Capital Markets Update
- In a nutshell
- Europe lockdown mk.II
- Brexit bluster
- Dems extend lead
In a nutshell
Risk assets were mostly on the back-foot in October, owing to the deteriorating Covid-19 situation (particularly in Europe) and uncertainty over the upcoming US elections. Unsurprisingly, the worst performing regions were the UK and Europe. Asian and Emerging market equities delivered the strongest returns again, driven by better than expected Chinese economic data. US government bond yields ticked up whilst German bund yields fell, and corporate bonds were largely flat.
Europe lockdown mk.II
October saw the ‘second wave’ of Covid-19 infections accelerate in Europe, with all major economies reporting new highs in infection rates. Over the previous few months, governments have tried to use limited localised solutions to try to stabilize new case numbers without crippling the economy. However, the recent surge in infections has led many governments to revert to nation-wide lockdown restrictions. New case growth accelerated in the United States also, but this has not impeded the reopening of the economy. However, hospitaliastions are rising and ICU spare capacity is quickly shrinking, leading to concerns about future US policy changes. On the vaccine front, Astrazeneca and Johnson & Johnson have been given approval to resume trials after the FDA concluded it was safe to resume testing. Both trials had seen a participant fall seriously ill after being treated with the vaccine. Another vaccine currently in development by Sinopharm, a Chinese state-owned enterprise, announced that it had enough production capacity to supply 1bn doses of its coronavirus vaccine in 2021.
At present there remains great uncertainty over the future path of the virus. Whilst much progress is being made on a viable vaccine, there remains uncertainty over how quickly it would be manufactured and distributed globally. For now, policy makers in developed countries will have to continue to walk the tight rope of trying to reboot their economies without generating a ‘second wave’ of infections. And for policy makers in many developing economies, the task of containment needs to be weighed against the risk of lasting economic damage.
Brexit talks ebbed and flowed in October, with another month failing to yield a trade agreement. There was posturing from both sides, with the European Union (EU) beginning legal action against the UK government (due to internal markets bill) and the UK briefly halting negotiations following the EU Council summit. Talks did resume later in the month, with the UK agreeing to extend their deadline for a trade agreement. Divisions remain over state aid, fisheries and governance of the deal; however betting markets indicate that no-deal remains an unlikely outcome.
Dems extend lead
October saw a frantic last push for votes in the US, as the Republican party sought to close the polling gap with the Democrats. Polls indicated that the GOP had not been successful however, with Biden’s polling largely improving over the month. By the end of October, FiveThirtyEight (political forecaster) gave Biden an almost 90% chance to take the keys to White House, with a majority expected in both the House and Senate. Risk assets generally reacted favorably to the prospect of a Democrat clean sweep, hopeful that it would help resolve the legislative impasse holding up the next round of fiscal stimulus.
Multi Manager Team Views
We are encouraged by the improving economic data releases, along with continued fiscal and monetary support. However, the second COVID-19 infection wave appears to be materializing in Europe, showing the challenges of re-opening economies. In addition, a lot of the fiscal support looks under threat, with furlough schemes and expanded unemployment benefits coming to an end.
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