The week that was:
US first-time jobless numbers for the week of July 11 came in at 1.3 million, down only 10,000 from the preceding week. The number has stubbornly held between 1.3 million and 1.4 million for weeks. This is a sign that the labour market recovery is stalling. The share of unemployment benefits as part of personal income has risen to 6 percent, which raises concerns about the impact of the federal benefit expiring at the end this month.
The Joint Ministerial Committee (JMMC) of OPEC+, which is tasked with oversight of compliance, confirmed that its 23 member nations would adhere to the schedule of cuts agreed at the April conference of ministers, who had agreed on a downward sloping trajectory of cuts from 9.7 million barrels per day (bpd) to 7.7 million bpd by the end of 2020 and to 5.8 million bpd by April 30 2021. The oil price initially rose, on OPEC+ making the case that the tapering was compensated by seasonal demand increases in KSA, Russia and beyond, and by Iraq, Nigeria and others compensating for their noncompliance during the second quarter. The latter will amount to more than 800,000 bpd in August and September. Later in the week the price fell slightly on fears of rising Covid-19 cases across the world, particularly in the western hemisphere.
China’s GDP grew 3.2 percent during the second quarter of 2020 compared to the previous year. This follows a GDP decline of 6.8 percent during the first quarter — the first shrinkage in decades.
The purchase of 20 percent of Reliance refining and petrochemicals by Aramco was delayed again due to the COVID-19 pandemic. Reliance chairman Mukesh Ambani assured investors the deal was still on. The transaction had been previously slowed by differences in valuation and structure.
In aviation, British Airways is retiring its entire Boeing 747 fleet with immediate effect in another sign that air travel will not rebound until later in 2023. Virgin Atlantic will resume passenger flights next week after Richard Branson secured a $1.5 billion rescue package.
Highlights from the earnings season:
Ericson reported 2 Q net income of 2.45 billion Swedish krona ($271 million) and a profit margin of 4.4 percent. Ericson is set to benefit from Huawei being eased out of the rollout of 5G infrastructure in many countries owing to US sanctions against China.
Daimler AG reported a 2Q preliminary EBIT loss of €1.68 billion ($1.92 billion) and an adjusted EBIT loss of €708 million, which is better than expected. The numbers showed that it had better sales in China and the US than in Europe. That matches the market observations of Volkswagen and BMW.
Electrolux reported 2Q net income of minus 141 million Swedish krona, which was better than expected and came in the face of a 16.6 percent decline in organic sales.
Luxury Group Richemont reported a 47 percent decrease in sales for the quarter ending in April with a net income of €1.99 billion, reflecting the impact of the pandemic on the luxury good sector.
The week was big for US banks because Wells Fargo, JP Morgan, Morgan Stanley, Citi, Bank of America and Goldman Sachs, reported second quarter earnings. Banks are a good litmus test of the economy. Across the board earnings were lower than the same quarter last year, but banks with strong investment banking / trading operations could compensate for weak performance in traditional banking and lending operations.
For Goldman Sachs, Morgan Stanley, JP Morgan, Citi and Bank of America trading gains increased between 35 and 93 percent, as federal stimulus packages provided liquidity and volatility increased trading volumes.
Morgan Stanley’s 2Q net income was $3.2 billion. Goldman Sachs, JP Morgan, Bank of America and Citigroup reported $2.42 billion, $4.7 billion, $3.5 billion and $1.3 billion net income respectively. Wells Fargo reported a loss of $2.4 billion.
Loan loss provisions dug into profits across the board. They had steadily increased since the outbreak of the pandemic and amounted to $35 billion for Wells Fargo, Citigroup, JP Morgan and Bank of America collectively. While the economy is recovering from its lows in April, we can expect insolvencies to pick up in the third quarter, having a direct impact on banks with large lending portfolios.
Where we go from here:
On Friday European leaders are gathering in Brussels to discuss the €750 billion proposed rescue package. German chancellor Angela Merkel and French president Emmanuel Macron played expectations down and Dutch prime minister Mark Rutte said a compromise was not close.
The controversy is between the frugal northern states of the Netherlands, Austria, Sweden and Denmark which oppose any mutualisation of debt; and the southern nations which are hardest hit by the pandemic, such as Italy, France and Spain. The former demand reform and the latter need funds to alleviate the economic pain caused by the pandemic. The EU will eventually come to an agreement, because its largest economy, Germany, effectively changed sides to support the package. The question is the timing of a consensus and the conditions attached. Observers hope for an agreement before the summer recess. Failure to reach an agreement could well endanger the existence of the union.
— 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.