Markets last week |
The biggest market news last week was President Trump and his wife catching COVID-19. It’s not yet clear whether this will hurt his re-election chances, as he cannot campaign in person, or help him with a sympathy vote. Before this event, the betting odds had spiked up for Biden after the debate on Tuesday, which was generally seen as a win for the challenger over the incumbent. Markets flip-flopped all week long on political events but also, mostly, on the chances of a fiscal stimulus deal in the US. The Democrats made another proposal for a further support package of US$2.2trn but in fact it’s a rehash of the previous one. Treasury Secretary Steven Mnuchin was quoted a few times, so the rumour was that things were making progress, but we don’t know yet whether there will be a deal between Republicans and Democrats. President Trump being in hospital cuts the chances of success, as he is more determined than his party to achieve this fiscal extension. Sterling has been rallying on hopes of a deal between the UK and the EU, helped by Saturday’s phone call between Prime Minister Boris Johnson and European Commission President Ursula von der Leyen. Part of it is the dollar rally exhausting itself, but the pound has picked up vs. the euro too. The US market has underperformed other equities during September, the worst month since December 2018 relative to other stock markets. At the end of the week, the best equity market was the FTSE 250 whereas Japanese shares fared worst. Government bond yields rose in the UK and the US. Oil prices fell 6-8% but gold rallied 2%. As we are now less than one month away from the US presidential election, there is no doubt that news on the political front, and particularly on President Trump’s health situation, will dominate markets. |
The week ahead |
Monday: Eurozone Sentix Investor Confidence survey Our thoughts: Europe has stalled after a sharp recovery, in part due to a second wave of COVID-19 infections in many countries, which has hampered the services sector, despite the sharp manufacturing bounce. The Sentix survey polls 4,500 private and institutional investors and reflects their confidence levels. The last reading was -8.0. The survey bottomed at -43 this year, was positive before COVID-19 at +7.6 and peaked at 31 in 2017-2018. If the survey moves back closer to positive territory, it would be a sign that confidence looks through the current second wave issues. Monday: US Markit Services PMI and ISM Services Index Our thoughts: both Markit and ISM delivered a strong manufacturing survey last week, but services is where the problems currently lie, as the rising virus toll stops hospitality, high street retail and travel and leisure activities. These polls will be crucial to gauge consumer confidence beyond the basic confidence surveys. Of the two firms, ISM tends to be the more volatile and hence the one giving better indications in the current environment. The last readings were 56.9 for ISM and 54.6 for Markit. Both surveys reached a high of 61 during the last cycle, so simply keeping the existing levels would be very good for consumers. Wednesday: Chinese foreign exchange reserves Our thoughts: China has by far the largest foreign exchange reserves in the world, above US$3.1trn. These reserves are replenished with net export proceeds. With the COVID-19 crisis and the stated effort by many countries to repatriate their supply chains, it will be important to watch whether foreign trade is still thriving. Chinese foreign exchange reserves will be a good gauge of that trend. They also will give good guidance on the relative strength (or weakness) of the US dollar. This year the Chinese currency, the Renminbi, has been one of the strongest in the world.
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The numbers for the week |
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Central banks/fiscal policy |
ECB to follow Fed in symmetric inflation policy In the US, the gap between the Democrats and Republicans on the potential stimulus package has not been bridged yet, which has dented confidence during the week. This may be further complicated by Trump’s illness, as he is more determined on this deal than the Senate Republicans. In Europe, European Central Bank (ECB) President Christine Lagarde made clear that she regards deflation, not inflation, as the main monetary risk, and opened the door to a symmetric inflation target going forward, following the lead of the US Federal Reserve (Fed). It therefore seems the ECB’s policy stance is only going to get more accommodative. It was announced that excess cash in the eurozone was a record €3trn.
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United States |
Soaring surveys but employment has stopped growing Housing and autos: the Case-Shiller city price index increased from 4.35% to 4.78%, although this is a July reading. Mortgage application loans for purchase are at the highest since before the global financial crisis. Pending home sales were up 8.8% in August. Total vehicle sales, as published by Wards, were quite buoyant, rising from 15.2 million to 16.3 million annualised. The pre-COVID-19 number was 17 million, so we are quite close to normal. Surveys: the Conference Board consumer confidence survey soared beyond expectations. The gauge rose from 86.3 to 101.8 with both the current situation and expectations rising equally strongly. The current situation is way below pre-COVID-19 levels but the expectations are close. The Chicago MNI surged to 62.4. close to the peak of the cycle in 2017-2018 and way above pre-COVID-19. The Institute for Supply Management (ISM) manufacturing PMI fell slightly to 55.4 but the underlying components were solid: new orders at 60.2, production at 61, employment almost reached 50. Prices at 62.8 were positive for pricing power. Backlog and new export orders were also strong. Employment: initial jobless claims fell from 873K to 837K and continuing claims fell almost 1 million to 11.8 million. Personal income fell 2.7% in August but personal spending is still positive, rising 1.0% vs. 1.5% the previous month. Non-farm payrolls for September disappointed, with only 661K jobs created during the month vs. 1489K the previous month. Private payrolls were strong, including manufacturing, but local government education jobs fell sharply. The unemployment rate fell to 7.9% from 8.4% and the underemployment rate to 12.8% from 14.2% but the participation rate fell from 61.7% to 61.4%, which shows people leaving the labour force. Inflation: the core Personal Consumption Expenditures (PCE) inflation reading unexpectedly rose from 1.4% to 1.6%. This is the US Federal Reserve’s main inflation gauge, which they hope will rise above 2%. |
United Kingdom |
Housing doing better than the rest of the economy Housing: mortgage approvals surged to the highest level in 13 years, at 84.7K in August. There was another good house price number with the Nationwide house price index up 0.9% in September and 5% YoY. Money supply: M4 continued to be strong but the high levels have dropped from 17.4% to 7.0% for the last three months annualised (August reading). Surveys: the Lloyds business barometer improved marginally from -14 to -11. The BRC shop price index fell 1.6% year-on-year in September, unchanged from the August. The Markit manufacturing PMI was almost unchanged at 54.1 vs. 54.3. |
Europe |
Services still lagging manufacturing Surveys: in the eurozone, economic confidence improved from 87.5 to 91.1, but other gauges were less buoyant: industrial confidence from -12.8 to -11.1, services confidence from -17.2 to -11.1 and consumer confidence stagnant at -13.9. The eurozone manufacturing PMI was unchanged at 53.7, with Germany still the leading country. Jobs: unemployment fell in Germany from 6.4% to 6.3%. Eurozone unemployment edged up from 8.0% to 8.1%.
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China/India/Japan/Asia |
China firing on all cylinders China: the official manufacturing PMI rose from 51.0 to 51.5 and the non-manufacturing PMI from 55.2 to 55.9, both above estimates. Japan: the jobless rate rose from 2.9% to 3.0%, a 3-year high. Many Japanese economic data points (Tankan business survey, machine tool orders, manufacturing PMI) showed a tiny level of improvement. The Tokyo Stock Exchange was closed down for the whole of Thursday due to a hardware malfunction. |
Oil/Commodities/Emerging Markets |
Oil prices collapsed after the Trump-Biden debate on Tuesday and have not recovered since. The global Brent grade fell below US$40. The supply-demand balance in crude is still not conducive to higher prices.
Gold rallied throughout the week and at some point topped US$1,900 again. |
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