Weekly multi-asset desk views

Weekly Review: 28 August 2020

Weekly Mag updates

Summary

  • COVID-19 update: diverging virus narratives as vaccine developments progress
  • Dovish Fed announcement as US bipartisan disagreement remains

Market and economic review

This week has seen a plethora of headlines as the MCSI global equity index reached all-time highs, led by US equities as a step up in some cyclicals developed. Coronavirus developments have continued to display diverging tendencies, with the US gradually bringing caseloads under control as Europe grapples with a second wave of the virus. Meanwhile, Federal Reserve (Fed) Chair Powell struck a dovish tone as he outlined their longer-run goals and monetary policy strategy at the Jackson Hole summit, with the Fed expected to maintain near-zero interest rates and allow inflation to run above the 2% target.

On the data front the US labour market continued to struggle with weekly initial jobless claims missing expectations, with focus returning to the stalemate between the Republicans and the Democrats as they continue to negotiate a stimulus deal. On a more positive note and in the face of increasing virus concerns, the Ifo business climate indicator from Germany beat consensus expectations in August with an increase to 92.6 (vs. 92.1 expected). That makes it the 4th consecutive monthly increase since the trough of 74.4 back in April, though it still stands below February levels.

Meanwhile in the US, Hurricane Laura shook US energy stocks and oil prices this week, with the expected area of impact containing a number of chemical and liquid natural gas producers. Thankfully the storm dissipated substantially, and oil prices came back with the damage not as severe as some had anticipated.

COVID-19 update: diverging virus narratives as vaccine developments progress

Global cases reached over 24m this week according to Bloomberg, with figures still being driven by the US, Latin America and India. In Europe we are continuing to see a rise in virus caseloads, with the UK and Italy joining Spain, France and Germany with figures reaching second-wave highs. This was accompanied by diverging containment responses: In France it was announced that masks would become compulsory throughout Paris, whilst the Italian health minister has rejected the idea of another national lockdown, following similar comments from Spain and Germany.

Meanwhile, caseloads in the US ‘sun-belt’ regions are continuing their steady decline following the imposed containment measures some weeks ago, with death rates also declining. Governor Cuomo of New York announced that 5 states would be removed from the 14-day quarantine requirement, including Arizona. In Asia, India has recorded its highest one-day toll of over 77,000 cases, whilst South Korea is still reporting record second-wave growth and has stepped up social distancing rules.

In terms of consumer activity, the EU has continued to see a drop off in mobility since early August, whilst in the US mobility and consumer spending appears to be returning at the margin this week following the noted decline in virus cases.

Against this backdrop, President Trump announced this week that the FDA has issued an emergency use authorisation for convalescent plasma to treat hospitalised patients, which involves using blood plasma from those who’ve recovered from the virus. There were also reports that the Trump administration were considering bypassing normal regulatory standards for the Oxford AstraZeneca vaccine, possibly with another emergency use authorisation. Elsewhere, a phase 1 trial from Moderna showed that the antibody response among those over 55 was comparable to that experienced by younger adults.

Dovish Fed announcement as US bipartisan disagreement remains

Meanwhile, the highlight this week was a reveal at the Jackson Hole summit as central bank speakers took the stage: Fed Chair Jerome Powell outlined their longer-run goals and monetary policy strategy. The Fed, he said, will now look to achieve an inflation rate averaging 2% over time, sometimes allowing inflation to run above the target to make up for prior undershoots. The other main change will allow unemployment to run lower than officials had previously tolerated, where the new statement says that policy will now be informed by the FOMC’s “assessments of the shortfalls of employment from its maximum level”.

The move confirmed to investors that the Fed is likely to keep interest rates at near zero for years to come as it seeks to decisively achieve its inflation goal, adopted in 2012. Powell’s announcement, though not entirely unexpected, marked the completion of a historic shift for a world leading central bank. Instead of a concern that very low unemployment would provoke inflation, they now have moved their focus more solely to low inflation. Fed policy makers meet again in September when they’ll detail how the new strategy will shape their policies, aimed at pulling the U.S. economy out of its worst downturn since the Great Depression.

Sticking with the US, weekly initial jobless claims remain in the headlights this week, coming in at 1.006m (vs. 1m expected), as the continuing claims number for the week ending 15 August fell to a post-pandemic low of 14.535m. With these figures still well above pre-crisis highs and some existing fiscal support deadlines drawing closer, pressure builds as hope for further fiscal stimulus falters in the background with the Republicans and the Democrats yet to agree on a stimulus deal.

Outlook

As we move into September next week, market focus will continue to be on the developments of the coronavirus in the EU and the US, along with the associated impact on high frequency economic activity data. Otherwise, markets will turn their attention to a number of important data releases including the August PMI readings from around the world, as well as the ISM readings from the US, which will give some indication of how the global economy has fared during the month following the flash readings last week. Elsewhere in data releases we will see the US jobs report next Friday, where Bloomberg market consensus is looking for a further c1.5m increase in nonfarm payrolls for August.

Otherwise, the events calendar is somewhat quieter following Jackson Hole, with the only major central bank announcement coming from Australia on Tuesday.

 

Important information

5-year performance record to 30 September 2020

  Calendar year returns   12-month rolling returns  
  2019 2018 2017 2016 2015   2019-2020  2018-2019  2017-2018 2016-2017 2015-2016 Currency
Insight's broad opportunities strategy (pooled) (GBP) 13.13 -4.99 10.13 5.05 -1.19   -3.60 5.80 2.18 6.82 5.45 GBP
3-month GBP LIBID 0.68 0.60 0.23 0.38 0.45   0.36 0.70 0.50 0.21 0.42  


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