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October’s news headlines were dominated by the resurgence of COVID-19 in Europe and the upcoming US elections. Equity markets spent most of the month in a holding pattern before the announcement of widespread restrictions across Europe in the final days tipped the balance of risk to the downside.
Market Round Up
Performance of major equity markets during October 2020:
The UK saw a significant increase in COVID-19 infections in October. In England, a tiered system of restrictions was initially rolled out before a persistent rise in new cases led to national lockdown measures being announced on the final day of the month. Restrictions varied across the different nations, but the objective of tighter controls was consistent. The UK’s furlough scheme will now be extended to March 2021, having previously been due to end on 31 October. The furlough scheme has reportedly protected 9.6 million jobs since it began in March, with the latest figures putting the cost to the government at £41.4 billion.
The second key issue driving UK markets is Brexit. Progress slowed in October as negotiations stalled. Although these have restarted there is still a risk of a further breakdown in talks, and the end outcome of any deal is clearly difficult to predict without speculating.
UK equity markets declined sharply at the end of October, ending the month down -4.75%. The pound fluctuated with Brexit headlines but ended the month all but flat against the US dollar. UK 10-year Gilt yields rose marginally.
In the US, while the virus has remained prevalent the news flow has focused primarily on the upcoming elections. Over the month the Democratic nominee Joe Biden extended his lead in the national polls and ended October ahead, as well as holding his lead in a number of the key swing states. Having now won the required number of seats, Mr Biden is the new US President-elect.
Risk assets generally reacted favourably to polls pointing to a higher likelihood of a Democrat clean sweep. With negotiations between House Democrats and Senate Republicans on a new fiscal stimulus package at an impasse, markets appear to view the prospect of near-term stimulus that could be unlocked by a Democrat victory as outweighing the potential headwinds from tax rises further down the road. Gains in the S&P 500 early in the month were subsequently given up as renewed concerns around the pandemic took hold. US stocks returned -2.66% in October, with value stocks outperforming their larger counterparts. US 10-year Treasury yields increased by 20 basis points to finish the month at 0.87%.
By the end of the month, all the major economies in the region were recording record daily cases per million citizens. Policymakers sought to balance economics with virus control and initially adopted a series of local lockdowns. As the month progressed, several major governments including Spain, France, Germany and Italy were forced to adopt national level restrictions. The Spanish government’s decision to extend its furlough scheme now means that all of the major economies in the euro area will benefit from ongoing labour market support. Yet this has not been enough to prevent a deterioration in the consumer outlook. The increase in infections and restrictions has impacted sentiment with consumer confidence falling. Equally of concern is the increase in the eurozone unemployment rate, which rose to 8.30%.
European equities delivered negative returns of -5.39% over the month underperforming most major regions. Germany was the biggest laggard, giving back some of the outperformance witnessed over the summer. This same cautiousness translated to fixed income assets, with 10-year German sovereign debt yields moving lower to end the month at -0.62%.
China was the first country to suffer from the virus and has retained stringent controls since. October finally saw the relaxing of the internal controls restricting movement between provinces that China has kept in place since the outbreak. This has not, so far, led to a resurgence in infections.
China’s success in controlling the virus has allowed its economic recovery to gather pace, with third-quarter GDP growth at 4.9% year on year.
After a strong bounce over the summer, China now looks set to be one of the only major nations that will see positive economic growth in 2020 relative to 2019. Chinese imports have also recovered with the latest data for September showing imports rising significantly. A resurgent Chinese consumer may help international exporters given the potential for weaker demand in their home markets.
Performance of major equity markets Year to Date (2020):
The fourth quarter of 2020 contains an unusually high number of unpredictable events for markets to negotiate. Market volatility in October was elevated as investors waited for a clearer picture from both the US election and the results of coronavirus vaccine trials before increased infections and subsequent lockdowns forced the market to re-evaluate the near-term risks.
November is set to be another very busy month, and several key events should provide a better steer on the outlook for 2021. The potential catalysts for a rotation between this year’s winners and losers in the stock market are possibly getting closer, but there remains significant uncertainty around the outcome of the US election, the vaccine trials, Brexit negotiations and the scale and scope of policy responses required over the winter.
As has been a common thread since the pandemic took hold, given the uncertainty that continues to dominate, relatively neutral asset allocation is likely to deliver the most prudent outcomes without exposing investors to increased risk and associated volatility.
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