Charlie Hines and Victor Balfour, Wealth Management
Summary: The second wave and the stock momentum fade
Global equities whipsawed in September and ended the month down -3.2% (in USD), posting their first monthly loss since March, whilst government bonds rallied +0.6% (in USD). Key events included:
- A pronounced second wave of infections in Europe; targeted restrictions;
- Global stocks lose momentum, but economic recovery remains robust;
- China continues to lead the recovery.
Global contagion rates reached record daily highs in major European countries. Corresponding fatality rates – so far – remain subdued; restrictions have been localised and targeted. Global stocks reversed recent gains in September, driven largely by technology. Safe havens – USD, JPY – gained on risk aversion and government bonds remained stable, with implied treasury volatility hitting a record low. Meanwhile oil (Brent, -9.6%) declined on fears of a slowing recovery, and oversupply. Gold also declined (-4.2%), following a record high in August.
US: Recovery slows, Stimulus impasse, Electoral noise
The US economy continued to recover, albeit more slowly, in September. US retail sales expanded modestly (+0.6% in August), though remain above pre-pandemic levels. Similarly, the ISM manufacturing survey declined in September (55.4 vs 56), though marking the fourth consecutive month of expansion. US housing activity continued at a strong pace with new home sales rising (+4.8% saar) to a 14-year high. On policy, the Fed remains dovish, leaving interest rates unchanged, signalling an even ‘lower for longer’ stance. A further US relief package remains in stalemate with disagreement between Republicans and Democrats over the size. Meanwhile, Biden maintains a narrowing lead in the polls after the first (of three) presidential debates proved indecisive.
Europe: Surveys fade, EU’s Green economy, Brexit Bill
A distinct second wave of infections emerged across Europe. September readings for Eurozone composite Purchasing Managers’ Index (PMIs) came in weaker – Spain and Italy contracted. Similarly, August retail sales were mixed: UK, Germany and France are all above pre-pandemic levels, while Spain and Greece lag. The European Commission announced that 30% (€225 billion) of the €750 billion pandemic recovery fund will be financed through the issuance of ‘green’ bonds, aligning with the EU’s green ambitions. Additional fiscal stimulus measures were announced in the UK, with the job-retention scheme following the German model – flexible wage subsidies based on hours worked. Meanwhile, as Brexit looms, political maneuvering continues, including the UK’s proposed Internal Market Bill; key sticking points – fisheries and state aid – still unresolved.
ROW: China’s supply-side, Japan’s lag, India’s outbreak
China’s rebound gained momentum in September: manufacturing PMIs expanded to 51.5 – beating expectations; retail sales rose in August for the first time this year (+0.5% y/y), and industrial production rose 5.6% (y/y), with the manufacturing sector already back at full capacity. Elsewhere, Japan’s rebound continues albeit behind other developed countries: the quarterly Tankan survey (-27) showed an improvement from June (-34). Meanwhile, despite rapidly increasing infection rates, India’s manufacturing activity (PMI) jumped to 56.8 in September – its highest reading in eight years. Geopolitically, tensions mount between China and India over border dispute, whilst trade and security tensions between China and the US continue to escalate.
Market Summary (total return in local currency)
Sources: Bloomberg, Rothschild & Co