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Market Update 11/09/2020

Stocks declined for the second straight week, as technology stocks experienced their worst pullback since March. There was no single catalyst for the move lower, which left the Nasdaq about 10% below its all-time high reached just six trading days ago. However, broad valuation concerns, skepticism about a compromise on a coronavirus stimulus package before the election, and signs of slowing progress in the labor market all contributed to the negative sentiment. However, European equity markets, which have lagged the US despite having greater control over the Covid19 outbreak, rose over the week.

US equities fell 2.6% over the week, with the technology sector giving up a further 3.5% on top of last weeks losses. However, despite this, US technology stocks have still recorded gains over twenty percent year to date, as the economic lockdowns put in place by developed countries have led to an acceleration in structural trends already underway, such as home working and internet shopping. European equities rose 1.5%, whilst UK equities increased by 3.3%. Concerns arose that the UK government is considering overriding elements of the withdrawal agreement put in place with the European Union, despite acknowledging that this would be breaking international law. This led to a slump in the value of sterling, thereby boosting the earnings of UK companies whose profits are derived from outside of the country. Japanese equities were up 1.2%, whilst Australian stocks fell 1.1%, and Emerging markets fell 1.3% in aggregate.

Government bond yields, which move inversely to price, fell this week as the risk off sentiment in US equities permeated into the bond market, with the 10-year Treasury touching 0.66% at its lowest point. However, an auction of $35bn worth of 10-year Treasuries went for a yield of 0.70%, slightly higher than the yield achieved at the previous auction of 0.67%. US Treasuries are now trading at a yield of 0.69%, German Bunds minus 0.46% and UK Gilts 0.22%, all down over the week.

Crude oil suffered further weakness this week too, as oil traders bet that the demand for oil would weaken from here now that the summer driving season is ending. At close, the price of crude oil fell by 5%, having fallen by almost 15% since the end of August, making energy stocks one of the worst performing sectors over the week. Brent crude is currently trading at $40.0 a barrel and US WTI (West Texas Intermediate) $37.4.

Despite the Eurozones fall into deflation for the month of August, the European Central Bank (ECB) left monetary policy unchanged in its latest meeting, with interest rates held at minus 0.5%. Perhaps somewhat unexpectedly, the central bank also revised up their inflation forecast for next year to 1%, from 0.8% previously. This change was partly explained by government plans to boost spending. The Euro has now appreciated by over 10% versus the US dollar since March, acting as a headwind to the ECB reaching its inflation target and making European exporters less competitive.

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