On the virus front, the US saw the start of its autumnal season as new COVID-19 cases remain high. Across the 50 states, 34 are seeing seven-day averages of new cases that are higher than a month ago1. The UK also saw daily case numbers continue to rise, as did Europe, with hospitalisations also increasing2.
With regard to a vaccine, the US’s Food and Drug Administration notified coronavirus serum developers that it wants at least two months of safety data before the agency would authorise any for emergency use2, pushing out any availability of a vaccine to US citizens until after 3 November. Meanwhile, Johnson & Johnson became the latest potential provider to have to temporarily pause its trials following an unexplained illness in a study participant2.
The lack of progress on a vaccine, meanwhile, seems to be mirrored by the limited relfation of the US economy as initial jobless claims came in at 840,0003, which was higher than expected, albeit at a lower level than the figure released on 1 October 2020. This muted recovery could continue – a view that was reinforced by the minutes of the most recent US Federal Reserve monetary committee meeting. This revealed that all its members are concerned about the pace of the recovery, given it is significantly slower than had been anticipated in the absence of any fresh fiscal stimulus4. Hopes remain, however, that the US continues to grow following the release of the Institute of Supply Management (ISM) non-manufacturing purchasing managers’ index, which came in at a strong 57.8 – above consensus and August’s figure of 56.9.
But, despite initial reports in the week suggesting that an agreement was close2, an already fraught situation was further complicated by Trump’s decision to stop the White House officials’ negotiations, only to reverse this position via a tweet later in the week. As such, it is increasingly likely that any package will have to wait for approval until after the US election.
With three weeks to go until 3 November, meanwhile, Joe Biden (Democrat) remains ahead in the polls – a position that was unchanged following the vice-presidential debate5. While the event was a far more civil affair then the presidential one, it is unlikely that either Kamala Harris or Mike Pence would have altered the trajectory of the race, despite the increased possibility of a mid-term promotion given the ages of their presidential running mates2.
In Europe, the minutes from the last European Central Bank (ECB) meeting highlighted how policy makers are monitoring the appreciation of the Euro, given concerns that a further rise could pose a risk to growth and inflation2.
Last week also saw a number of Eurozone purchasing managers’ indexes6 published with the composite index number slipping to a three-month low of 50.4, down from August’s 51.9 and indicative of only a marginal expansion. The final reading was, however, firmer than the earlier flash estimate of 50.1.
Meanwhile, the UK released its August gross domestic product7 early estimate, which came in lower than expected at 2.1%. While this is the fourth consecutive monthly increase, it is below the levels of recovery seen in previous months. If confirmed in later readings, it indicates that the UK’s recovery is starting to lose momentum.
News from Brexit-related announcements, meanwhile, led to more Sterling volatility as reports suggested that the EU was not planning to make any concessions ahead of the EU leaders’ summit and Boris Johnson’s self-imposed deadline to cease talks, which are both on Thursday 15 October.
Over the week, the MSCI AC World Index rose 2.95% in Sterling terms, while the US Dollar return was slightly higher at 3.66%. All major markets were firm, with the best being the US (+3.23%), Emerging (+3.07%) and Asian (+3.07%) markets, while the UK (+1.59%) continued to lag, probably on continuing Brexit concerns.
Sector-wise, there wasn’t a great deal of difference between cyclicals and stable earners. The strong performance of IT (+3.93%) helped the US market, and it was also notable that the struggling energy sector (+4.25%) had a better week as the oil price rose – although at -38.97% year-to-date, energy remains by far the worst performing sector in 2020.
While there are plenty of uncertainties across markets and economies right now, the market appears to be focused on the growing probability of Biden winning the US presidential election6. Regardless of the result, getting the election out of the way should clear the path for a second US stimulus package, which will be all-the-more likely if the Democrats also retain their majority in the House of Representatives. There is also a chance that the Senate could also flip to the Democrats, although that remains a very close call.
With the performance of riskier assets improving, safe havens were in less demand. As such, the core sovereign bond yields generally rose. The 10-year US Treasury yield rose by 0.07% to finish the week at 0.77%, the 10-year UK gilt yield rose 0.03% to finish at 0.28%, and the 10-year German bund yield rose 0.01% to end at -0.53%. One notable exception was peripheral European bonds, which benefited from talk of more quantitative easing by the ECB.
Riskier fixed income paper also fared a little better as corporate credit spreads tightened on both sides of the Atlantic. Looking across the different regions, US high yield spreads tightened by -0.46%, while US investment grade corporate bond spreads tightened by -0.08%. In Europe, the moves were smaller at -0.19% for high yield debt and -0.05% for investment grade.
The performance in fixed income was supportive of our strategy of favouring shorter dated US corporate credit.
For alternative investments, with Q3’s quarter end having just passed, it has been very quiet with regard to material announcements.
Our property investments, however, were a little firmer, both globally and in UK commercial property markets.
The coronavirus is likely to remain in focus this week following the decision by the UK to tighten restrictions, with many other European nations expected to follow suit.
Brexit is also likely to dominate the headlines as we count down to the European Council summit and Boris Johnson’s deadline on Thursday 15 October.
The US sees some September data published in the form of the consumer price index, retail sales and industrial production figures. US earnings season also kicks off again this week: with a number of the big financial names reporting.
China will release its trade balance for September, and we will also get to assess the Eurozone’s industrial production for August.
Despite Trump’s refusal to take part in a second presidential debate this week, following a decision to hold it virtually, attention on the upcoming US election is only likely to intensify since early voting had already begun before the week of 12 October in all but 23 states, with all absentee ballots sent out to voters.
Attention will also turn to the International Monetary Fund (IMF) and World Bank’s annual meetings which will take place this week, as well as the IMF’s latest World Economic Outlook report, which will be released on Tuesday 13 October.
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Sources: Nedbank Private Wealth and (1) John Hopkins University; (2) Bloomberg; (3) US Department of Labor; (4) Federal Reserve Board and Federal Open Market Committee; (5) RealClearPolitics; (6) IHS Markit; and (7) UK Office for National Statistics.
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