Market Watch: Aug. 6

N.A. markets bounced back on Tuesday, however, as data showed that U.S. factory orders rose 1.5 per cent in June after a 2.3 per cent increase in May, beating economists’ expectations. By Tuesday’s close, the Dow added 278 points, while the Nasdaq and S&P rose 80 and 36 points, respectively. In Canada, the TSX jumped 78 points.

U.S. markets were mostly weak Wednesday as new economic data revealed that the private sector added fewer jobs than expected in July — just 330,000 — almost half the number forecast. Countering that data was news that U.S. service-sector activity rose at the fastest pace on record in July. The Institute for Supply Management’s PMI reached 64.1 last month, clearly in expansion territory. By Wednesday’s close, the Dow dropped more than 300 points, while the S&P and TSX surrendered 20 and 36, respectively. The TSX ended with a minor loss, despite a 4 per cent drop in the energy sector, as oil prices fell for a third consecutive day. The lone bright spot was the Nasdaq, which added 19.

Fresh data Thursday showed the U.S. trade deficit grew to $75.7 billion in June, more than economists had forecast, as Americans ramped up purchases from overseas. Meanwhile, initial jobless claims in the U.S. for the previous week fell slightly to 385,000—still nearly double the pre-pandemic average. Despite the economic news, U.S. stocks staged a broad-based rally Thursday, as financials, travel and technology names regained ground. In Canada, the TSX added 46.

Markets Gain Ground, Despite Surging Delta Variant

For the four trading days covered in this report, the Dow added 129 points to close at 35,064, the S&P 500 rose 34 points to settle at 4,429, while the tech-heavy Nasdaq jumped 223 points to close at 14,895. In Canada, the TSX climbed 87 points to end at 20,375.

Strategy

The relationship between fatalities and infections could result in a less severe impact from future variants than in earlier waves of the pandemic. The delta variant of COVID-19 has hit the U.K. leading to higher case levels across the country. However, in our view, the new wave of cases likely threatens to moderate the pace of recovery, not fundamentally change the overall trajectory.

First, vaccinations are, for the time being, breaking the relationship between cases and mortality. Figure 1 shows the relationship trending neatly since last summer, but the recent increases in infections have not led to the predicted rise in mortality.

Rising vaccine coverage, especially for vulnerable and elderly populations, means the relationship between case counts, hospitalizations, and mortality is changing. Further, the lowest vaccinations rates and the highest risk from the spread of the delta variant are concentrated in smaller regions that account for a smaller share of overall GDP. This is true in the U.S., and other countries, where metropolitan populations have a higher vaccination rate than rural locations.

We think the change in the relationship between infections and deaths and continued vaccine roll-out suggests the variants pose less risks. Still, their ultimate negative economic clout may be less impactful than earlier waves.

Figure 1: Cases are rising quickly in the U.K., but fatalities are staying relatively low

(Sources: Scotia Wealth Management, Bloomberg)

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by Scotia Wealth Management - The Zukiwsky Group

Market Watch: Aug. 6

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