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    Weekly multi-asset update: October

    Weekly multi-asset update: October

    23 October 2020 Multi-asset
    Week to 23 October, 2020


    • 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.


    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


    • 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%.


    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


    • 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.


    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


    • 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.


    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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