Markets last week

Global equity markets fell sharply in a broad-based decline throughout the week, driven by four clear factors:

• Firstly, an acceleration of new COVID-19 cases in many parts of the word, but especially in the US and Europe, was accompanied by the re-imposition of regional lockdowns of varying severity. This increased worries over a potential return to a sharp recession, as experienced in the spring and early summer of this year.
• Secondly, bickering between the Democrat and Republican sides delayed passage of an expected bumper US stimulus package beyond next week’s presidential and congressional elections. As noted last week, Treasury Secretary Stephen Mnuchin and House of Representatives majority leader Nancy Pelosi were close to bridging the gap between their respective positions, but the Senate Republican leadership was in no mood to countenance a package of the envisaged size.
• Thirdly, evidence of tightening polls in key battleground states in those elections undermined prospects for a “clean-sweep” Democratic win that investors have hoped will release a jumbo fiscal stimulus in 2021. This tightening also increased worries that the result may be contested in the courts and thereby drag uncertainty on for weeks if not months.
• Finally, even as many of them produced better than expected results in the third quarter earnings season, investors sensed that valuations in the major technology titans had become stretched after very strong performance thus far in 2020, and consequently took profits. This sense was reinforced by appearances by the CEOs of Google, Facebook and Twitter before the Senate Commerce Committee to answer questions on their dominance of social media platforms, appearances that highlighted the potential threat of regulation to their business models.

All this led to declines of 5.0% in US equities (when translated into sterling) and falls of 4.8% in the FTSE All Share in the UK, with a worse drop in Europe of 8.4%, as the area was undermined by a weakening euro and imposition of new lockdowns in France and Germany. Emerging market equities and the benchmark indices of China and Japan held up better, but still fell by around 3%, sustained somewhat by often less stretched valuations.

Fixed interest markets were largely becalmed compared with the more volatile outcome from equities. UK 10-year bond yields fell very slightly to 0.26%, while 10-year US Treasury yields rose very slightly to 0.87%. German 10-year bund yields fell the most, to -0.63%, reflecting dire news on COVID-19 from the major European nations.

In commodities, gold was very slightly lower, despite its usual safe-haven status, but crude oil plunged by over 10% on fears over the impact of lockdowns on demand.

The week ahead

Tuesday: US presidential and congressional elections

Our thoughts

Although Joe Biden has maintained a consistent lead of between 8% and 10% in national polls in the run-up to the election, the picture in key battleground states is much tighter, and a small shift in momentum towards Donald Trump in the last few days could move these marginals into his camp in the electoral college. The worst outcome from a market perspective would be one where either side refused to accept the result and the choice of winner ended up in the courts.

This is what happened with the contested result in Florida in 2000 between Al Gore and George W Bush, with Bush only emerging the winner on 13 December, nearly six weeks after the election had taken place, when the state’s 29 Electoral College votes were allocated to him by a margin of just 537 out of over 5.8 million ballots cast.

Less uncertainty surrounds the elections for the House of Representatives, where the Democrats are forecast to retain their majority. However, the Senate is up for grabs, with either party within reach of a majority. If the Republicans retain the upper house, then market expectations for a large fiscal stimulus may be disappointed. On the other hand, by the same measure fears over the impact of Democrat-promised tax increases would abate.

A Democrat sweep of Congress and the presidency would empower significant changes to government spending and entail higher taxation. At the time of writing, this appears the most likely outcome, but not by much.

Monday/Wednesday: US ISM Purchasing Managers’ surveys (manufacturing Monday, Services Wednesday)

Our thoughts

After a strong recovery over the summer and early autumn, there is mounting evidence of slowing momentum in the US economic recovery (despite record quarter-on-quarter growth recorded last week, see below).

It would be no surprise to see further evidence of this deceleration in both the manufacturing and the services purchasing managers’ surveys due out on Monday and Wednesday respectively. Consensus estimates for each remain relatively optimistic, with expectations of a small increase in the manufacturing survey to 55.6 compared with last month’s 55.5, while the services survey is expected to see a small decline from a robust 57.8 to 57.5.

Thursday: Central bank decisions from the Bank of England in the UK and from the Federal Reserve in the US

Our thoughts

Although it is unlikely that policy rates will be changed, consensus expectations are for the Bank of England to increase the size of its asset purchase programme (QE) by another £100bn to £845bn in total. This is in the light of the relatively weak economic recovery in the UK compared with other major economies and the impact of the severe lockdown measures Prime Minister Johnson announced on Saturday.

In the US, the Fed has already clarified its policy to its long-term inflation target of 2% saying in late summer that it would operate a symmetrical approach – in other words that it would tolerate periods where inflation is above the target if these have been preceded by periods when it has been below. Since the Fed’s favoured measure of inflation (PCE, or Personal Consumption Expenditures) has been below target, with the exception of a few months in 2011, for the last dozen years, this gives the Fed plenty of latitude to maintain ultra-low interest rates well into the future. No changes to key policy rates are expected at this meeting, especially as it is so close to the general election. However, it is possible that some commentary may be made repeating Fed Chairman Jerome Powell’s view that the need for a substantial stimulus package is pressing, given the impasse in Congress between the two parties over the issue.

Friday: Non-Farm Payroll data is released in the US

Our thoughts

Although by Friday markets may well be focused on an uncertain post-presidential election outcome, the monthly release of US non-farm payroll data will provide an important further clue as to the direction of travel for the US recovery. Market expectations are for a decline in the rate of additions to jobs from 661,000 in October to a still robust 600,000 in November.

Again, it would be no surprise were the result to be lower than this, given recent economic momentum, the withdrawal of emergency federal employment support measures in late summer and more recent evidence of a pick-up in long-term unemployment. Even so, an increase in jobs of anything like the expected magnitude should help push official headline unemployment down to around 7.7% from 7.9% last time, still almost twice the pre-COVID-19 level.

The numbers for the week

Sources: FTSE, Canaccord Genuity Wealth Management