We enter the last trading day of October with stock markets once more under pressure following some disappointing Big Tech third-quarter reports yesterday evening, volatility spikes close to 40 and the consequence price pressure resulting in the Stoxx 600 MTD losing -5% and the S&P down by - 1%. However, while the Wall Street barometer is still up 3% year-to-date, the European one has lost 18%, driven not least by more targeted, partial Covid-19 lockdowns. While yesterday’s newsflow included a strong US third- quarter GDP recovery of +33.1% annualized quarter-on- quarter, the European Central Bank gave a quite dovish message following its meeting, indicating further easing in the light of the economy losing momentum faster than expected. This is likely to be decided at its 10 December meeting.
As industrial activities remain open t, the economic damage from the partial lockdowns should be less fierce than in the second quarter. However, significant short-term political risks from US politics to Brexit, in combination with the virus, look set to cause further increased volatility in November. But based on our view of the global early economic cycle, further monetary and fiscal stimulus (next US fiscal programme is only a matter of time) should re-accelerate the recovery from early 2021, accompanied by more positive medical news, including nearing vaccines.
Later this morning, eurozone GDP numbers for the second quarter should confirm this summer’s strong recovery. Approaching the New Year, we may well see decreasing uncertainty, once we’re through the US election and there is more clarity on Brexit. In addition, the partial lockdowns should hopefully contain the spread of the virus, probably boosting investor sentiment further down the line. Beyond these short-term developments, the backbone of our moderately pro-risk investment strategy remains our base scenario of an ongoing U-shaped economic recovery, which should become more dynamic next year.
European equity markets closed mostly lower on Thursday. The focus remained on tighter government restrictions in response to surging Covid- 19 cases, with Germany and France announcing one- month lockdowns. Macron warned of an overwhelming second wave, while Merkel claimed the situation "is very difficult.” The European Central Bank left its key policy settings on hold, leaving its key deposit rate at -0.5% and its pandemic emergency purchase programme (PEPP) at EUR 1.35 trillion, as expected. Its introductory statement gave a strong hint that it will shift its policy settings in December to respond to the unfolding situation and to ensure financial conditions remain favourable. In macro data, latest confidence data published by the European Commission showed confidence was in decline before the latest round of coronavirus mitigation measures by eurozone governments. German unemployment numbers were better than forecast. Italian business confidence and UK mortgage approvals were also showing some improvements.
US equities finished higher Thursday, following a big drop for major indices on Wednesday, when the S&P 500 declined the most since June. Tech hardware, airlines, autos, railroads, semis, media, and energy firms were some of the strongest areas. Treasuries were mostly weaker, with the curve steepening. The dollar was better on the major crosses. Gold ended down 0.6%. WTI crude oil settled down 3.3%, off worst levels but still down 9% for the week. Strong earnings were in focus yesterday, with high beat rates offering some reprieve from coronavirus case concerns and tech selling. Initial jobless claims were better than expected, hitting their lowest level since mid-March. Third-quarter GDP expanded a slightly larger-than-expected 33.1% annualized, but the best quarter on record followed the worst quarter of all time.
Asian equities are weaker Friday. On the macro front, Tokyo deflation deepened in line with expectations. Japan and South Korea logged stronger growth in industrial production, underpinned by machinery and manufacturing output. The China plenum communique set a goal of sustained economic development through 2025 with a focus on higher quality growth. China emphasized the need for technological self-sufficiency, strengthened defence capabilities and promoting Taiwan reunification.
