During October financial markets were fairly unrewarding for investors, with equities, in particular, coming under pressure towards the latter stages of the month. Fixed income returns were mixed, with US bond values falling, while EU bonds generally posted modest gains on the hope the European Central Bank might extend monetary stimulus.
The sharp rise in the spread of coronavirus throughout the Northern hemisphere, especially in Europe and the US, saw authorities reinstate various restrictions which will inevitably have an impact on economic activity and corporate earnings over the coming months. The US election also cast an uncomfortable shadow over financial markets as it drew closer over the month. While it is not unusual for financial markets to take a risk averse approach to such political events, this particular election took place against a background of significant political, racial and generational division across the US, with the two sides offering radical different visions for America’s domestic and foreign policies. Partisan politics only added to uncertainty as it became clear that the much needed second US fiscal stimulus package would be delayed, with Trump’s administration unable to reach agreement with the Democrat led House of Representatives on its size and scope.
October was a busy period for Q3 earnings reports, with a record number of companies beating analysts’ forecasts, many of which had been massaged down to levels that turned out to be too conservative. Investors took encouragement from these reports early in the month, before investor concerns about COVID-19 and the US election took precedence as October wore on.
Brexit took various turns, with the United Kingdom’s government at one point walking away from talks, only for negotiations to resume later in the month as the EU appeared to take a more conciliatory tone. Even so, the two sides remain far apart on a number of key issues, and at this late stage, there has to be doubts that a deal on future trade relations can be reached before the end 2020 transition deadline.
With equity markets under pressure, the MSCI AC World Index fell -2.7% when measured in sterling terms. Across the major markets and regions, Asia ex Japan (+2.5%) and the Emerging Markets (+1.8%) bucked the trend, while Europe ex UK (-6.0%) and the UK (-5.3%) were particularly weak. At the sector level, Communication Services (+1.8) and Utilities (+1.5%) stood out on the positive side, while falling oil prices undermined Energy (-5.9%) and worries about US healthcare reform overshadowed Healthcare (-4.9%). From a style perspective, the performance of Value (-2.6%) was similar to Growth (-2.7%), while Smaller Companies (-0.3%) held up better than Larger Companies (-2.7%).
Within fixed income, high quality government bonds declined a little, led by weakness of US treasuries on concerns a Biden led government could be profligate in its spending. While the JP Morgan Global Government Bond Index declined -0.2%, other fixed income sectors fared better as spreads narrowed slightly, with the ICE Merrill Lynch Global Corporate Investment Grade Index rising +0.1% and the Merrill Lynch Global High Yield Index up +0.4% (all hedged to sterling).
Over the month, the Bloomberg Commodities Index gained +1.2%, with Agriculture (+3.7%) and Industrial Metals (+2.8%) gaining, while Gold (-1.1%) and Crude Oil (-11.8%) fell, with the later considered to be particularly vulnerable to further lockdown / travel restrictions.
The foreign exchange markets were relatively quiet, with the majors (the US Dollar, Yen, Sterling and the Euro) trading in relatively tight bands, with little change over the month. Elsewhere, some of the emerging market currencies showed some life, with the Mexican Peso (+4.1% Vs the Pound) and South African Rand (+2.8%) both rising, although this was balanced by weakness in some of the more vulnerable currencies, such as the Brazilian Real (-2.6%), the Argentinian Peso (-3.1%) and Turkish Lire (-8.4%).
(Notes: All monthly data is quoted in Sterling terms unless otherwise stated).
|INDEX||END SEPTEMBER VALUE||END OCTOBER VALUE|
|DJ Ind. Average||27781.7||26501.6|
|£ Base Rate||0.10||0.10|
This month’s values quoted as at 30/10/2020. The above values are sourced from Bloomberg and are quoted in the relevant currency.
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