Monthly Financial Markets Commentary – October 2020

We have a winner – Maybe!

  • Markets appear to have moved on from the US election result, reflected in the 7.3% gain in the US S&P 500 index last week (its best week since April).
  • The US sharemarket declined 2.7% over October.  Global equities fell 2.4% and Oil 11.0% on rising COVID-19 cases internationally and US election uncertainty.  Europe led markets lower, falling -5.6%. Emerging markets rose 2.1%, driven higher by Chinese stocks.
  • The “Blue wave” failed to materialise. Although Biden won the US Presidency and the Democrats retained their majority in the House, control of the Senate will be decided in runoff elections in Georgia in January.  It was not the resounding win predicted by the “Polls”.
  • With a divided government, regulatory risks decline for some sectors, and government spending is likely to be less robust relative to a Blue wave outcome.  A $1 trillion dollar US Government stimulus package is now expected, less than half of what was previously anticipated. 
  • Global interest rates are expected to remain lower for longer given the US election outcome. 
  • The result is also slightly positive for emerging markets due to lower interest rates for longer and an expected friendlier global trade environment under a Biden Presidency.
  • October witnessed a rise in COVID-19 cases across Europe and in the US, resulting in fresh lockdown announcements in Europe and the UK.
  • In view of the above outcomes, economists are trimming their economic growth forecasts for the US and Europe.  Albeit the “V” shaped global economic recovery remains on track.
  • In more positive economic news, the US Labour market is rebounding more quickly than anticipated, largely due to a rehiring of temporarily laid off workers.  Measures of global manufacturing activity have also improved more than forecasted.
  • The US economy grew at a 33% annualised rate in the third quarter of 2020 but remains 2.9% lower compared to a year ago.  In the US retail sales, manufacturing, CAPEX, and the housing market underpin the bounce back in economic activity.
  • The Chinese economy continues to recover, economic activity is 4.9% higher compared to a year ago, driven by industrial production, rising retail sales, and strengthening exports.

The Red Wave

  • In a red wave New Zealand’s Labour Party (which is more aligned with the US Democratic Party) claimed a decisive victory in the General Election.
  • Like the rest of world, New Zealand is expected to see a sharp rebound in economic activity over the second quarter (the economic growth data is not available yet).  Consistent with this, Business confidence has rebounded sharply to be above pre-pandemic levels, according to the NZIER Survey of Business Opinions.
  • New Zealand’s unemployment rate rose by 1.3% to 5.3% in the third quarter’s Employment Report.  Workers covered under the Government’s wage subsidy programme are counted as employed in the official data.  Accordingly, the unemployment rate is expected to rise further.
  • The New Zealand Sharemarket continues to perform strongly in absolute terms and relative to the rest of the world.  The strong performance of F&P Healthcare and the electricity generating sector helped push the market 2.9% higher over the month.
  • The Australian sharemarket also outperformed, returning 1.9%, on an improving economy and expectations the Reserve Bank of Australia (RBA) would reduce interest rates further, which they delivered in early November by reducing the cash rate to 0.1% from 0.25%.
  • Australia and New Zealand remain relatively well placed for 2021 as the global economy transitions into a recovery phase. 
  • Australia is expected to benefit from a pickup in global economic activity, particularly if a vaccine becomes available.
  • A COVID-19 vaccine is anticipated to become available by January 2021.  If so, global economic growth is expected to pick up strongly over the second quarter of 2021.   
  • Global equities are likely to perform strongly in this scenario.

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