Weekly Market Commentary (October 12 – October 16)

 

Global Market Highlights

  • Equities gain for the week

  • Economic recovery faces setback in Europe

  • No-Deal Brexit is closer than you might think

  • Chinese GDP growth forecast raised by IMF

US Markets

Major US indices managed to eke out a third consecutive week of gains as industrials and utilities were able to outperform the benchmark S&P 500 index. As bank earnings reports were mixed, financials were weak this week even though some of the large financial institutions surprised for the upside. The benchmark was lifted by Apple as it released its Iphone 12 lineup, while Amazon shares were also strong ahead of its annual Prime Day which happened on Tuesday and Wednesday.  

Come Tuesday, the Republican Senate Majority Leader stated that he was only prepared to take a $500 billion package to a vote , which is far below the $2.2 trillion that the Democrats in the House demanded. On Wednesday, Steven Mnuchin said that he and Nancy Pelosi remained far apart on some issues.

Coronavirus worries also seemed to pressure sentiment during most part of the week. Investors appeared concerned by the continued rise in cases in the U.S. and Europe, and Wednesday brought news of pauses in trials of both Johnson & Johnson’s vaccine and Eli Lilly’s antibody treatment due to possible adverse reactions. The U.S. also recorded its first confirmed case of reinfection with the virus. On Friday, however, markets appeared to get a lift from news that Pfizer was preparing to seek emergency use authorization  from the Food and Drug Administration for its vaccine as soon as November.

The week marked the unofficial start of earnings season, with 31 S&P 500 companies expected to report third-quarter results. Analysts expect overall Q3 earnings for the S&P 500 to fall over 20% on a year-over-year basis.

Economic data was mixed for the week as core retail sales rose 1.4% in September and the University of Michigan’s consumer sentiment index for October also positively surprised investors. However, weekly jobless claims rose to 898,000, which marked a two-month high. Continuing claims seemed more hopeful falling to 10.1 million.

For the week, markets were up as the S&P 500 index gained 0.13%, the Dow Jones Industrial Average advanced 0.13%, while the Nasdaq Composite Index gained the most, 0.79%.

European Markets

European stock indices were down for the week as investors feared the increase in coronavirus infections, Brexit related uncertainty, and the diminishing hopes for a US fiscal stimulus package. The European Stoxx Europe 600 index ended the week 0.78% lower, while the German Dax 30 index dropped 1.09%. The UK’s FTSE 100 declined 1.61%.

European governments started to impose stricter measures to contain the accelerating spread of the virus and to prevent a second wave of economically damaging national lockdowns. France imposed a nighttime curfew in 9 cities including Paris, while Germany began to impose restrictions on socializing behavior. The UK implemented a three-tiered system of localized lockdowns across England and offered business subsidies to the worst-affected areas.

UK Prime Minister Boris Johnson said the country should get ready for a no-deal exit from the EU on December 31, in response to Brussels’ demands for more unilateral concessions. However, Johnson kept the door open for more talks, saying he would listen to proposals based on a fundamental change of approach. The EU said before the announcement that it was ready to continue talking.

Furthermore, the EU is gathering a hit list of up to 20 internet giant companies that would face tougher regulations aimed at reducing their market power. Within these plans, which could include efforts to break up some of these giants, the targeted companies would have to comply with new rules forcing them to share data with competitors and to be more transparent on how they collect their data.

Asian Markets

Asian markets were mixed as the Japanese Nikkei 225 index dropped 0.9%, while in China the Shanghai Composite Index rose 2% and the CSI 300 index gained 2.4%.

The Japanese government is looking into a third stimulus package to boost consumption, which has faltered during the global pandemic. Prime Minister Yoshihide Suga has asked for specific recommendations for the proposal next month, so that a draft of the package can be created by year-end and submitted to the next ordinary Diet in January. The third supplementary budget in fiscal 2020 is expected to include more government subsidies for domestic travel, an extension of the “Go To” program, additional spending, and tax relief for struggling businesses. Japan’s government has already passed two supplementary budgets totaling approximately JPY 57 trillion in fiscal 2020. The government still has approximately JPY 8 trillion remaining in reserves for these initiatives. The third supplementary budget will likely be partially funded in the fiscal 2021 budget, which will be discussed in the January Diet.

Last month marked another strong month for foreign purchases of Chinese bonds, with foreign investors buying USD 20.2 billion in September. At a monthly press conference, People’s Bank of China officials appeared to show little appetite for cutting interest rates. The central bank injected RMB 500 billion into the financial system via its one-year medium-term lending facility, although the added liquidity was seen by market participants as not particularly generous, given upcoming tax payments.

The IMF raised its full-year gross domestic product forecast for China to 1.9%, up from its June forecast of 1.0%, in its October World Economic Outlook. The upward revision makes it likely that China will be the sole G-20 country to record positive growth in 2020. Longer term, China is on track to overtake the U.S. as the world’s largest economy in 2030 in current U.S. dollars, even if the country generates slower-trend growth of 4.5% over the next decade