Weekly Market Commentary (October 19 – October 22)
Global Market Highlights
The major benchmarks ended the week in the negative as investors reacted to stimulus negotiations as they turned their attention to Q3 earnings reports. The Nasdaq Composite index was the worst performer this week as it was dragged lower by a weakness in Apple. Communication services shares gained as internet giants Facebook and Alphabet increased in value, even though news sources reported that Alphabet had become the target of the DoJ antitrust lawsuit.
Monday saw the worst declines during the week as opposition to a larger stimulus package of $2.2 trillion seemed to harden within the Senate Republicans. Earnings season changed into higher gear, as 91 S&P 500 companies reported Q3 results. Shares of Netflix fell sharply on Wednesday as the number of new subscribers came in below expectations. As of the end of the week, analysts were expecting overall earnings for the S&P 500 to have declined 16.5% in the quarter versus the year before. Of the companies that had reported to date, however, 84% had beaten earnings estimates—the highest proportion ever recorded by analysts.
Economic data during the week seemed positive, especially when it came to housing. Housing starts in September missed expectations, while single-family construction and overall building permits reached a new 13-year high. Existing home sales lso jumped 9.4% in September. Weekly jobless claims fell more than expected to 787,000, while continuing claims continued to drop sharply, dropping to 8.4 million.
Overall, US indices were lower for the week as the S&P 500 dropped 0.46%, the Dow Jones Industrial Average declined 0.95%, and the technology-heavy Nasdaq Composite index shed 1.06%.
Equity markets in Europe also declined on news that the economic recovery was stalling as tighter restrictions were put in place to curb the surging coronavirus infections. The Stoxx Europe 600 index declined 1.36%, the German Dax 30 index slipped 2.04%, while the Uk’s FTSE 100 index lost 1%. Several European countries tightened mobility restrictions to battle the coronavirus. In Ireland, the government announced a six-week full lockdown, while Northern Ireland will follow a less rigid lockdown for only a month. France extended its curfew to cover almost 70% of its population and said that the state of emergency could last until February of 2021. Amending an earlier bailout plan, the UK government increased support for jobs and workers hit by restrictions in tier-2 areas after growing clamor from firms in the hospitality sector. The Italian government approved a preliminary 2021 budget that includes expansionary measures totaling EUR 39 billion, including EU recovery funds, to help heal the economic damage caused by the coronavirus.
The President of the ECB, Christine Lagarde said in an interview that the economic recovery is losing momentum as governments started to impose new restrictions to curb the pandemic. She also stated that both fiscal and monetary policy support will have to remain in place for as long as necessary to tackle the current situation. Lagarde also urged EU leaders to accelerate efforts to approve the 750 billion euro recovery fund so that the funds can be distributed next year. Macroeconomic data showed that PMI data for October shows that business activity in the eurozone has contracted, another sign that the economic recovery is slowing.
Asian markets were mixed as the Japanese Nikkei 225 index gained 0.5%, while in China the Shanghai Composite index shed 1.8% and the CSI 300 index dropped 1.5%.
The BoJ’s policy meeting will begin on October 28th and is expected to lower its projections for GDP growth and inflation for the fiscal year. The main reason for lowering growth forecasts is the larger-than-expected decline in economic activity in the previous quarter due to the coronavirus pandemic. Data released after the BoJ’s forecast in July showed that Japan’s economy contracted at an annualized 28.1% pace in the period, its worst decline in the postwar era. Additionally, the latest BoJ quarterly survey, compiled in October, showed that large-cap firms plan to reduce capital spending to 1.4% in the current business year from 3.2% in June. However, most economists do not expect any additional stimulus measures unless conditions worsen significantly, because the central bank believes the economy is showing signs of a gradual improvement.
Exports from Japan fell 4.9% in September, which was the smallest rate of decline in seven months. Car and truck shipments to the US have rebounded to the best levels since the beginning of the pandemic. Exports to the US increased for the first time and while exports to Asia dropped 2%, shipments to China rose 14%.
In China, reports suggested that the economy expanded by 4.9% in Q3. Industrial output, for example, grew by 1.2% in September from August and surpassed pre-pandemic levels. By comparison, industrial activity remains 3% to 7% below pre-crisis levels in the U.S. and Europe.
Mainland renewable energy stocks have also been in focus after President Xi Jinping pledged at the United Nations in September that China would achieve carbon neutrality by 2060. An index of 40 renewable energy stocks compiled by data provider Wind has gained around 5% over the past month, reflecting the belief among domestic investors that green energy will feature prominently in China’s next five-year economic plan to be unveiled at month-end.