19th October 2020

It was a tough week for stock markets, particularly in the UK as rising COVID cases combined with increased social restrictions and poor labour market data to weigh on stocks. Global markets did manage to eke out modest gains, but this was largely due to the weakness in the pound and continued resilience from the US technology sector. It’s very much more of the same for markets this week, with investors firmly focused on the US Presidential election (with the final debate this week) and corporate earnings, as well as – closer to home – any progress with the Brexit agreement and the direction of the COVID case numbers.

Last Week

  • Global stocks made very modest gains but the UK market lagged
  • The UK had some poor economic data, particularly concerning the labour market
  • Sovereign bond markets did well during the week as yields fell
  • US economic data was generally good but the jobs market was more challenged
  • Hopes for US stimulus continue to tantalise markets
  • Commodities continued their good run

This Week

  • There’s a fair amount for markets to focus on this week: in Europe, the spread of COVID cases along with the ongoing negotiations of the Brexit agreement. We also have UK inflation data out tomorrow and retail sales data on Friday.
  • We also have a fair number of companies reporting earnings in the US, with 90 doing so over the week, including names such as Netflix, Nextera and Tesla.
  • Friday sees the publishing of flash PMI data across the major economies: most readings are expected to remain in expansionary territory.
  • There’s also the final presidential debate which is on Thursday. Biden still holds a healthy lead in the polls and with the bookmakers.

Last Week’s Highlights​

Global stock markets made very modest gains last week driven largely by the technology sector, but most other sectors struggled. Index heavyweight Apple rallied hard at the start of the week in anticipation of the launch of the new iPhone 12 and just about held onto those gains to give the tech sector – and the broader index – a boost. The banking sector was the worst performing, despite some decent earnings numbers which generally showed results that were better than expected: boosted by strong trading and investment banking revenue, with less money set aside for impaired loans.

It is very early days in the US earnings season, but the estimated earnings decline for the 3rd quarter is -21% which follows a -26.9% decline in Q2.

The UK All Share market dropped by 1.5% on the week, dragged lower by the larger companies in the index and in particular oil and gas names which were hit more by increased concerns around a second wave of the virus and the potential for lockdowns impinging on economic activity. Unsurprisingly, the worst performing stocks in the All Share index were those hardest hit by the three tier lockdown system, with Restaurant Group and JD Wetherspoon both down by over 19% on the week.

The UK stock market was also further weighed down by some poor economic data, rising COVID cases and lack of progress on the Brexit trade agreement.

Unemployment came out higher than expected at 4.5% to mark its highest level in three years, with redundancies increasing at their highest annual rate since 2009. This came alongside stalling Brexit negotiations, with Prime Minister Johnson saying on Friday that the UK will prepare to leave the European Union’s single market at year end without a Brexit trade agreement in place.

Amidst the poor UK data, UK government bonds were a notable beneficiary, returning nearly 1.5% on the week as 10 year yields fell to 0.18%. This falling of yields also helped drive decent returns for UK investment grade credit markets, which saw themselves return 0.7% as the more risky areas of the bond market suffered, with both high yield and emerging market debt giving up ground on the week as spreads widened.

US economic data was generally good last week, with retail sales more than doubling vs expectations by rising 1.9%, although there was definite evidence of a 2-track recovery, with sales of goods doing very well (notably sporting and DIY) but of services falling. However, the strength here was challenged by the US jobs market which saw weekly jobless claims rise to 898,000, a two-month high.

Hopes for US stimulus before the election on the 3rd November continue to tantalise markets, with the White House having offered a package of $1.8 trillion and the Democrats pushing for $2.2 trillion.

Commodities continued their quiet ascent, with the Bloomberg Commodity Index returning over 1% on the week to take returns for the quarter to over 3.5%. Last week much of the return came from agricultural commodities such as wheat and soy meal, which has been much of the story for the quarter-to-date, with livestock also doing well as the African swine fever serves to drive up prices

Asset Returns

Equities & Oil: returns are all in base currency, save for global and emerging which are in GBP. Bond returns are all shown in GBP. Gold in GBP. Source Bloomberg.

Joe Biden has a comfortable lead over President Trump heading into the last TV debate this week ahead of the 3rd November election

Source: RealClear Politics / Financial Times

Rory McPherson
Head of Investment Strategy