Weekly Market Update October Sunday 11th 2020
Markets broadly rose this week as President Trump discharged himself from hospital, having spent a mere 3 days being treated for coronavirus, announcing to the US “don’t fear Covid”. Markets are beginning to price in a Democratic win for both the House of Representatives and the Senate at the upcoming US Presidential election on November 3rd, with rising expectations of fiscal stimulus. European equities similarly made further headway this week, despite disappointing data pointing to a slowdown in the economic recovery and escalating coronavirus cases putting ever greater pressure on politicians to veer towards lockdowns. Positivity in Europe was in part explained by companies providing improving guidance as to future earnings, with the drug company Novo Nordisk, jewellery producer Pandora and Zalando, the online clothing retailer all raising their full-year forecasts. Whilst British Land, the UK property firm, reinstated their dividend.
As at 12pm London time on Friday, US equities rose 2.9% over the week, whilst US technology stocks increased by 3.1%. European equities were up by 1.8%, with UK equities rising by 2.2%. More domestically focused companies in Europe and the UK both made stronger gains, with European smaller companies having increased by 3.0% and UK mid-caps 3.6%. Japanese stocks gained 2.4%, whilst Australian stocks rose a massive 5.4%. Global emerging markets rose by 3.3%, whilst Latin America stocks were up 4.6%, helped by a rally in the oil price.
Treasury yields rise as expectations for a Biden victory increase
US Treasury yields rose over the week (yields move inversely to price), as markets began to price in a Democratic victory, with the 10-year yield touching 0.79%, before settling down at 0.77%. German bund yields, however, remained anchored at minus 0.54%, not helped by the slowing economic recovery in Europe. UK gilts increased to 0.3%, before heading down towards 0.27% as the economic data releases on Friday disappointed markets.
Crude oil jumps as Hurricane Delta leads to a 95% cut in supply from the Gulf of Mexico
Crude oil rose over the week, with Brent crude rising 9.6%, now trading at $43.0 per barrel and US WTI (West Texas Intermediate) climbed 10.3%, trading at $40.9. The increase in price was triggered by the threat of a strike in Norway that could cut output from Europe’s biggest producer by up to 25%, and Hurricane Delta which led to a 95% cut in supply from the Gulf of Mexico. The copper price, considered by many as a barometer to the health of global growth, rose by 3.1%, now having reversed most of its recent losses.
An erratic President Trump leads investors to look beyond November 3rd for further fiscal stimulus
President Trump continued to flip flop between offering increased benefits to those who have lost their jobs due to coronavirus and then taking it away. Whilst the Republicans and the Democrats fail to agree anything this close to an election, market expectations as to increased stimulus this side of November 3rd has ebbed away. However, with Jo Biden maintaining a steady lead over Trump in the polls, investors are increasingly looking beyond the election, with growing confidence of a Democratic clean sweep, and the possibility of more generous stimulus packages on offer thereafter. This has helped the yield curve to steepen, as the issuance of Treasuries would be expected to increase under a Biden presidency, whilst the US Federal Reserve continues to keep the short end anchored down, with no foreseeable increase in interest rates anytime soon. The US ISM (Institute for Supply Management) Services Index was released this week, offering an insight into business conditions for service sector companies. The index exceeded expectations, coming in at 57.8, with any number above 50 indicating expansion.
‘V’ shaped recovery hard to come by in Europe, as coronavirus cases escalate
Disappointing data out of the Eurozone suggested that a ‘V’ shaped recovery has been harder to come by versus other parts of the world. French industrial production for August disappointed, having increased by 1.3% versus forecasts of 1.7%, following the release of the latest PMI (purchasing managers index) data on Monday suggesting continued contraction within the services sector. Similarly, industrial production in Germany for August came in at minus 0.2% versus forecasts of plus 1.5%. However, new factory orders beat expectations, increasing by 4.5% versus forecasts of 2.8%, potentially setting up German manufacturing for a strong fourth quarter. The UK also disappointed on Friday, with GDP growing by 2.1% for the month of August, versus projections of 4.6%.
Australian equities bounce back
Whilst last week was the Australian equity market’s worst week since April, this week was the reverse, with the market posting strong gains. Australian markets were particularly supported by government measures to help boost the economy. Aftermarket hours on Tuesday, the government announced personal tax cuts worth AUD $17.8 billion and a further AUD $5.2 billion in new programmes to boost employment. The market reacted positively and consequently over the week all sectors posted positive gains. However, the most notable performers were energy stocks, which rose by approximately 9%.