By Tim Sharp, Hottinger & Co
Equity markets started October in buoyant fashion as retail investors, mutual funds and hedge funds alike put cash to work and bought the September dip. Yet, by month-end western markets were under pressure again as the second wave of the pandemic rolled across much of Europe. In the US, investors were concerned about the deadlock in stimulus talks and seemed less sure than the pollsters that a Biden-led “blue wave” would prevail. In the UK, Boris Johnson marked Halloween, a Celtic festival often associated with something more sinister than the beginning of winter, to announce a mutation of the March lockdown.
The initial positive sentiment in the US was driven by expectations that a Democratic sweep in the forthcoming election would lead to greater fiscal stimulus, and a belief that the US Federal Reserve would tolerate higher inflation before tightening. Meanwhile, with Q3 earnings season on the horizon, there was the usual opportunity for companies to beat carefully managed expectations.
In Europe, the central bank was expected to do more to support the recovery with additional asset purchases, probably under the Pandemic Emergency Purchase Programme. While, in the UK, there were signs that the Bank of England would loosen policy further after it asked the banks to provide information regarding their ability to implement negative rates without damaging their businesses.
Chinese markets were closed during the first week of October due to a lengthy national holiday but reopened to strong investor demand assisted by positive economic data. The Caixin China General Purchasing Managers’ Index showed activity climbed to its highest level in three months in September, while GDP expanded by almost 5% year-on-year; China could be the only major economy to record positive growth in 2020. By mid-month the total value of China’s stock market had risen to a record high of more than $10tn, thereby surpassing its previous peak of five years prior [i]. Ant Group dominated investor attention towards the end of the month as it became the largest initial public offering in global financial history breaking records in Shanghai and Hong Kong. It attracted orders of more than US$3 trillion (equal to the GDP of the UK) and was oversubscribed by almost 400 times, according to the South China Morning Post.
Demand for Chinese assets was not solely confined to the equity market; the renminbi traded at its highest level against the US dollar in over a year, despite the Chinese central bank lowering the cost of betting against its currency. In the bond market, Beijing received strong demand selling dollar debt directly to US buyers attracted by the superior yields versus US Treasuries.
The positivity surrounding Chinese assets helped the country’s equity market remain in positive territory for the month where other major markets failed, following a brutal final week in which fear surrounding the pandemic returned to markets.
The resurgence of the virus has been seen across Europe in particular, with national lockdowns in France and Germany, alongside local lockdowns in the UK. The US has remained open but with a record number of cases being reported, whilst Asia remains less affected at present. This sliding scale of severity was reflected in the performance of global equity markets over the month, with China and emerging markets gaining 2%, the S&P500 losing 3%, the FTSE100 giving up 5% and the Euro Stoxx 50 down 8%.
The equity market sell-off in the final week masked a broadly positive earnings season in both the US and Europe. Earnings beats across the two regions reached the highest level since 2009. Positive surprises were generally higher among cyclical stocks but there was earnings growth among the Defensives as well [ii]. Further, most companies reported an improved outlook based on a better-than-expected recovery during the past quarter. In addition, some companies expressed plans to reinstate their dividends, including HSBC, Credit Suisse and Royal Dutch Shell. However, within the technology sector the strong gains recorded so far this year brought high expectations, and companies including Apple, Intel, SAP and Twitter received a rude awakening when either, missing earnings, or simply not providing positive guidance.
For a second consecutive month, government bonds failed to act as an effective hedge against falling stock markets, with the US and UK 10-year yields rising by 19bp to 0.87% and 3bp to 0.26%, respectively. In the US, the long-end of the yield curve has been driven higher by expectations of a Democratic sweep that could usher in significantly more stimulus to support the economy, thereby pushing up inflation expectations and bond yields with them. The economic data has also been supportive of higher yields; the US economy expanded in the third quarter at its fastest pace in post-war history as activity bounced back from Covid lockdowns.
The Gilt market was dealt a blow by Moody’s, which cut its investment rating one notch to Aa3 – equivalent to a double-A minus rating from rival S&P Global. The agency said it believed growth would be “meaningfully weaker” than it had previously forecast, and that the economy had been struggling even before the pandemic took hold [iii]. Certainly, the economic data during October backed-up Moody’s pessimism. The economy grew by a disappointing 2.1% in August and remains 9.2% below pre-pandemic levels in January. Meanwhile, consumer confidence, spending and mobility dropped in October while the number of people claiming out of work benefit has doubled from its level in March.
In commodity markets, gold fell marginally to $1,878 oz, thereby also failing to hedge against equity market volatility while Brent crude fell 11% to $37 a barrel in response to the expected hit to future demand from further lockdowns.
It is fair to conclude that markets ended October in a sombre mood and November is teed-up to be a pivotal month with ongoing Brexit negotiations and the US going to the polls. Yet, whilst the US election might be a source of further volatility in the short-term, especially if it is too close to call on the night, over the long-term elections typically have little impact on market performance, and a decisive outcome would remove a source of risk. Of greater importance could be any developments with regards to a coronavirus vaccine and, according to the biotech and pharma research team at Neuberger Berman, there could be some market-market-moving news on the horizon. They believe that both Pfizer and Moderna could potentially apply for emergency use authorisation (EUA) for their vaccines by late November/early December. Of course, “there’s many a slip ‘twixt the cup and the lip” but markets may not be pricing-in too much good news at present.
[i] ft.com – China’s stock market value hits record high of more than $10tn; October 14, 2020
[ii] Barclays – Lockdown 2.0 and final countdown to the election; October 30, 2020
[iii] ft.com – UK credit rating downgraded by Moody’s; October 17, 2020
[iv] Neuberger Berman – Moving the needle; October 26, 2020
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