Last week marked the 11th time this year that the S&P 500 has closed more than 2% lower than where it started the week, compared with a yearly average of around six times since 2010. The sell-off was largely driven by news that daily coronavirus cases have hit new record highs, and by less certainty that we will see another round of fiscal stimulus this year. Notably, the technology sector, which has been a leader for much of this bear-market rally, was down 6.5%, making it one of the leaders in the decline this week. Some good news was the strong third-quarter GDP growth, a labor market that is continuing to recover, and consumer spending that is continuing to exceed expectations.
It has become increasingly clear that the restrictive social measures taken by European countries in recent months have failed to slow the virus, pointing towards an increased likelihood of a return to national lockdowns. Italy and Spain announced further restrictions at the beginning of the week, followed by France and then the UK on Saturday evening. Even Germany, which has managed to contain the virus relatively well within the context of Europe, announced tighter restrictions.
In the US, record case numbers have largely been ignored by the Trump administration, and once more, Republicans and Democrats failed to agree a new financial support package for those who have lost their jobs due to the pandemic. China, the country at the centre of the outbreak, having largely controlled the virus, was able instead to focus on its fifth five-year economic plan, and it still on track to achieve a ‘V’ shaped recovery.
European equities, very much at the epicentre of the latest escalation in Covid19 cases and with governments increasingly looking to implement economically costly lockdowns, fell 5.7% over the week. This was despite third quarter GDP surpassing expectations, increasing by a massive 12.7% for the Eurozone in aggregate, as economies reopened post the second quarter lockdown. UK equities fell 5.0%, with more domestically orientated mid cap stocks falling by 5.8%.
US equities had fallen 4.5% over the week, whilst technology stocks once again proved to be relatively defensive, dropping 3.1% as Alphabet (Google’s parent company), Amazon, Apple and Facebook all revealed third quarter earnings this week that surpassed expectations. US GDP growth for the third quarter came in at 7.4%, higher than forecast, following the contraction of 9% in the second quarter. Initial jobless claims also came in lower than expectations, with 751,000 new applications versus forecasts of 775,000.
Japanese stocks fell by 2.8%, whilst the Australian equity market dropped by 3.9%. Japan’s incidence of coronavirus cases lies somewhere in between the experience of Western developed nations and that of China, whilst the city of Melbourne in Australia this week emerged from one of the longest and strictest lockdowns in the world.
Despite the selloff in equity markets, government bond markets offered little upside as yields (which move inversely to price) are trading at such low levels already. 10-year US Treasuries are currently trading at 0.82%, German Bunds minus 0.63% and UK Gilts 0.23%. Bond markets are waiting to see the outcome of the US election, with the possibility that the Democratic party could achieve a clean sweep of both the House of Representatives and the Senate, which would enable them to enact much more radical fiscal policy.
Crude oil fell sharply this week, as traders priced in a fall in demand as social restrictions were tightened across Europe. Brent crude fell by 10%, now trading at $37.6 a barrel, and US WTI (West Texas Intermediate) fell by 9.4%, currently priced at $36.0 a barrel.
Important economic data being released this upcoming week include the Unemployment Rate, the Fed’s upper bound key interest rate, and various PMI series.
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