Weekly Market Commentary (October 26 – October 30)
Global Market Highlights
Equities in the US suffered their largest weekly decline since March, as the resurgence in new COVID-19 cases and election uncertainty made investors bearish and weighed on sentiment. All indices, except the S&P 500 index got pushed into correction territory on Friday as the declines were broad-based. Consumer discretionary and IT shares fell the most during the week. The Cboe volatility index or VIX reached its highest point since June.
Trading on Monday started on a down note as concerns over new coronavirus cases in Europe and the US weighed on sentiment and concerned investors. On Tuesday, markets continued their free fall as data showed that hospitalizations had risen at least 10% during the week. The pullback continued on Wednesday as countries in Europe started to enact new shut down measures. The bearish sentiment continued and overshadowed positive news about AstraZeneca reporting positive news about its vaccine producing robust immune response in elderly people.
Economic data for the week brought some positive news and limited the declines. On Thursday, reports showed that Q3 GDP had risen by 33.1% on an annualized rate, which was above the 31% estimate. Weekly jobless claims also supported sentiment as data showed that it was lower than estimates and reached a new pandemic low. Continuing claims were in line with expectations and fell to 7.8 million from 8.5 million. Durable goods orders have also risen by 1.9% in September which is more than expected. Personal income and spending also rose more than expected.
Macroeconomic and political concerns seemed to dominate sentiment even though the week marked the peak of Q3 earnings reporting season as 180 of the S&P 500 companies reported earnings during the week.
All of the major indices were sharply down for the week as the DJIA dropped 6.47%, the S&P 500 down 5.54%, and the Nasdaq Composite index shed a whopping 5.51%.
European equity markets also reported sharp declines during the week as investors worried that new lockdowns can push the eurozone economy into a double-dip recession. US political uncertainty supported the negative sentiment. The European Stoxx Europe 600 index dropped 5.56%, the German Dax 30 index shed 8.61%, while the UK’s FTSE 100 slid 4.83%.
Major European countries extended strict lockdown measures to contain the COVID-19 epidemic, although businesses and schools will remain open, which could soften the affect the lockdowns have on the economies.
French President Emmanuel Macron ordered a nationwide lockdown until December, with limitations on outdoor movement and mandatory working from home. Germany also announced sweeping restrictions, shutting bars, restaurants, and theaters for a month. Spain extended a state of emergency for six months, enabling the regions to curb residents’ mobility, impose curfews, and shut their borders. Italy ordered bars and restaurants to stop serving in the evening and closed gyms, swimming pools, cinemas, and theaters. Greece ordered Thessaloniki, its second-biggest city, and two other regions to move into lockdown. In the UK, Boris JOhnson announced a stay-at-home policy.
On the macroeconomic front, the ECB left its monetary policy unchanged and kept its deposit rate at -0.5% and its bond buying program at 1.35 trillion euros. The central bank stated that risks are tilted to the downside and promised to carry out a deep assessment of the economic outlook and the balance of risks. They will also recalibrate their instruments to respond to the unfolding situation.
Data showed that the eurozone economy rebounded faster than expected in Q3, although growth was lower than last year’s levels. Eurostat estimated that GDP increased by 12.7% after the Q2 contraction of 11.8%. The German and Spanish economies expanded at record rates and faster than expected. Consumer prices fell 0.3% year-on-year for a second consecutive month, in line with consensus expectations. A sharp drop in energy costs exceeded price increases in alcohol, food, and tobacco.
Asian markets also dropped, but not as dramatically as its US and European partners. The Japanese Nikkei 225 index shed 2.29%, while in China the Shanghai Composite Index declined 1.6% and the CSI 300 index shed 0.5%.
Asian sentiment turned bearish as the worsening coronavirus numbers in the US and Europe spooked investors as well as some quarterly earnings reports seemed to disappoint the market, which sparked a sell-off. At its October meeting, the Bank of Japan lowered its growth outlook for FY2020. The bank said that a recovery in demand for services may take longer than its forecast in July. Growth outlook for 2021 was revised higher. As expected, the central bank kept interest rates unchanged at the meeting. The BoJ’s short-term policy rate is set at -0.1%, and the bank said it will continue to purchase 10-year Japanese government bonds to keep the longer-term benchmark close to 0%.
Economic data during the week showed the continuing impact of the pandemic. Retail sales fell 8.7% in September on a YoY basis, marking the seventh straight month that the number has fallen short of 2019 results. Industrial output also remained below last year’s level but, on the positive side, increased 4% from August.
In China, Beijing reported that industrial sector profits climbed roughly 10% in September from a year earlier, driven by strong growth in computer and other electronic equipment manufacturing. Though YTD cumulative profits growth is negative owing to the first quarter’s coronavirus-driven plunge, the rebound in profits at large industrial enterprises is noteworthy.
In corporate news, Chinese fintech company Ant Group geared up for its mega initial public offering. The company, an offshoot of Chinese e-commerce giant Alibaba, aims to raise around $35 billion through selling an 11% stake in a dual Hong Kong-Shanghai listing in what promises to be the world’s largest IPO, exceeding Saudi Aramco’s USD 29 billion sale last year. In addition to Ant’s potential to shake up the traditional, bricks-and-mortar banking industry, the deal is a sign of China’s status as a leader in new economy areas, as well as the attractiveness of Chinese companies to global investors even at a time of rising anti-China sentiment in the West.