Weekly Market Review – July 26, 2020

The US stock market suffered the first negative week in four weeks amid volatile trading. The big tech companies led the decline. Escalating tensions with China, concerns about expensive valuations and uncertainties around the pandemic impacts on corporate profits rattled investors. 

On Tuesday, the Dow climbed 307 points, or 1.2%. The Nasdaq Composite dropped 0.5%. Shares of tech companies like Facebook, Apple, Microsoft, and Netflix were down 0.7%. Meanwhile Delta Airlines rose 1.7% and United Airlines rose 2.9%. Investors in airline companies are hopeful because on the same day, the European Commission agreed on a 750 billion euro stimulus package to help countries and sectors most affected by the coronavirus. 

Apple CEO Tim Cook will join chief executives from Amazon, Facebook, and Google in a hearing before the House Judiciary Committee as part of an antitrust investigation into major technology companies. The main issue is about Apple’s App Store, the only way to install apps on an iPhone. Software developers have alleged that Apple engages in anti-competitive behavior and business practices, such as taking a 30% cut of the sale of digital goods and requiring developers to use only the Apple payment system for digital purchases. 

On Thursday, stocks traded lower than earlier this week. The Dow dropped 0.6% and Nasdaq dripped 0.5%. Microsoft stock fell by around 2%, despite having a better than expected earnings report. Its revenue was $38 billion, up 13% since last year, and higher than the expected value of $36.4 billion. Microsoft’s transactional licensing was slowing and Linkedin was negatively impacted by the weak job market. Amazon dropped 1.5%, and Apple traded 1.3% lower. The number of jobless claims for this week was 1.416 million, the 18th week where claims were above 1 million. 

New Stimulus Package in Discussion

The Trump administration wants to block 25 billion dollars going towards the CDC for testing and contact tracing for a stimulus relief bill. This came after the administration had relied on overly optimistic models that the outbreak would peak in early spring, and the federal government shifted responsibility of dealing with the pandemic to the states. Republican senators, in a break with the administration, are trying to keep the money as part of the stimulus relief bill. 

The $600 per week unemployment checks are ending July 31st, affecting 25 million Americans. Congress is looking to pass a stimulus check. Currently, the national unemployment rate is over 11%, and expected to stay high through 2021.

Democrats have proposed to offer additional aid to jobless workers, send another direct payment to individuals, offer hazard pay to essential workers, give financial aid to state and local governments facing budget problems, and offer assistance to renters and homeowners as moratoriums on evictions and foreclosures start to expire. Republicans have proposed to have more tax incentives and bonuses that encourage people to return to work and school. Senate Majority Leader Mitch McConnell proposed these ideas as well as more direct payments, $105 billion to reopen schools, and funding for vaccine development, testing, and hospitals. Republicans later wanted to extend the benefits to $200 per week.

Tensions with China Are Rising

The UK suspended its extradition treaty with Hong Kong and extended the arms embargo that had been applied to mainland China to Hong Kong. The extradition treaty states that if a person in Hong Kong is suspected of a crime in the UK, then British authorities can ask them to hand them over to face justice in the UK, and vice versa. The UK will suspend the exportation of potentially lethal weaponry, its components, and ammunition to Hong Kong. These actions stem from British opposition to China’s new security law for Hong Kong, which restricts Hong Kong’s government autonomy. 

On Tuesday, there was a small fire in the courtyard of Houston’s Chinese consulate. Fire crews had to wait outside the building because of an international agreement that they could not enter without consent, and remained there until there were no confirmed threats to the occupants in and around the building. Interestingly, no smoke or flames were visible from the vantage point of the fire crews. There have been theories that the Chinese officials were burning documents. The fire occurred after the US arrested two Chinese spies who had been targeting US COVID-19 research.

On Wednesday, the US State Department ordered China to close its consulate in Houston. State Department spokesperson Morgan Ortagus said the decision was made to protect American’s intellectual property and private information, and to show that “Washington would not tolerate the People’s Republic of China’s violations of U.S. sovereignty and intimidation of our people, just as we have not tolerated the PRC’s unfair trade practices, theft of American jobs, and other egregious behavior.” China warned of firm countermeasures against the closing of the Chinese consulate in Houston. US-China relationships have been deteriorating ever since the coronavirus outbreak. On Friday, China ordered America to close their consulate in Chengdu in response. 

Economic News This Week

The Federal Reserve will meet on Tuesday and Wednesday. It is expected that the Fed will keep interest rates and quantitative easing programs intact. The second quarter GDP number will be released on Thursday. The market consensus is a 34.5% drop in GDP because of the lockdown, according to FactSet. 

Earnings Reports This Week

Investors seemed to be more concerned about the business reopening, new stimulus package and tensions with China. The solid reports from Netflix, Tesla and Microsoft did not generate much optimism last week. The earnings reports from Visa, Facebook, Apple, Amazon, Alphabet and Procter & Gamble may help determine the market direction this week.