Markets Last Week
In a week dominated by the US election and the disputed counting afterwards, markets reacted very strongly to the expectation that the US Senate would likely stay in Republican hands even if Joe Biden becomes President. Although neither outcome was confirmed during the week, the tallying of postal ballots continued, together with law suits in many states and demands for a recount. Many of the trading patterns seen prior to the election were unwound from Wednesday on. Technology and healthcare rebounded sharply whereas financials and many industrials corrected as hope waned of massive fiscal spending by the US Congress.
The weekend brought news of Biden’s victory (despite the refusal by President Trump to concede defeat amid unsubstantiated allegations of vote-rigging) and confirmation that the Senate shape will be decided by two run-off ballots in January in the state of Georgia. Although unlikely, there is a small possibility that both could be won by the Democratic candidate and hand a wafer-thin majority in the Senate to President-Elect Biden thanks to the tie-breaking vote of Vice-President-Elect Harris. Investors are considering this a very long shot though.
The prospect of a split government is seen favourably by markets, which had their best week since April, due to the inability of the incoming President to raise taxes. In sterling terms the strongest market last week was Europe, which is seen as benefiting from a Biden administration. Sterling and the euro rose sharply as the US dollar gave ground across the board. Gold bounced back to US$1,950 and oil also recovered to near US$40 for Brent. Government bond yields rallied too after the big drop on Wednesday, ending very close to where they started.
On the healthcare side, the US became the first country to top 100,000 new COVID-19 infections in a single day on Thursday. It is not clear what steps will be taken by President-Elect Biden when he takes office to deal with the pandemic but he made it clear that it was on top of his priority list.
The Week Ahead
Tuesday: US NFIB Small Business Optimism Index
Our thoughts
800 companies that are members of the National Federation of Independent Business (NFIB) are surveyed every month in a series that has been going on since 1974. The series is quite volatile and peaked at the end of August 2018 ahead of the difficult Q4 for the economy and markets. It soared before and after Trump’s election in 2016 so it will be interesting to see how it is reacting to the election results this time. The latest level was almost level-pegging with the pre-COVID-19 reading in a sign that many businesses are back to normal. Small businesses have been indicating a willingness to hire in excess of the pre-COVID-19 levels, so there is some hope that the Optimism Index may also reflect that.
Wednesday: Japanese machine tool orders
Our thoughts
Global manufacturing has been crucial to the current recovery from the lockdowns and early signs of change in that activity are vital to pick up. Japanese machine tools are used worldwide in industrial activity and provide an early warning sign of inflection points in manufacturing levels. The orders peaked at the end of 2017 and bottomed in May of this year, bouncing back quite sharply since. Interestingly, the last level was much higher than the pre-COVID-19 reading, as there was pent-up demand for industrial supplies following the lockdown, whether in China or Germany. The next level could be a high watermark for the last couple of years.
Thursday: UK industrial production, construction output and index of services for September
Our thoughts
Every month, the UK publishes detailed activity statistics for the various different parts of the economy: industry, construction and services. Although the data are published quite late (this week we will be getting September numbers), the readings are quite useful in understanding how various sectors are working. The UK has been relying on a strong construction sector against a backdrop of weak services, with manufacturing doing well but not quite in line with other industrial countries. September could be an interesting month, after the Eat Out To Help Out scheme expired, to see if services have picked up some of the slack.
The numbers for the week
| Equity indices (price only) | |||||
| In local currency | In sterling | ||||
| Index | Last week | YTD | Last week | YTD | |
| UK | |||||
| FTSE 100 | 6.0% | -21.6% | 6.0% | -21.6% | |
| FTSE 250 | 4.1% | -18.1% | 4.1% | -18.1% | |
| FTSE All-Share | 5.6% | -20.7% | 5.6% | -20.7% | |
| US | |||||
| US Equities | 7.3% | 8.6% | 5.6% | 9.5% | |
| Europe | |||||
| European equities | 8.3% | -14.4% | 8.7% | -8.7% | |
| Asia | |||||
| Japanese equities | 5.0% | -3.7% | 4.7% | 1.3% | |
| Hong Kong equities | 6.7% | -8.8% | 4.9% | -7.6% | |
| Emerging Markets | |||||
| Emerging market equities | 6.6% | 5.5% | 4.9% | 6.4% | |
| Government bond yields (yield change in basis points) | |||||
| Current level | Last week | YTD | |||
| 10-year Gilts | 0.27% | 1 | -55 | ||
| 10-year US Treasury | 0.82% | -6 | -110 | ||
| 10-year German Bund | -0.62% | 1 | -44 | ||
| Currencies | |||||
| Current level | Last week | YTD | |||
| Sterling/USD | 1.3156 | 1.6% | -0.8% | ||
| Sterling/Euro | 1.1069 | -0.5% | -6.4% | ||
| Euro/USD | 1.1874 | 1.9% | 5.9% | ||
| Japanese yen/USD | 103.35 | 1.3% | 5.1% | ||
| Commodities (in USD) | |||||
| Current level | Last week | YTD | |||
| Brent oil (bbl) | 39.45 | 5.3% | -40.2% | ||
| WTI oil (bbl) | 37.14 | 3.8% | -39.2% | ||
| Copper (metric tonne) | 6946.5 | 3.4% | 12.5% | ||
| Gold (oz) | 1951.35 | 3.9% | 28.6% |
Sources: FTSE, Canaccord Genuity Wealth Management
Central banks/fiscal policy
More QE from the Bank of England and more furlough support from the Chancellor
The Bank of England surprised markets by increasing its Quantitative Easing (QE) programme (asset purchases) by £150bn from £745bn to £895bn.
Chancellor of the Exchequer Rishi Sunak extended furlough payments to employees of shuttered companies until the end of March 2021.
In the US, no change in the Federal Reserve (Fed) policy on interest rates and asset purchases but the communication underlined the Fed’s concern about the virus and reinforced the commitment to do everything it takes to help the US economy.
United States
Strong surveys and a better jobs report to welcome the new President
Surveys: the Markit manufacturing PMI was almost unchanged at 53.4 vs. 53.3, as it tends not to be volatile, but the ISM (Institute for Supply Management) soared. The ISM manufacturing index went from 55.4 to 59.3, above 56.0 estimates. New orders surged from 60.2 to 67.9, prices paid from 62.8 to 65.5 and employment from 49.6 to 53.2. The details were as strong as the headline, with new orders, production and supplier deliveries all above 60, which is exceptional. This shows that the manufacturing sector still has a lot of potential in the US.
Services were a little more subdued but the levels remain very high. The Markit services PMI also rose from 56.0 to 56.9, but the ISM services index fell from 57.8 to 56.6.
Employment: jobless claims stopped falling in the US. Initial jobless claims were almost unchanged at 751K and continuing claims went down from 7.8 million to 7.3 million, but mostly owing to people exhausting their time on unemployment benefits. Non-farm payrolls rose 638K, with a public sector jobs cut due to the census and a strong private payrolls reading of 906K vs. 680K expected. The unemployment rate (U-3) fell 1% to 6.9% and the underemployment rate (U-6) to 12.1% from 12.8% with higher labour force participation rate (61.7% vs. 61.4%).
Productivity: non-farm productivity was up 4.9% during Q3, below estimates and below the 10.6% previous reading, with unit labour costs falling 8.9%, less than expected, down from +8.5% the previous quarter. These numbers are difficult to interpret given the massive down and then up movement in the US economy during Q2 and Q3.
Housing: 30-year mortgage rates fell to a record low of 2.78% to lend further support to the already buoyant housing market.
United Kingdom
Is construction starting to falter?
Surveys: the manufacturing PMI was a little better at 53.7 vs. 53.3. The Markit/CIPS construction PMI fell sharply from 56.8 to 53.1. Construction has been the shining light in the UK economy amid depressed services activity.
Auto sector: new car registrations were down 1.6% in October year-on-year, better than -4.4% the previous month.
Europe
No change in direction for weak data
Surveys: the eurozone manufacturing PMI moved from 54.4 to 54.8, above expectations, with Germany, Spain, Italy, France all higher and above estimates. The eurozone services PMI rose marginally from 46.2 to 46.9, above estimates, but still at a depressed level. The German Markit construction PMI fell further from 45.5 to 45.2.
Industry: German manufacturing orders rose 0.5%, below estimates.
Retail: eurozone retail sales fell 2.0% in September, below estimates and worse than the +4.2% previously.
China/India/Japan/Asia
China’s economy is broadening beyond manufacturing
China: the Chinese manufacturing PMI in October eased to 51.4 from 51.5 in the previous month, largely in line with estimates, whilst consumer spending helped to lift services output, suggesting the economic recovery remains on track. The non-manufacturing PMI climbed to 56.2 from September’s 55.9.
Japan: the services PMI went up from 46.6. to 47.7.
Other Asia: India and Taiwan were the top PMI performers. Remaining surveys were down in the low 50’s. South Korea surpassed 50 for first time since December 2019.
Oil/Commodities/Emerging Markets
Gold prices bounced back after the US election, surpassing the US$1,900 level again and ending around US$1,950 for the week. Crude oil also rallied with Brent above US$40/bbl again. Industrial metals were also strong.
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