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    Weekly multi-asset update: October

    Weekly multi-asset update: October

    30 October 2020 Multi-asset
    Week to 30 October, 2020

    Summary

    • According to polls, Joe Biden remains in a strong position to be elected as US President next week
    • Lockdown restrictions become stricter across Europe as the increase in COVID-19 cases remains a concern
    • Outlook: next week we have the US election result, a bundle of earnings reports and activity from both the Fed and BoE

    Market and economic review

    As the final full week before the election draws to a close, Joe Biden remains in a strong position to become the next US President, with the FiveThirtyEight model giving him an 89% chance of winning, and national polling showing an average lead of 8.8%. That being said, betting markets are more cautious, with the PredictIt probability at 64% for a Biden win. Whilst additional fiscal stimulus may well be granted despite who wins, any level of uncertainty around the outcome, with a close result possibly being contested, will likely be unhelpful for risk assets.

    On the virus front, the spread across Europe remains at concerning levels. The extent of which has resulted in both Germany and France moving to a partial lockdown. In Germany, restaurants, bars, nightclubs, gyms, event venues, cinemas and amusement parks will all be closed until at least the end of November. Whilst in France, tougher restrictions include the shutting of bars and restaurants, as well as a ban on domestic travel and public gatherings.

    Economic activity will likely take the brunt of the stricter restrictions, and this will certainly be on the minds of the European Central Bank (ECB) who met on Thursday for their latest policy decision. At the meeting, the main refinancing and deposit rates were left unchanged, at 0.00% and -0.5% respectively, with the marginal lending facility rate also unchanged at 0.25%. Perhaps more interestingly,  the door has been left open for further easing of policy in the coming months. In the press release, the ECB noted that "In the current environment of risks clearly tilted to the downside, the Governing Council will carefully assess the incoming information, including the dynamics of the pandemic, prospects for a rollout of vaccines and developments in the exchange rate”. The release then went on to say that on the basis of the above assessment (due in December), policy tools will be recalibrated to respond to the unfolding situation and to “ensure that financing conditions remain favourite to support the economic recovery and counteract the negative impact of the pandemic on the projected inflation path.” So, unless there is a major turnaround in the economic backdrop and virus dynamics, it seems likely that further easing will follow.

    There has been plenty for markets to digest, even before mentioning the earnings season that continued in full flow this week, with 185 companies reporting, which represents almost 50% of S&P 500 market capitalisation. The headline EPS growth rate for Q3 is now at -15% which is a big beat on expectations for -22%, while sales growth is running at -3% which is also a strong beat on preseason consensus. Thus far, almost 90% of companies which have reported have beaten expectations which is well above historical averages. The schedule this week was dominated by the mega-caps with all 5 of the largest index constituents reporting. In many ways, the reporting from these names echoed the themes of the whole earnings season. All of the firms posted very strong Q3 numbers with several even posting record revenues. However, price reaction was negative, particularly for Apple, which fell 5% after iPhone sales in China disappointed. Amazon results were also notable, with strong revenue offset by high cost growth. The impact on margins of the pandemic is something we are monitoring closely. Caterpillar and 3M also reported this week, again share price reaction was negative as both firms refused to give guidance due to high uncertainty in global demand.

    Finishing on the data docket, this week brought news that the US economy expanded at a record 33.1% pace (on an annualised basis), with business reopening and consumer spending powered by stimulus injections. This follows the Q2 decline of 31.4%, and overall puts US GDP at -3.5% below pre-Covid-19 (Q4 2019) levels. Staying with the US, where the initial jobless claims came in at 751k for the week ending 24th October, a decrease of 40k from the previous week and slightly ahead of market expectations.  Whilst this is certainly welcome news, a continuation in the spread of the virus across the US may well dampen future releases.

    Outlook

    Next week will likely be as busy as this one, with the US election result set to dominate news. Whilst it is not necessarily certain that a winner will be declared on election night, we are at least likely to know the leanings of the race and the possible composition of the senate. Florida and North Carolina will be worth watching, as these states could give an early signal on the result given the large number of early voters, which can be counted ahead of the poll closure.

    Away from the US election, the earnings season continues in full force with another 224 companies from the S&P 500 and Euro Stoxx 600 reporting. 

    Finally, attention remains on central bank action following the ECB’s meeting this week, with both the Federal Reserve and the Bank of England (BoE) due to announce their latest monetary policy decision. On the former, similar to the ECB, no change is currently expected  by the market, however there may well be signals that further easing could follow in months to come. From the BoE, whilst there is no expectation of an interest rate cut, we could see additional stimulus by way of an increase to the Bank’s Asset Purchase Facility.

    Week to 23 October, 2020

    Summary

    • COVID-19 cases continue to rise at worrying levels in Europe, which is filtering through to October PMIs
    • The headline EPS growth rate for the Q3 US earnings season is now at -18%, 4% ahead of expectations
    • Still no additional fiscal stimulus from the US, but news flow remains upbeat
    • Outlook: the final full week of the US presidential campaigns, whilst the European Central Bank delivers their latest monetary decision

    Market and economic review

    Any further fiscal stimulus from the US remains on hold, however news remained upbeat this week as House Speaker Nancy Pelosi said that she and Secretary Mnuchin are “just about there” in terms of agreeing on a deal. There remain a few key sticking points in the amount of aid to both state and local governments, funding for schools, and the liability shield for employers. On top of those points, it is by no means certain that an agreed deal will pass through a Republican-controlled Senate, which adds importance to the results of the upcoming elections. On that, the final US presidential debate took place on Thursday, with early analysis suggesting there was no clear winner. This is an ideal outcome for Joe Biden who went into the debate averaging high single digits above President Trump in the polls. FiveThirtyEight and RealClearPolitics averages currently show a Biden lead of 9.9pts and 7.9pts respectively.

    Whilst on politics, the UK government restarted negotiations with the EU over a transitional Brexit trade agreement. After a period in which apparently no progress had been made in talks between the two sides, hopes remain that a compromise will be reached. However, if a deal is finally agreed, it is now likely to be much less wide-ranging than initially expected, given the limited time left to negotiate. Sterling appreciated over the week, however Brexit negotiations were likely not the only catalyst with Dave Ramsden, the Bank of England’s deputy governor, stating that now was not the right time for negative interest rates. 

    The pandemic remains a focal point with the number of new cases continuing to escalate, particularly in Europe. In an attempt to combat the spread, it comes as no surprise that governments continue to impose stricter lockdown measures. For example, in the UK, regions are being categorised under different tiers based on caseload numbers, with an array of restrictions being imposed. Another mitigant comes in the form of a curfew. France has reported an extension of the curfew they recently imposed, and Chicago is following suit after their daily case record was exceeded this week.

    The issue governments face is, whilst lockdowns may help to limit the spread of the virus, they also constrain economic activity, which has started to filter into the PMIs released at the end of the week. Thus far for October, the common theme has been an improvement in manufacturing while services have been slightly softer. In Europe, the German manufacturing print came in at 58, an increase from 56.4 last month, with demand for capital goods strong, underlining the rebound in capital expenditure and the strength of the auto sector. With services falling to 49.4 (from 50.6), the composite print was broadly in line with last month, however the underlying composition has clearly diverged. Looking more broadly at Europe, manufacturing printed at 54.4 (up from 53.7) and services printed at 46.2 (down from 48), contributing to a composite of 49.4 (down from 50.4 last month). The UK composite was slightly stronger, coming in at 52.9, however this is a material drop from the 56.1 in September. Manufacturing softened despite new orders holding up, whilst services dropped sharply, with the outlook for the services sector rather bleak, given the increase in recent lockdown measures. 

    In other data releases, the weekly initial US jobless claims number came in at 787k for the week ending 17 October. This is the lowest number the series has seen since the beginning of the pandemic, however it’s worth noting that this is still in nose-bleed territory compared to historic data. China’s third-quarter GDP expanded 4.9% year-on-year. This was less than expected but compared well with a rate of 3.2% in the second quarter as economic activity continued to recover from the COVID-19 shock. After a state-backed industrial recovery, the expansion is now extending to consumption: in September, retail sales rose 3.3% year-on-year, their second consecutive monthly increase, as industrial production grew 6.9% year-on-year (the most since December 2019).

    Finishing with an update on earnings, and the US season kicked into gear this week with 89 firms reporting, representing 15% of S&P 500 market cap. The headline EPS growth rate for Q3 is now at -18%, which is 4% ahead of expectations. Thus far, 90% of companies reported have beaten expectations – this is above historical averages. That said, price reaction has been negatively skewed, with the average price reaction to misses the worst we’ve seen in 5 years. This week there weren’t too many notable names reporting, although comments from the Coca-Cola CEO on regional divergence matched what we are seeing in our high frequency indicators. Namely, that Chinese activity has now got back to pre-COVID-19 levels, in big contrast to western economies and particularly Europe where activity is running significantly below. Earnings season in Europe is also in full swing, with price reaction more mixed, particularly for European banks where both UBS (+5%) & Barclays (+7%) rallied strongly after posting strong results.

    Outlook

    COVID-19 cases and associated lockdowns will likely dominate market proceedings next week, especially as the second wave remains a concern. Away from the pandemic, next week is the last full week of the US election campaign, and it will be interesting to see whether Joe Biden manages to maintain his advantage in the polling averages.

    It is a relatively quiet week on the macro data front, but we do hear from central banks with both the European Central Bank (ECB) and the Bank of Japan (BoJ) making their latest monetary policy decisions. On the former, the market expects policy to remain unchanged, however it will be interesting to see the updated macroeconomic projections, along with estimates of for growth and inflation.

    Finally, it is another big week for earnings with another 184 companies from the S&P 500 reporting, and 94 companies from the STOXX 600.

    Week to 16 October, 2020

    Summary

    • Risk markets broadly flat as no progress is made on additional US fiscal stimulus
    • The COVID second wave continues to cause concern as large case numbers are reported across Europe
    • US earnings season kicks off, with 8% of the S&P500 market cap. reporting
    • Outlook: flash PMIs, further earnings reports and political developments likely to take centre stage next week

    Market and economic review

    Risk assets started the week strongly, however as at the time of writing, appear to be closing the week broadly flat. The possibility of a further US stimulus bill remains on the cards, even if little progress was made this week. A driver behind the declines towards the end of the week was the concerning number of Covid-19 cases being reported, particularly out of Europe. Whilst the week was fairly quiet on the central bank front, it was reported that the Bank of England (BoE) conferred with banks over their readiness to cope with negative interest rates (in a sign that they are moving ever closer), setting a deadline of 12 November for a formal response. At the same time, there are growing expectations that the BoE will raise the size of its bond-purchasing programme, currently set at £745bn.

    On the stimulus front, the latest from US President Trump suggests that whilst open to a large stimulus package (potentially even higher than the $1.8trn he claims to have pushed in the past), any short-term progress seems unlikely. This followed news that Treasury Secretary Mnuchin does not expect a bill to reach Trump’s desk prior to the election next month. With the Senate Majority leader McConnell rejecting calls for such high levels of funding, extra importance weighs on whether the Democrats take back the Senate with regards to the level of stimulus that may be eventually agreed upon.

    Moving on to the pandemic, and the second wave numbers being reported out of Europe continue to be a cause for concern. According to numbers reported by Bloomberg, over the week (Thursday to Thursday), the UK reported a further 111,953 cases, an increase of 19.8% from the week before. In France it was a similar picture, with an additional 139,293 cases, which represents an increase of 19.6%. Whilst Germany (36, 571, 11.6%) is faring slightly better in limiting the spread, Belgium (48,363, 33.7%) has seen a large rise in cases. Spain (73,050, 8.6%), having been one of the initial second-wave hot-spots, is starting to see numbers improve, whilst Italy (43,204, 12.8%) is beginning to show signs of following in the footsteps of the UK and France, which is creating some unease within markets.

    With case numbers reaching such levels, governments have started to impose stricter lockdown measures in attempts to slow the spread of the virus and limit pressure on healthcare systems. For example, French President Macron announced that Paris, as well as eight other large cities, will be subject to a curfew from 9pm to 6am lasting at least 4 weeks. In the UK, the government has raised London to high alert, meaning that residents can no longer mix indoors with other households. Authorities in Spain, Switzerland and Poland have walked a similar path.

    The US earnings season kicked off in earnest this week with 8% of the S&P 500 market cap reporting. For Q3, expectations are for headline earnings-per-share growth of -22% year-on-year (yoy), which represents a considerable pickup from the nadir of -33% yoy last quarter. The quarterly pickup is similar in Europe, but from a much lower level with Q3 expectations at -38% yoy vs -52% yoy in Q2. The key takeaway from the last earnings season was the ever-growing divergence in fortunes between the large-cap technology firms and the rest of the market. Indeed, this trend is expected to continue this quarter, with earnings in the US technology sector only expected to fall -1.5%. The focus this week however was on financials with the five largest US banks reporting - the majority delivered strong beats on analyst estimates, driven by lower than expected loss provisions and continued strength in trading revenues. However, this masked a more worrying trend in commercial & retail banking activities, where the current interest rate environment meant net interest income fell sharply yoy. This appeared to be the market’s focus, as negative share price reaction was particularly notable, with the S&P 500 Banks index suffering over the week.

    Finishing with data releases: there was an increase in the US jobless claims reported for the week ending 10th October. The number came in at 898k, which was 73k higher than the market expected, and the highest number printed in the last seven weeks. With the lack of additional stimulus, at least in the short-term, this print will add to concerns that the recovery in the US labour market is running out of steam. Outside of that, US consumer inflation rose to 1.4% on an annual basis in September, marking the highest growth rate in the series since March and the fourth successive month of acceleration in the inflation rate since it troughed in May at 0.1%.

    Outlook

    Given the increase in Covid-19 cases across Europe this week, developments on the pandemic will likely be a focal point for markets next week. Outside of that, flash PMIs will be released where we will get a sense of how several economies have fared moving through October. Earnings season will continue with 90 of the S&P 500 reporting, including names such as Netflix, Coca Cola, Intel and AT&T, to name a few.

    In the political sphere, the final presidential debate ahead of the US election is due to take place on Thursday. Across the Atlantic, negotiations between the UK and the EU, in regard to their future trading relationship, will continue, following the EU calling on the UK to “make the necessary moves to make an agreement possible”.

    Week to 9 October, 2020

    Summary

    • Risk markets buoyed by optimism of further fiscal stimulus in the US
    • September PMIs paint a picture of an ongoing global recovery, with services lagging manufacturing
    • Outlook: politics remains in the spotlight, whilst the US earnings season kicks off in earnest next week
    • The portfolio returned +1.42% this week, taking the year-to-date returns to -4.48%

    Market and economic review

    Risk markets were buoyed by optimism surrounding additional fiscal support from the US, potentially even this side of the forthcoming election. Earlier in the week, US President Donald Trump instructed White House negotiators to stop further stimulus discussions until after the election. However, as the week progressed, he somewhat softened that rhetoric - stating that there is a good chance something could be agreed. This more positive sentiment, along with Joe Biden’s chance of winning the election increasing according to FiveThirtyEight’s prediction model (which ticked up to 84% on Friday), raised the prospects of significant further stimulus. This may be even more likely should the Democratic Party also win the Senate, which the same prediction model suggests has a 68% probability. 

    With the first round of fiscal stimulus expiring some time ago, it is unsurprising that risk markets are reacting to news of further government support. Looking at how the pause in stimulus is affecting the economy, the latest initial jobless claims number in the US (for the week ending 3 October) came in at 840,000. To put this into perspective, the record pre-COVID was 595,000, all the way back in 1982. Therefore, the current number still exceeds even the worst week post the global financial crisis, adding to concerns that the recovery in the US labour market is stalling.

    Staying with economic data releases, the week brought a number of services and composite PMI prints for September following the recent manufacturing numbers. In summary, the final PMIs painted a picture of an ongoing global recovery but the 0.5 point rise in the global manufacturing aggregate was offset by a -0.4 point fall in the global services aggregate. This means that the global composite reading edged lower over the month to 52.1. The reversal in services was most apparent in Europe, where the re-imposition of restrictions has been most evident. The relative resilience of manufacturing activity makes sense – it is less affected by renewed activity restrictions. But it remains to be seen how long these divergent trends can hold and labour market conditions appear to be worsening as companies begin to adjust to what are seen to be longer-term demand shifts in a post-COVID world.

    We may get a sense of how companies are coping as we move through the third quarter earnings season which kicks off in earnest next week. In the US, expectations are for headline earnings per-share growth of -22% year-on-year (y-o-y), which represents a considerable pickup from the nadir of -33% y-o-y last quarter. A similar pick-up is expected in Europe, but from a much lower level with Q3 expectations at -38% y-o-y vs -52% y-o-y in Q2. The key takeaway from last earnings season was the ever-growing divergence in fortunes between the large-cap technology firms and the rest of the market. Indeed, this trend is expected to continue this quarter, with earnings in the US technology sector only expected to fall -1.5%. We will be particularly focused on aggregate share-price reaction, which can shine a light on whether positioning looks stretched, and management guidance, which has been notable for its absence in the ‘post-COVID’ world.

    Switching tack to COVID-19. Using Bloomberg data, the number of global confirmed cases reached 36.57million on Friday, which is a 6% increase week-on-week. Whilst that number continues to rise significantly across many countries, death rates and hospitalisations, while edging up, have not moved up to what we saw during the first wave. Should this trend continue, say perhaps because herd immunity is building, it will be interesting to see whether governments move to embrace less restrictive, more localised approaches to virus spikes.

    Outlook

    Next week has plenty for markets to focus on. The continued spread of COVID-19 cases will inevitably be followed with rigour, especially as we approach the winter months in the Northern Hemisphere. With case numbers this week continuing to warrant cause for concern, authorities will persist in trying to strike a balance between keeping economies open while ensuring virus numbers do not over-stretch healthcare systems.

    Outside of COVID-19, the US election will remain a focal point with just 25 days to go. With Trump pulling out of the second ‘virtual’ presidential debate, and polls suggesting that Biden’s chance of winning is trending upwards, we will likely hear more from the President as the week progresses. Staying with politics, next week could be important for UK-EU negotiations with the European Council summit towards the end of the week, marking a self-imposed deadline by the UK Prime Minister Boris Johnson to reach an agreement on a trade deal.

    Finishing up, the calendar is relatively quiet from both a central bank and data perspective, however as mentioned above the US earnings season kicks off with a number of financials reporting, including Citigroup, Goldman Sachs, JPMorgan Chase and Wells Fargo.

    Week to 2 October, 2020

    Summary

    • Risk assets edged higher for most of the week on optimism over a further US fiscal stimulus package and generally supportive economic data releases
    • Politics: US elections potentially complicated by President Trump’s positive COVID test; Brexit talks reaching a crunch point
    • COVID second wave being managed through local restrictions; interplay of virus dynamics and economic activity a key issue for markets

    Market and economic review

    Risk assets edged higher for most of the week supported by hopes of a further round of US fiscal stimulus and economic data which generally painted a picture of ongoing economic recovery, albeit with some signs of moderation, and beholden to COVID-19 dynamics.

    One of the concerns that drove a retracement in risk assets in September was that the next round of fiscal stimulus in the US (including the extension of some expiring benefits) would be delayed until after the Presidential elections. Markets were therefore encouraged by reports of renewed discussion between Treasury Secretary Mnuchin and House Speaker Pelosi aimed at finding a compromise package that could win bipartisan support. A number of Federal Reserve governors have mentioned the need for more fiscal support to augment their policies and markets will remain attuned to how this develops. The other major political event in the US was the much anticipated first live debate between presidential candidates Trump and Biden. It turned out be a raucous event, which surveys suggested that Biden edged. Indeed, subsequent opinion data suggested his lead has extended with an implied win probability of 66% according to quotes from PredictIt (at the time of writing). News early on Friday that President Trump had tested positive for COVID-19 led to a risk-off tone in markets and introduces some uncertainty on how the run-up to the election may proceed.

    Turning to Europe, there was some concern on reports that implementation of the €750bn European Recovery Funds could be delayed. It requires unanimous agreement from member states, but there have been some disputes over aspects of conditionality. Germany appears to be leading efforts to find a compromise for what is a key policy support for the eurozone economic recovery. Meanwhile, Brexit talks continued with initial suggestions that the mood music was improving, contrasting with subsequent news that EU was initiating legal proceedings against the UK with respect to the draft Internal Market Bill. With mid-October the practical deadline for reaching an agreement, we have reached the crunch point in terms of finding compromise on the key sticking points of fisheries and state aid. Reports on Friday suggested that Prime Minister Johnson would meet with European Commission President Von der Leyen over the weekend.

    Meanwhile, COVID-19 case growth continued, with Europe experiencing a second wave. We have commented before that what seems to be different this time are the remarkably lower hospitalisation and mortality rates. The challenge for leaders is to find the optimum mix of policy to contain the virus while maximising economic activity. For now, more localised or targeted restrictions have been introduced across countries, rather than wholesale lockdowns. This will remain a key area of focus for markets in terms of trying to gauge how activity levels and the momentum of economic recovery will evolve.

    Economic data releases over the week pointed to an ongoing recovery in activity around the world, but a high degree of uncertainty remains on how its momentum will evolve from here. PMI surveys from China came in at 51.5 for manufacturing and 55.9 for non-manufacturing, both marginally higher than the prior month. The final reading of manufacturing PMI for the eurozone came in unchanged at 53.7 and markets will look forward to the final services reading due next week – the estimate had come in at 47.6, a noticeable step down from prior 50.5. (PMI readings below 50 suggest conditions are worsening vs prior months). In the US, the ISM manufacturing survey came in at 55.4, moderating from prior 56.6, but still in expansion territory. It will be interesting to see how these readings evolve over the coming months as we move beyond post-lockdown replenishment of inventories and pent up demand.

    US employment data presented a mixed picture. Non-farm payrolls edged higher by 661,000 but that was lower than 859,000 expected, and a step down from the prior (upwardly revised) 1,489,000. Earlier in the week, the latest continuing claims fell to 11.7m vs a prior reading of 12.6m. However, if we compare that to pre-COVID-19 levels of c1.7m it is clear there is still a long way to go in terms of getting back to ‘normal’. This underscores the importance of securing further fiscal support for the economy and an extension of unemployment benefits. Disney’s announcement that it intends lay off 28,000 employees form its US theme parks was a painful reminder of the ongoing disruption caused by the virus, and the risks to employment across the world as companies continue to adjust their cost bases, particularly as some government support measures taper off.

    Against that background, core government bond yield largely traded sideways and the US$ weakened reversing the recent trend.

    Outlook

    Politics will likely remain in focus next week. In the US attention will be on President Trump’s condition, the first vice-presidential debate, as well as developments on the fiscal stimulus. In Europe, the focus will be on Brexit discussions and any outcomes from the weekend meeting between Prime Minister Johnson and European Commission President Von der Leyen. In terms of economic data, the key releases next week will be service sector and composite PMI readings around the world.

     

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