Markets last week |
Global equity markets fell sharply in a broad-based decline throughout the week, driven by four clear factors. Firstly, an acceleration of new COVID-19 cases in many parts of the word, but especially in the US and Europe, was accompanied by the re-imposition of regional lockdowns of varying severity. This increased worries over a potential return to a sharp recession, as experienced in the spring and early summer of this year. Secondly, bickering between the Democrat and Republican sides delayed passage of an expected bumper US stimulus package beyond next week’s presidential and congressional elections. As noted last week, Treasury Secretary Stephen Mnuchin and House of Representatives majority leader Nancy Pelosi were close to bridging the gap between their respective positions, but the Senate Republican leadership was in no mood to countenance a package of the envisaged size. Thirdly, evidence of tightening polls in key battleground states in those elections undermined prospects for a “clean-sweep” Democratic win that investors have hoped will release a jumbo fiscal stimulus in 2021. This tightening also increased worries that the result may be contested in the courts and thereby drag uncertainty on for weeks if not months. Finally, even as many of them produced better than expected results in the third quarter earnings season, investors sensed that valuations in the major technology titans had become stretched after very strong performance thus far in 2020, and consequently took profits. This sense was reinforced by appearances by the CEOs of Google, Facebook and Twitter before the Senate Commerce Committee to answer questions on their dominance of social media platforms, appearances that highlighted the potential threat of regulation to their business models. All this led to declines of 5.0% in US equities (when translated into sterling) and falls of 4.8% in the FTSE All Share in the UK, with a worse drop in Europe of 8.4%, as the area was undermined by a weakening euro and imposition of new lockdowns in France and Germany. Emerging market equities and the benchmark indices of China and Japan held up better, but still fell by around 3%, sustained somewhat by often less stretched valuations. Fixed interest markets were largely becalmed compared with the more volatile outcome from equities. UK 10-year bond yields fell very slightly to 0.26%, while 10-year US Treasury yields rose very slightly to 0.87%. German 10-year bund yields fell the most, to -0.63%, reflecting dire news on COVID-19 from the major European nations. In commodities, gold was very slightly lower, despite its usual safe-haven status, but crude oil plunged by over 10% on fears over the impact of lockdowns on demand. |
The week ahead |
Tuesday: US presidential and congressional elections
Our thoughts Although Joe Biden has maintained a consistent lead of between 8% and 10% in national polls in the run-up to the election, the picture in key battleground states is much tighter, and a small shift in momentum towards Donald Trump in the last few days could move these marginals into his camp in the electoral college. The worst outcome from a market perspective would be one where either side refused to accept the result and the choice of winner ended up in the courts.
This is what happened with the contested result in Florida in 2000 between Al Gore and George W Bush, with Bush only emerging the winner on 13 December, nearly six weeks after the election had taken place, when the state’s 29 Electoral College votes were allocated to him by a margin of just 537 out of over 5.8 million ballots cast. Less uncertainty surrounds the elections for the House of Representatives, where the Democrats are forecast to retain their majority. However, the Senate is up for grabs, with either party within reach of a majority. If the Republicans retain the upper house, then market expectations for a large fiscal stimulus may be disappointed. On the other hand, by the same measure fears over the impact of Democrat-promised tax increases would abate. A Democrat sweep of Congress and the presidency would empower significant changes to government spending and entail higher taxation. At the time of writing, this appears the most likely outcome, but not by much. Monday/Wednesday: US ISM Purchasing Managers’ surveys (manufacturing Monday, Services Wednesday)
Our thoughts After a strong recovery over the summer and early autumn, there is mounting evidence of slowing momentum in the US economic recovery (despite record quarter-on-quarter growth recorded last week, see below). It would be no surprise to see further evidence of this deceleration in both the manufacturing and the services purchasing managers’ surveys due out on Monday and Wednesday respectively. Consensus estimates for each remain relatively optimistic, with expectations of a small increase in the manufacturing survey to 55.6 compared with last month’s 55.5, while the services survey is expected to see a small decline from a robust 57.8 to 57.5.
Thursday: Central bank decisions from the Bank of England in the UK and from the Federal Reserve in the US
Our thoughts Although it is unlikely that policy rates will be changed, consensus expectations are for the Bank of England to increase the size of its asset purchase programme (QE) by another £100bn to £845bn in total. This is in the light of the relatively weak economic recovery in the UK compared with other major economies and the impact of the severe lockdown measures Prime Minister Johnson announced on Saturday.
In the US, the Fed has already clarified its policy to its long-term inflation target of 2% saying in late summer that it would operate a symmetrical approach – in other words that it would tolerate periods where inflation is above the target if these have been preceded by periods when it has been below. Since the Fed’s favoured measure of inflation (PCE, or Personal Consumption Expenditures) has been below target, with the exception of a few months in 2011, for the last dozen years, this gives the Fed plenty of latitude to maintain ultra-low interest rates well into the future. No changes to key policy rates are expected at this meeting, especially as it is so close to the general election. However, it is possible that some commentary may be made repeating Fed Chairman Jerome Powell’s view that the need for a substantial stimulus package is pressing, given the impasse in Congress between the two parties over the issue.
Friday: Non-Farm Payroll data is released in the US
Our thoughts Although by Friday markets may well be focused on an uncertain post-presidential election outcome, the monthly release of US non-farm payroll data will provide an important further clue as to the direction of travel for the US recovery. Market expectations are for a decline in the rate of additions to jobs from 661,000 in October to a still robust 600,000 in November.
Again, it would be no surprise were the result to be lower than this, given recent economic momentum, the withdrawal of emergency federal employment support measures in late summer and more recent evidence of a pick-up in long-term unemployment. Even so, an increase in jobs of anything like the expected magnitude should help push official headline unemployment down to around 7.7% from 7.9% last time, still almost twice the pre-COVID-19 level. |
The numbers for the week |
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Central banks/fiscal policy |
No more stimulus yet, but it’s coming
The ECB left rates unchanged at its meeting on Thursday, leaving its benchmark repo rate at -0.5%, as expected. However, ECB Governor Christine Lagarde hinted heavily at additional QE to be announced at the December meeting. Expectations are for an additional €500bn on top of the existing programme of €1.35trn. The combined amount would be more than all forecast euro-area government debt issuance in 2021.
In addition, Lagarde hinted at a possible further relaxation in Targeted Long-Term Repo Operations (TLTRO), a mechanism by which banks access funds at below official rates, to encourage lending into the economy. The last set of TLTROs were pitched at -1.0%. Finally, she also encouraged EU politicians to get a move on with unblocking the €750bn European Recovery Fund, which is tied up in regional squabbling at the moment.
Earlier in the week the Bank of Japan also left its main policy rate unchanged, and although it did not add further to liquidity, it also stressed its readiness to reopen the QE spigots if required. |
United States |
A powerful bounce back in activity in the third quarter, but still not fully recovered
GDP The coronavirus pandemic inflicted the deepest US recession since World War II, with GDP contracting at an annual rate of 31.4% in the second quarter. However, data out last week showed that in the subsequent three months the US saw a record bounce in activity, with an increase in 33.1% annualised GDP. This left the level of US GDP 2.9% lower than 12 months ago and 3.5% below where it was at the end of 2019.
Since the last quarter of 2019, information technology and computer equipment fixed investment is up by 13%, investment in consumer durables by 16% and residential fixed investment by 7%, but business fixed investment excluding IT is down by 23%, showing the pressures in the economy and echoing the way technology has led the equity market thus far in 2020.
In order to reach end-2019 levels by the end of 2021, the US needs to grow from here at a 3% annualised rate, which is above trend. 2% growth from here would only see end 2019 levels surpassed at the end of 2022.
Durable goods orders These showed a continued recovery, with an increase of 0.8% in September. However, the numbers are relatively historic and may not accurately reflect the current state of the economy, given the recent rise in COVID-19 cases.
The Conference Board Consumer Confidence survey The overall measure came in slightly lower than expectations, at 100.9 compared with consensus forecasts of 102. In parallel with the IFO survey in Germany (see below), current expectations were markedly better at 104.6 from 98.9, but future expectations were much lower at 98.4 against 102.9 last time. Clearly, rising COVID-19 caseloads are hurting consumer confidence in the US.
US Initial Jobless Claims Claims stayed relatively elevated at 787k, compared with 791k last week, but there is little sign that the second wave of COVID-19 is, as yet, damaging the jobs market further, although we may see some impacts in next week’s non-farm payroll numbers. |
United Kingdom |
A quiet week for UK data, as markets awaited this weekend’s confirmation of the renewed lockdown in England and the Bank of England Monetary Policy Committee meeting next week
UK M4 money supply Growth in M4 rose marginally to stand at an increase of 12.1% year-on-year, although money velocity – the speed at which it moves via transactions through the economy – remains depressed, as noted in the eurozone earlier in the week. This combination is likely over time to drive liquidity into financial assets.
The Lloyds Bank Business Barometer There was a sharp fall to -18 from -11, highlighting the challenges facing the UK economy as we enter various forms of lockdown across all four home nations.
Positive news for house prices The most positive piece of news in the UK came from the Nationwide House Price Survey. This rose to a record high, with an increase of 0.8% over the previous month and 5.8% compared with the same time last year. The housing market remains buoyed by government assistance from stamp duty relief, which lasts at least until March 2021, and from help-to-buy schemes in the new housing market. |
Europe |
Strong recently as evidenced by third quarter GDP numbers but looking less secure in the immediate future as the continent re-enters lockdown
GDP Friday saw the release of a slew of national third quarter GDP data. France led the way with an increase of 18.2% in annualised quarterly GDP, followed by Spain at 16.7%, Italy at 16.1% and Germany at 8.2%. The lower German number reflects its much greater earlier success in containing COVID-19, so its recovery was coming off a higher base than other European countries. In aggregate, EU GDP climbed 12.1% on this basis, although in all cases the level of activity remains lower in absolute terms than last year, and the roll-out of new lockdowns will have a severe effect on the relevant numbers for the final quarter of the year.
IFO survey The much-watched IFO purchasing managers’ survey in Germany came in below expectations at 92.7, compared with consensus of 93.2. There was a notable divergence between the current situation measure, which rose to 90.3 compared with last month’s 89.2, while the expectations component was much weaker at 95.0 versus 97.4 last time, as businesses took note of tightening restrictions on activity due to the combat against COVID-19.
Money supply Eurozone M3 money supply showed more strong growth, with a rise of 10.4% from the level a year ago. As in the UK, the velocity of money remains low, which means the natural tendency is for this increase in the volume of money to end up in financial assets over time.
Inflation and unemployment German inflation came in at -0.5% year-on-year, as expected, and EU CPI came in very weak as well. European measures of inflation remain far below the ECB’s targeted rate of 2%. Meanwhile, German unemployment dipped to 6.2% from 6.3%, although we note that unemployment is a lagging indicator and these figures do not reflect the lockdown that is starting now.
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China/India/Japan/Asia |
Little news from the Far East and emerging markets this week
Japanese Industrial Production In Japan, Industrial Production climbed month-on-month, and has now recovered to -9% year-on-year, from -13.8% at the last print in September. Exports are on a recovering trend and Japanese companies are benefitting from the relative strength of the Chinese economy. |
Oil/Commodities/Emerging Markets |
Crude oil collapses
The gold price scarcely moved over the week, ending at US$1,879/oz.
In stark contrast, crude oil collapsed by just over 10%. Brent crude closed the period at below US$37.46/barrel, having started the week at nearly US$42. Oil traders were spooked by the sharp increase in COVID-19 cases, fearing a repeat of the collapse in the crude price in spring, which saw it fall below US$20/barrel in mid-April. |
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