A testing time
- Tentative signs of a rotation in global markets in September
- The S&P 500 amongst the worst performers, seeing its first monthly decline since March, whereas the FTSE 100 fared relatively better
- OECD revises global GDP forecast up for 2020 and forecasts 5% growth in 2021
- Globally, Covid-19 cases continue to rise and Europe re-imposes some lockdown measures
- Johnson & Johnson becomes the fourth western pharma to start a phase III vaccine trial
- President Trump attacks China at United Nations General Assembly
- US Presidential election race gets underway with slanging match debacle
- US politicians fail to agree fiscal stimulus and latest Democrat proposal is heavily scaled down
- UK Autumn Budget cancelled and Jobs Retention Scheme announced to support viable jobs
- UK track & trace app hits 10 million downloads
- Brexit trade term negotiations reach crunch phase ahead of EU summit on 16th October
- PM Shinzo Abe steps down and replaced by his close ally Yoshihide Suga
- China’s economic activity in August was stronger than expected
- Saudi Arabian Oil Minister said OPEC will remain ‘pro-active and pre-emptive’ on oil price
US technology shares proved especially volatile, with the NASDAQ 100 falling some 12% during the month, before retaking some of the lost ground into the month-end. Stretched valuations, alongside stock specific factors such as Tesla’s failure to qualify for a position in the S&P 500, drove the selling pressure.
Having responded swiftly and decisively to the pandemic with sizable support to the economy, US politicians have not been able to agree on the latest support package. The proximity to the Presidential election presents a major challenge to finding consensus and may well require something to force their hands if agreement is to be reached.
Trade talks between the EU and UK continued, although the absence of agreement on certain issues continued to prevent substantial progress. Nevertheless, reasons for cautious optimism remain, not least that it is in both sides interest to reach a deal. Added to this is the precarious position of the Prime Minister, and it is difficult to believe he would be able to survive the fallout of a no deal outcome.
In contrast to earlier in the year, the recent pickup in covid-19 cases in Europe has so far not been accompanied by a meaningful rise in deaths. A combination of better treatment and preventative measures suggest that the chances of a return to outright lockdown in the UK would appear slim. It is also striking that life in Wuhan, the epicentre of the outbreak, appears to be largely back to where it was pre-covid.
Western countries have not been able to take the same authoritarian position in bringing the virus to heal, and as such, time and a vaccine remain key. Reassuringly, there are a number of potential vaccines in phase three trials.
The final quarter of the year starts with much uncertainty and markets may well remain cautious in the coming weeks as US election day approaches. Nevertheless, the position on both this and EU-UK negotiations should be clearer by mid-November. Whilst further support from politicians in the US may take some time, the Federal Reserve, like central banks elsewhere, remains in whatever it takes mode.
Covid remains a challenge but economy wide lockdowns are unlikely and a vaccine appears very close. Whilst a lack of fiscal stimulus will slow the US economic recovery, it is unlikely to completely derail it, with further stimulus going into next year.
We would expect that the tentative signs of a market rotation seen during September to be the start of a trend. A move away from highly valued US companies coincides with UK valuations at multi-decade lows. A resolution to Brexit would also herald the re-emergence of overseas investor interest into the UK stock markets, thereby forming the foundations for a period of outperformance of UK equities going into 2021.
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