Investors still betting on massive money-printing, despite growing fears of second wave lock-downs in America, India and Brazil, and as Australian cases spike

Big disconnect: The S&P 500 closed up another 1.05 percent at 3,185 on Saturday morning New Zealand time and is now less than six percent below its early February record high of 3,380, despite the prospect of the worst global recession since World War Two and growing signs that Covid-19 is now out of control in America, India and Brazil.

Bangalore lockdown: Second waves are now crashing through states that re-opened too early, while some parts of the world’s largest economy are seeing exponential growth in cases and a resumed increase in deaths. Florida reported a record 15,000 cases overnight and US President Donald Trump wore a black mask for the first time during a visit to a medical centre. India’s case numbers rose to being the third highest in the world over the weekend with Bollywood star Amitabh Bachchan saying he was infected and authorities deciding to put Bangalore back into a 21 day lockdown from Tuesday night.

Watch Australia: Closer to home, Australia’s economy is also juddering with Melbourne going into a full lockdown last week and reporting its second-highest daily caseload of 273 on Sunday. There are 57 cases in hospital and 16 in intensive care. Meawhile, schools in Melbourne are to close again from July 20. Elsewhere, New South Wales said yesterday it was urgently trying to track 600 people linked to a fresh cluster in a pub in southwest Sydney. 

So why so relaxed? Investors have bet central banks have unlimited money-printing firepower to buy bonds and flood cash into asset markets to keep them high. They’ll get fresh updates on that bet through the week ahead, with the European Central Bank expected to confirm on Thursday it is going full-steam ahead with a plan to print €1.35 trillion to buy bonds. They will also look out for signs of weak US inflation on Tuesday and the Bank of Japan’s next money printing move on Wednesday. 

Done deal: Metlifecare has confirmed it has entered into a new scheme of arrangement with Swedish company EQT to buy all its shares for $6 each, a dollar less than the earlier deal EQT had previously withdrawn. However, only four of the company’s six directors are supporting the offer. The new price values Metlifecare at $1.28 billion, down from the $1.49 billion value of the earlier offer. Metlifecare’s largest shareholder, the New Zealand Superannuation Fund, has agreed to vote in favour of the scheme of arrangement.

No more animosity: Metlifecare and EQT have also agreed to discontinue all litigation and to settle all disputes related to the earlier offer with each party covering their own costs. Metlifecare had been trying to force EQT to go ahead with the original scheme. It seems Metlifecare investors also favour the deal over the risk of protracted litigation. However, Chair Kim Ellis is the holdout and is not recommending that shareholders vote in favour while director Carolyn Steele has abstained from making a recommendation, given her association with the Super Fund. A meeting to vote on the offer is expected to be held in late September. Metlifecare shares closed up 5c at $5.84.

Consumers spending again: Seasonally adjusted retail card spending jumped 16.3 percent in June compared to May according to Stats NZ. Core retail spending – which strips out expenditure on fuel and vehicles – was up 15.3 percent from May, when it climbed 72.6 percent from the locked-down April. Actual retail spending hit $5.7 billion in June, up 8 percent from a year earlier, and the highest level since January.

Food up, fuel down: The lift was led by spending on durable goods – furniture, hardware, appliances, and recreational goods – which rose $310 million or 24 percent from a year earlier. And at $1.6 billion, it was the highest it has been since December last year. Consumables, covering supermarkets, specialised foods, and liquor stores recorded the second-largest increase, up $205 million, or 11 percent, at $2.15 billion from June 2019. On the flip side, fuel spending was down 15 percent from the year-earlier month at $466 million while hospitality spending dropped 7.3 percent to $934 million.

Tax payments higher: Meanwhile, government accounts published last Friday showed that the tax take was $79 billion in the 11 months to May 31, $1.5 billion, or 1.9 percent, above the Budget forecast in May mainly due to higher than forecast GST revenue, which was not as adversely affected by lower economic activity as had been assumed.

Bank losses to rise: International ratings agency Standard & Poor’s is forecasting New Zealand banks’ credit losses will rise to about 12 times those in 2019 as a result of the coronavirus pandemic. However, the agency is confident that NZ banks have the headroom within their earnings to absorb the losses in conjunction with a significant contraction in interest income. S&P is forecasting NZ’s economy will contract by 5 percent in 2020 before bouncing back to 6 percent growth in 2021, supported by government and Reserve Bank stimulus measures.

Risks remain: The moratoriums on loan repayments the banks have offered will cushion the blow for many borrowers and “timely and coordinated monetary support from the central bank has alleviated bank funding and liquidity concerns, in our view,” S&P said. 

Assume the brace position: Although the S&P is still up, US investors are being warned to brace themselves for the worst earnings season in years. Analysts say it’s possible the stock market could shrug off the sharp profit decline, as long as companies see some signs of a recovery ahead. Earnings are expected to fall by 44 percent, the worst quarterly performance since the Great Recession when S&P 500 profits fell by 67 percent in the fourth quarter of 2008, according to market watchers. It is also expected to be the worst quarter of the pandemic crisis, revealing the extent of the earnings damage as the economy slumped more than 30 percent.

What to watch for: JPMorganBank of AmericaGoldman Sachs and Wells Fargo are among the major US financial firms reporting this week. The financial sector is expected to see profits decline by more than 50 percent according to analysts. Other highlights this week will include Pepsico, Johnson and Johnson, Abbott Labs and Netflix which has been one of the few companies to significantly benefit from the lockdown.

On the rise: Tesla CEO Elon Musk, aged 49, has overtaken US investor Warren Buffett, aged 89, to become the world’s seventh wealthiest person according to the Bloomberg ranking of the world’s billionaires. Musk’s fortune rose more than US$6 billion last Friday after Tesla’s stock surged almost 11 percent to a record $US1,544 per share. Its market value now stands at US$286.5 billion. With Musk owning 20 percent of Tesla’s stock, it makes his stake worth just under US$60 billion. Musk is also the primary shareholder of privately held SpaceX, as well as a privately held tunnelling company.

Tesla v Amazon: Buffett’s fortune fell last week after he donated nearly $3 billion worth of Berkshire Hathaway stock to charity — part of his plan to give away most of his wealth to philanthropic ventures. Tesla’s stock is up more than 500 percent over the past 12 months, exceeding the value of almost every company in the S&P 500. The electric car maker has also become the world’s most valuable auto company by a wide margin. Based on the pay package Tesla shareholders approved in 2018, Musk may well end up easing out to Amazon CEO Jeff Bezos to become the world’s richest person.

Europe’s bike frenzy: Europeans are flocking to purchase bikes at such a rate that manufacturers are unable to keep up. Many bike shops globally report selling out of stock almost as soon as new bikes are delivered, leaving shop floors empty and customers frustrated at being added to ever growing waiting lists. Bike manufacturers in western markets and the two biggest Asian producers, China and Taiwan, have struggled to meet the surging demand as the effects of the pandemic continue to resonate.

Two wheels beats four: In bike-loving France, online cycle sales are reported to have surged 350 percent in the month to May as the virus gripped Europe, according to new data from Decathlon, the French sporting goods chain which runs stores worldwide. It has reported running out of cheaper models leaving thousands of customers bikeless. While the company previously accepted part-exchanges, it is now buying second-hand bikes for repair and resale in an effort to satisfy customers. One bike shop owner said after 55 years in the business he had never seen anything like it.

Andrew Patterson is Newsroom's Markets Editor and has worked for decades as a financial journalist, radio presenter and editor with Australia's ABC, Radio Live and NBR.

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