Weekly Market Insight

Week ended: Sunday, 25 October 2020

Key Points – Week in Review

Global equities declined for the week. Investors grew cautious about a resurgence in coronavirus cases in the US and Europe with more than 83k new cases recorded in the US on both Friday and Saturday, and Europe registering a record 200k of daily new infections in a single day. The yield on the 10-year Treasury climbed to a four-month high of 0.85% from 0.75% in the previous week. Volatility, measured by the Cboe Volatility Index (VIX), closed Friday at 27.55%, while Brent crude futures declined slightly to USD 41.77. The value of the US Dollar against a basket of major currencies, ended the week lower around 92.76, hitting the lowest level in more than six weeks. China’s Yuan traded stronger against the US dollar (USD/CNY 6.6867) after the onshore rate was set at 6.6703, and traders established long positions following comments from China’s State Administration of Foreign Exchange that the Yuan has proved more stable than expected. Gold prices hovered around the flatline of USD 1,900 for most of the week, closing Friday at USD 1,902.05 per troy ounce, and in credit markets, the 3M USD Libor rate hit a record low of 0.21%. It is now down more than 100 basis points from its highs in March.

Key Market Developments – North America

• The major US benchmarks ended the week lower led by losses in the tech-heavy Nasdaq (down -1.06%). The large-cap S&P500 Index fared better declining -0.53% in the same period. Sector wise, within the large-cap index, Communication Services outperformed, up +2.13%, while IT shares fell -2.21%. Gains within Communication sector were helped by internet giants Alphabet and Facebook, while IT sector was dragged down by Intel shares after the world’s largest semiconductor chip manufacturer fell over -10% in early trading Friday as investors assessed results in its data center business. The quarterly reporting season got into full swing and 90 companies of the S&P 500 have reported their results during the week. Analysts polled by FactSet Research expect overall earnings for the large-cap index to decline -16.5% QoQ.
• Retail sales in the US increased by +1.9% in September MoM, beating market expectations.
• The number of workers filing for unemployment benefits declined to 787K in the week and below market expectations of 860k. Most of the drop can be attributed to California, where the claims declined to 159k following a 2-week pause to remove a large backlog.
• A flash IHS Markit composite PMI estimate showed increase to 55.5 in October from 54.3 in the previous month with the reading pointing to the fourth successive month of expansion in private sector activity. The services sector grew at the fastest pace in nearly two years (56 in October vs 54.6 in September), while manufacturing output rose the most in 21 months (53.3 in October vs 53.2 in September).
• The Kansas City Fed’s manufacturing production Index rose by 5 points to +23 in October, suggesting an increase in manufacturing activity, mainly boosted by output at fabricated metal and machinery plants.
• Housing starts in the US rose 1.9% to a seasonally adjusted annual rate of 1.41mn units in September and below market expectations of 1.45mn. Building permits rose 5.2% and above market expectations of 1.52mn. The NAHB/Wells Fargo Housing Market Index shows the homebuilder sentiment is at a record high in October for the second consecutive month.
• The National Association of Realtors’ report showed sales of previously owned houses jumped 9.4% in September, the most since May of 2006. It was the fourth consecutive month of gains amid record-low interest rates and demand for houses away from big cities.
• The Federal Reserve Governor Brainard said in prepared remarks to the Society of Professional Economists that the economic recovery in the US remains highly uncertain and highly uneven, with certain sectors and groups experiencing substantial hardship. He added that the Fed is committed to providing sustained accommodation to achieve a broad-based recovery. Brainard warned that further fiscal support will be needed alongside accommodative monetary policy to turn a K-shaped recovery into a broad-based and inclusive economic recovery.
• The latest Fed’s beige book showed the economic activity in most part of the country was up “slightly to modest”.
• The Federal Deposit Insurance Corporation reported that 7.1mn households in the US did not have a bank account in 2019 – the lowest level since 2009.
• House Speaker Pelosi said there was still a chance for a stimulus deal with Congressional Republicans despite resistance from Republicans, adding that she was optimistic an agreement could be reached. It is unclear, however, whether the deal could be passed before the November election. Initially, Pelosi said stimulus deal must be agreed within 48 hours deadline which expired earlier in the week.
• Biden and Trump had their last debate 12 days before the November election. Pundits and strategists labeled it as a more civil debate than the first one. Biden made clear that if elected president, his administration would reverse Trump’s foreign policy decisions by immediately re-entering the Paris climate accord and halting the US’s exit from the WHO. Given uncontrollable spread of the coronavirus across the country, Biden warned that the US was about to enter a “Dark Winter”.
• The number of confirmed coronavirus cases in the US nears 8.5mn with Florida reporting on Thursday, its highest daily jump in new cases in over two weeks. At the same time, other states such as Illinois and Ohio faced record rises in infections.
• At least 5 of Vice President Pence’s aides including his chief of staff were reportedly tested positive for the coronavirus in recent days.
• White House chief of staff Mark Meadows suggested during a CNN interview on Sunday that the US could not get control of the pandemic following a recent surge in new infections.

Key Market Developments – Europe

• Equity markets across Europe ended the week largely lower as alarming rise in coronavirus infections, lingering Brexit uncertainty and fading hopes for US fiscal stimulus weighed on investor sentiment. The Europe 600 and the UK’s FTSE All-Share Indexes declined -1.36% and -0.46%, respectively.
• A flash IHS Markit Eurozone composite PMI estimate for October slipped to 49.4 from 50.4 in September with the latest reading pointing to a renewed contraction in business activity across the Eurozone. Accelerating growth of manufacturing output (54.4 in October vs 53.7 in September), was overwhelmed by a steepening deterioration in the service sector (46.2 in October vs 48.0 in the previous month). The latest reading pointed to a second successive month of contraction in the service sector as inflows of new business fell at an accelerated rate.
• A preliminary estimate shows the Eurozone consumer confidence indicator fell to -15.5 in October from -13.9 in the previous month. It was the lowest reading since May as a second wave of coronavirus infections and the threat of stricter restriction measures weighed on households’ mood.
• The Eurozone current account surplus narrowed sharply to EUR 21.8 bn in August from EUR 32.1bn the previous year. Services surplus declined to EUR 6.4bn from EUR 13.3bn while the primary income account posted a EUR 0.2bn deficit.
• A preliminary IHS Markit/CIPS UK composite PMI estimate for October dropped to 52.9 from 56.5 in the previous month. The latest reading pointed to the weakest rise in UK private sector output since July, as the speed of recovery slowed in both manufacturing (56.4 in October vs 59 in September) and services sectors (52.3 in October vs 56.1 in September). The manufacturing output pointed to a solid growth although at slower pace, while the service sector indicated a sharp loss of momentum across the service economy.
• German GfK consumer climate for November reached a score of -3.1, missing market expectations. The consumer confidence in the UK declined to -31 in October from -25 in the previous month as further lockdowns to contain the second wave of coronavirus cases weighed heavily.
• Annual CPI rate in the UK increased to 0.5% in September from 0.2% in August, matching market expectations. Retail sales increased 1.5% MoM in September, beating forecasts of a 0.4%.
• In an interview with French newspaper Le Monde, the ECB President Lagarde said that the European economic recovery risked “losing momentum” as governments imposed new restrictions to curb the coronavirus pandemic. She urged the EU members to consider making Eurozone debt a permanent tool.
• The ECB policymaker Holzmann said he saw no need for further monetary stimulus at present, while leaving the door open for more easing if the pandemic worsens.
• The BoE’s chief economist Bailey said is not in favor of deploying negative interest rates. The clarifying comment came after a contradicting statement was made by policymaker Vlieghe on Tuesday, in which he said negative rates might be needed to bolster recovery, and that the economic outlook was pointing that more stimulus was needed.
• The Eurozone governments plan to borrow more and increase deficits in 2020, with total budget deficits expected to hit EUR 1tn. In addition, Italian government approved a preliminary 2021 budget that includes expansionary measures totaling EUR 39bn.
• Public sector net borrowing in the UK (excluding public sector banks) hit an all-time high of GBP 36.1bn in September. This is GBP 28.4bn more than a year ago and the third-highest borrowing in any month since records began in 1993 as the UK government stepped up efforts to support the economy hit by the pandemic. Also, this equated to 103.5% of GDP, the highest level of borrowing as a share of the economy since the 1960-61 financial year.
• The UK is expected to resume trade talks with the EU marking a new push by the two sides to protect billions of dollars worth of trade from the beginning of 2021. According to the UK’s minister of the Cabinet Office Glove, the door is still open for a post-Brexit trade deal, but the EU needed to change its approach and show it is serious before talks can resume. Following the conversation with the UK chief Brexit negotiator Frost, the EU negotiator Barnier twitted that Brussel was ready to discuss detailed legal treaty texts and to “intensify” trade talks. The PM Johnson, however, still refuses to restart Brexit negotiations despite ticking clock.
• Spain and Italy announced stricter lockdown measures over the weekend, while France reported the country’s highest ever number of new coronavirus cases in the past days. France extended a curfew to cover almost 70% of its population and said the state of emergency could extend until February 2021. Germany’s Merkel announced difficult times ahead as a second wave of Covid-19 in Europe is under way. In the UK, Wales opted for a full lockdown expected to last 17 days, while England’s the strictest tier-3 lockdown, was extended to cover South Yorkshire and greater Manchester and could be implemented in other areas soon.

Key Market Developments – Asia-Pacific/Emerging Markets

• Stock markets across Asia-Pacific ended the week mixed. Mainland Chinese equities, measured by the CSI 300 Index, retreated -1.65% as investors turned cautious ahead of China’s Communist Party Congress and lack of progress in the US stimulus talks. The Hang SengIndex added +2.18% for the week posting its fourth consecutive weekly rally. Japan’s Nikkei 225 Index was lower –0.75% in the same period.
• The report by National Bureau of Statistics showed China’s economy grew by +4.9% in Q3 YoY, below market expectations of +5.2%. Industrial production gained +6.9% YoY in September, while retail trade rose by +3.3% – the strongest gain so far in 2020.
• Average new home prices in China’s 70 major cities increased by +4.6% YoY in September, posting the slowest gain in home prices since February 2016.
• Japan’s core CPI declined by -0.3% YoY in September, while Singapore CPI stayed flat in the same period beating market expectations, of -0.4% decline.
• Exports from Japan fell -4.9% YoY in September, beating market expectations, as exports to the US increased for the first time in 14 months. Exports to the Asia region dropper -2.0%, while shipments to China, Japan’s largest trading partner, rose +14.0%.
• China’s PBoC injected a CNY 50bn seven-day reverse repos operation and held the rate unchanged at 2.2% in a move to maintain the reasonable and sufficient liquidity of the banking system.
• The BoJ policy-setting committee is expected to lower its projections for Japan’s GDP and inflation growth for the current fiscal year in a meeting on 28-29 October. The main reason for lowering the growth forecast is the larger-than-expected decline in economic activity caused by the coronavirus pandemic, with data released after the BoJ’s forecast in July showing Japan’s economy contraction at an annualized rate of -28.1%.
• The BoJ’s member Sakurai said the central bank should spend time monitoring the impact of steps it took to cushion the economic impact from the coronavirus crisis, signaling that no immediate expansion of stimulus was needed.
• Japan and Britain signed their first post Brexit-deal with UK companies being exempted of tariffs on 99% of the country’s exports.
• To combat China’s regional assertiveness, Vietnam and Japan agreed to strengthen security and economic ties including Vietnam’s imports of Japan’s military technology.
• On Wednesday, the IMF downgraded a 2020 forecast for Asia-Pacific region to a contraction of -2.2%. The fund noted the lower outcome for the region by 0.6% than it had forecasted it in June, amid possible resurgence of coronavirus infections and ongoing tensions between Beijing and Washington.
• As reported by the US Seventh Fleet, on 19 October, the US, Japan and Australia conducted naval exercises in the South China Sea.
• On Thursday, Lebanon’s President Michael Aoun designated Saad al-Hariri as Lebanon’s new prime minister to form a new government. Hariri faces major challenges including a mounting list of woes such as a banking crisis, currency crash, rising poverty and crippling state debt.

Key Points – Week Ahead

• In the week ahead, important macro data releases in the US include Q3 GDP growth, personal income and expenditure and durable goods orders. The earnings season continues with Alphabet, Apple, Amazon and Facebook due to report their quarterly results.
• In Europe, Eurozone will release consumer confidence and economic sentiment, unemployment and inflation rates and Q3 GDP growth. The ECB will decide on monetary policy decision. The UK will publish national wide housing prices, consumer credit and mortgage approvals. Brexit negotiations will be in the spotlight next week.
• In Asia-Pacific, China will release NBS manufacturing PMI. China’s Communist Party Congress will be held in the week. Japan will publish retail sales and consumer confidence. The BoJ will announce its monetary policy decision.
• In emerging markets, Turkey will release the latest business confidence and inflation report, while South Africa will publish inflation rate and balance of trade data.

Disclosures

Sources of information and data: Bloomberg; Financial Times; Reuters.com; CNNMoney.com; BBC Business News; The Wall Street Journal. The material in this document has been prepared by Patronus Wealth Privé (DIFC) Limited for general information and illustrative purposes only and does not constitute any form of recommendation or investment advice. The material in this document is intended for recipient’s use only and any disclosure, copying, distribution or any action in reliance on its contents is prohibited. The historical performance is not meant to forecast, imply or guarantee the future performance. The information presented in this document have been obtained from sources generally believed to be reliable. Patronus Wealth Privé (DIFC) Limited makes no representation as to its accuracy or completeness and accepts no liability for any loss arising from the use of material in this document.

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