Capital Markets Update
- In a nutshell
- Second wave worries
- Brexit's back
- US election hots up
In a nutshell
Many assets struggled to make headway in September, over concerns about failure to renew fiscal stimulus in the US, rising COVID-19 cases in Europe and uncertainty over the United States (US) election. Well known US technology names led the declines, with investors appearing to question the sustainability of their gains. Sterling fell against most major currencies, driven by renewed concerns of a hard Brexit type outcome, which gave overseas holdings a returns boost. In GBP terms, Japanese equities delivered the strongest returns, driven by the strength of the Yen, whilst UK companies lagged owing to their more cyclical exposures.
Second wave worries
September saw global COVID-19 infection rates tick up again, driven by mounting cases in Europe. In Europe, the ‘second wave’ picked up pace, causing localised lockdowns of many cities and regions, from Madrid to Manchester. Other regions are beginning to turn the corner however, with India and the US seeing a stabilisation in case numbers. On the vaccine front, Chinese officials announced that a coronavirus would be publicly available by November. Moderna, one of the many companies involved in the vaccine race, published an update stating that it may not be able to evaluate the effectiveness of the vaccine until late December. It is worth adding that many drugs are at the Phase III trial stage (which involves testing on larger sample groups), with results coming out over the coming months. COVID-19 testing also took a leap forward in September, as the World Health Organisation (WHO) announced the release of an effective antigen test that produces on the spot results within thirty minutes.
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.
The end of this year will see the Brexit transition period end, and lawmakers are rushing to hammer out some sort of a deal. Given the economic devastation already unleashed by the coronavirus pandemic, the stakes could not be higher. Whilst some progress has been made, there remains disagreement on a number of key issues, including state aid, fish and governance. The apparent stubbornness of the UK government, coupled with the EU’s need to appease each of its members interest, is creating deadlock. There was some cause for optimism in September, as the meeting of the Joint Committee, which oversees the implementation of the Withdrawal Agreement, was framed as productive from both sides. All eyes will now be on the European Council summit on 15 and 16 October, which Boris Johnson has set as the deadline for agreeing a deal.
US election hots up
Another key date for the financial markets is 3 November, when Americans will decide who they want sitting in the White House for the next four years. September saw the first presidential debate, with Donald Trump and Joe Biden facing off live in front of millions watching at home. Whilst the debate was eagerly anticipated by political commentators, in the end it was a chaotic affair that did not meaningfully alter how the candidates are polling. Polls on the whole point to a victory for the Democrats, with one well known political forecaster, Nate Silver, giving Biden an almost 80% chance of securing the keys to the White House. The potential impact of a Biden presidency has been difficult to digest for markets, given how vague the Democrats have been on big issues such as regulation, trade, taxes and spending. Therefore, whilst it looks likely that the Democrats will win the election, there still remains some uncertainty about what this means for financial markets.
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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