Market Update 26/10/20
Following three consecutive weekly advances, equities declined modestly last week. The news flow was dominated by headlines around the negotiations for another round of fiscal relief from Washington before the election, which is fast approaching. Whilst the imposition of new lockdown restrictions rattled equity markets at the start of the week, in the US and Europe losses were curtailed by better earnings data and economic news.
Economic survey data out of Europe also boosted sentiment later in the week. In Germany, the composite purchasing managers’ index rose to 54.5, above expectations of 53.2, driven by optimism from manufacturing. A reading above 50 indicates expansion in economic activity. In addition, despite further local lockdowns, UK retail sales rose 1.5% in September from the previous month, above expectations and up 4.7% on a year-on-year basis and exceeding the forecasted 3.7% rise.
US markets finished down 0.87%, with no clear conclusion this week on negotiations between Democrats and Republicans over a $2 trillion coronavirus aid package. The main European market finished down 1.09%, whilst the UK market finished lower by 0.29%, hindered by a stronger Pound Sterling as UK large caps derive a large portion of their revenues from overseas.
In Asia, the Japanese market finished higher by 0.47%, whilst the Hong Kong Index was the standout performer this week rising by 2.2%. Robust GDP (Gross domestic product) data out of China helped the region as the country reported Q3 GDP growth at 4.9%. Industrial growth powered the country’s recovery from the coronavirus pandemic. Industrial production in China leapt 6.9% in September, its highest level this year and the same rate as of December before the virus outbreak.
US bond prices have come under pressure this week, as polling forecasting, a democratic win for the Presidential election has increased the expectations of even further fiscal stimulus. The prospect of more fiscal stimulus would improve the US economic outlook and raises the chances of higher inflation, which would send yields higher. Bond yields, which move inversely to their bond price, rose for both the 10-year and 30-year US treasuries, by 11 and 15 basis points respectively over the week. The 10-year US Treasury is now yielding at 0.85% whilst the 30-year treasury is yielding at 1.67%, a four-month high.
The UK Pound sterling is on course for its biggest weekly gain since March, up 1.18% to $1.306 The currency was buoyed by positive statements from both sides of the Brexit negotiating table. On Wednesday EU chief negotiator Michel Barnier commented that a trade deal between the UK and the EU bloc was “within reach” if both sides were prepared to compromise. A response from the UK government indicating preparation for “intensive talks” aided the currency’s rally.
Brent crude prices finished the week slightly lower, by 0.68% to trade at $42.64 per barrel, on the back of concerns over weaker demand given the news of further economic shutdowns. Elsewhere, copper prices made the headlines as the industrial metal hit $7,000 a tonne for the first time since 2018. Stronger industrial demand from China and supply interruptions in Chile, the world’s largest copper producer, helped boost the price.