Chinese Second Quarter GDP Rebounds

China’s GDP grew a better-than-expected 3.2% in the second quarter of this year, reversing a historic 6.8% contraction in the first quarter. Economists polled by Reuters expected China’s gross domestic product to have grown at 2.5% in the April to June quarter. With many firms still operating below capacity some analysts questioned the official growth figure.

In the U.S. stocks ended the week mostly higher on increased optimism on the progress of an effective coronavirus-vaccine.  Researchers around the world are racing to develop a vaccine against Covid-19, with more than 140 candidate vaccines now tracked by the World Health Organization (WHO). The front runners include, Moderna Therapeutics who announced on Tuesday that its novel messenger RNA vaccine had produced high levels of antibodies in all test participants in an initial safety trial, while on Wednesday, Oxford University researchers announced that their vaccine candidate, which is under development with AstraZeneca, had produced not only antibodies in participants, but also “killer” T-cells that may offer prolonged immunity.

Coronavirus cases continue to rise around the world with the biggest increases in the US, Brazil, India and South Africa. In the US, cases are surging in the states of California, Texas and Florida with reopening plans either paused or reversed increasing concerns that the hoped-for V-shaped economic recovery may be running into some headwinds.

Earnings season kicked-off in U.S. with several major banks reporting higher provisions and steep drops in profit over the quarter. JPMorgan Chase posted better-than-expected results, enjoying a surge in trading revenue that overcame losses in some of its other businesses while long-struggling Wells Fargo, reported a $2.4 billion loss and slashed its dividend to 10 cents from the previous 51 cents per share.

Most investors are expecting this to be one of the worst quarters for corporate profits in living memory. Earnings from the likes of Microsoft, Intel, American Express, Tesla and Twitter will take centre stage in the week ahead.

Investors are also closely watching the EU summit as leaders gathered in Brussels for a special summit to deliberate over a €750bn Covid-19 rescue package. Southern member states — Italy and Spain in particular — are in favour of the current proposal but they are opposed by the so-called "Frugal Four" — Austria, Denmark, Sweden, and the Netherlands — which want the amounts to be reduced and are wary of pooling debt with less solvent countries.

In a volatile trading week, China’s benchmark Shanghai Composite Index ended down 5.0% as Beijing continued to roll out stimulus measures to prop up the world’s second largest economy. Staying in the east Japanese stocks posted gains for the week with the Nikkei 225 Stock Average advancing (1.82%) and closing at 22,696.

In the U.S. the S&P 500 Index marked its third consecutive week of gains (+1.25%) and reached intraday levels not seen since the market sell-off began in late February while the Nasdaq Composite Index pulled back from its recent all-time highs ending the week in the red (-1.08%). European markets were generally stronger with the Eurostoxx 50 and the FTSE 100 gaining 2.1% and 3.2% respectively over the week.

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Market Moves of the Week

Locally, the Reserve Bank is expected to announce a further cut to the repo rate on Thursday. The median forecast among economists polled by Bloomberg is for the Bank to cut the repo rate by 25 basis points to a record low of 3.50%.

On Thursday, the department of public enterprises announced that it had secured the concurrence of Finance Minister Tito Mboweni to “mobilise funds” for the restart of SAA. It said that it projected that an amount of R10.1bn would be required for working capital and to settle outstanding obligations, including the payment of retrenchment packages to staff. This amount was not included in the supplementary budget tabled by Mboweni on June 24.

The Democratic Alliance (“DA”) lodged an urgent court application on Friday in a bid to stop the finance minister from using his emergency powers under the Public Finance Management Act to transfer funds to SAA. The DA wants the court to interdict any disbursement of funds, if they have not already been disbursed.

The rand was firmer on Friday, in line with its emerging-market peers, as hopes over a potential Covid-19 vaccine and more stimulus lifted investor risk appetite, despite a rising number of local infections. The JSE all share gained 0.89% to end the week on 55,911.80 points aided by strong gains in the resource sector (+3.97%).

Weekly (4)
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Chart of the Week

China reported that the country’s economy grew by 3.2% in the second quarter of the year, compared to a year ago. China’s first quarter GDP contracted by 6.8% in 2020 from a year ago as the world’s second largest economy took a huge hit from the coronavirus outbreak. This year, China made a rare decision not to set a GDP target due to uncertainties from the impact of the pandemic.

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