Please see latest ‘investment intelligence update’ from Invesco received today 26/10/2020.
Monday 26 October 2020 – update
The contrast between those economies seeing a severe re-escalation in the virus and those that have escaped relatively unscathed was clear to see in economic news flow last week. China’s economy continues to recover strongly (see chart of week), while declining flash PMIs in Europe, led by the more exposed Services sector, highlighted the increasing economic pressures being felt in the region from renewed containment measures. The EZ’s Composite PMI is now in contraction territory, below 50, and although it remains just above 50 (52.9) in the UK, it is well below the 59.1 level seen in August’s survey. And it is only likely to get worse as the full impact of lockdown measures start to hit home. A difficult winter ahead for these economies. Fortunately for the global economy, the US continues to defy any virus-related concerns with last week’s PMI hitting a post-pandemic high, led by the Service sector. Notwithstanding that, further fiscal support is deemed necessary there to underpin the recovery and bridge the gap to the widespread availability of an effective vaccine. The UK has already been forced down that route, with further policy support announced last week for businesses and the labour market. Alongside the virus, politics continues to hog the limelight. The US elections are just over a week away, while closer to home Brexit negotiations appear to be back on track. The outcome of both remains uncertain, bringing with it the potential for increased market volatility in coming weeks.
Against this backdrop, equity markets struggled to make any headway last week. The MSCI ACWI declined slightly, with EMs comfortably ahead of DMs. Japan was the only gainer amongst the major DM markets. Small Caps marginally outperformed. Value and Cyclicals were the best style factors. IT had a rare poor week and Financials a rare strong one, the latter helped by higher bond yields. It was a mixed week for UK equities, with decent gains from mid and small caps being offset by large cap weakness, with the FTSE 100 hitting its lowest level for five months. Improved Brexit sentiment was the key driver here, with a strengthening £ a headwind for the latter.
Government bond yields had a difficult week, with yields moving higher across the board. 10yr USTs hit their highest level (0.85%) since June but remain over 100bp below their YTD starting level (1.91%). Expectations of further stimulus was the culprit here. Improved Brexit sentiment was behind higher Gilts. Weakness in government bonds weighed on IG credit, even with spreads hitting post-virus lows. HY performed better, with yields edging lower.
In currency markets the US$ weakened across the board. £ had its strongest day since March during the week on Brexit optimism. Copper benefitted from a weaker US$ as well as strong economic news flow from China, hitting a YTD high during the week. Gold remained below $1900. Oil weakened on expectations of increased Libyan output and virus-related demand concerns.
Market performance last week (%)
Past performance is not a guide to future returns. Sources: Datastream as at 25 October 2020. See important information for details of the indices used.1
YTD market performance and YTD low/high (%)
Past performance is not a guide to future returns. Sources: Datastream as at 25 October 2020. See important information for details of the indices used.1
Chart of the week: China Real GDP and forecasts (yoy%)
Source: Datastream as at 23 October 2020. Forecasts are red dashed line based on Bloomberg median quarterly yoy%.
- China announced its Q3 GDP number last week. While these numbers always need to be treated with a degree of caution given the speed in which the second largest economy in the world can produce its “final” estimate (the US by contrast does not produce its first estimate until late October and its final estimate until late December) they are the only official numbers available as to understand the overall state of the Chinese economy. And for 2020 at least the lack of an official growth target means there has been less political pressure to massage the figures this year.
- In Q3 the economy grew by 4.9%yoy. This was disappointing relative to the consensus expectation of 5.5%, due to below trend growth in the services sector, but was still an acceleration from Q2’s 3.2%yoy. A “good” pandemic, substantial fiscal and monetary support and strong foreign demand have clearly been important contributors to this rapid recovery back towards “normality”. And a continuation of the recovery in Q4 should take real GDP growth back to its pre-virus 6% trend. This puts the median consensus expectation for 2020 at 2.1% growth, which would leave China as the only major economy to see positive growth this year (by contrast the US is expected to contract by 4% and the EZ by 7.9%).
- The strong relative performance of the Chinese economy has had a positive knock-on effect on the performance of Chinese assets. The MSCI China and MSCI China A Onshore (large and mid cap stocks just listed on Chinese domestic exchanges) have returned 20% and 17% respectively, while the Renminbi has risen 4% against both the US$ and China’s preferred Trade Weighted measure (CFETS RMB index).
- In terms of longer-term prospects, Chinese leaders will discuss the next 5 Year Plan (2021- 2025) at the 5th Party Plenum meeting this week. The main theme of this FYP will be the “dual circulation” strategy, which calls for more emphasis on the domestic economy as a source of growth, compared to earlier export-driven growth strategies. This is against a backdrop of a steady economic slowdown, driven by an ageing population and slower productivity growth, rising geo-political tensions and a slowing down of globalization. Key to this will be a focus on boosting domestic consumption and further market opening measures. While any growth target is unlikely to be announced until March next year, expectations are that it will be in the range of 5-5.5%, which compares to the 6.5% target in the previous FYP.
Key economic data in the week ahead
- A fairly busy week on the data front, with the highlights being Central Bank meetings in the EZ and Japan alongside the first look at GDP performance in the former as well as the US. Outside the data news flow, developments on the virus front, the final run-in to the US elections and Brexit progress will all be closely watched by investors.
- Preliminary US Q3 GDP data is published on Thursday and forecast at an annualised 31.9%qoq – the sharpest rebound in the history of post-WW2 GDP. However, this will still see the overall economy behind where it was at the end of March, following the 31.4%qoq contraction in Q2. On Wednesday the Conference Board Consumer Confidence index is expected to show a slim improvement in October at 101.9 from September’s 101.8, but this would still leave it well below the 130+ level at the start of the year. The impact of the virus on consumer confidence remains plain to see. Following last week’s surprise drop in US Initial Jobless Claims at 787k, this week is forecast at 785k when released on Thursday.
- In the UK, the housing market takes centre stage, with Wednesday’s Nationwide House Price Index for October. House price inflation is expected to have slowed to 0.3%mom from 0.9%mom in September. Year-on-year house prices are estimated to have increased 5.2%yoy from 5.0%yoy. This would be the strongest growth since 2016. Mortgage Approvals for September on Thursday are expected to confirm the current robustness of the housing market, even if new approvals are forecast to be lower, at 76.1k from August’s 84.7k. This is still comfortably above the 60k 10-yr average pre-pandemic.
- The EZ publishes its first estimate of Q3 GDP on Friday. A strong rebound to 9.5%qoq is forecast, but again insufficient to redeem the -11.9%qoq drop of the previous quarter. Year-on-year this leaves growth at -7%, compared to -14.7% last quarter. On Thursday the ECB monetary policy meeting is expected to keep the policy stance unchanged, but the press conference should be of interest as ECB members discuss their updated economic outlook. The latest Inflation and Unemployment data is published on Friday. For the former, no improvement is expected in October, with Headline and Core forecast to remain at -0.3% and 0.2% respectively. The latter is expected to see a small uptick from 8.1% to 8.2% – still low in the context of the past decade – as government support schemes continue to underpin the labour market.
- The Bank of Japan meets on Thursday, with no change in policy expected there either. A busy day on Thursday also sees Industrial Production data for September, expected at 3%mom and -9.8%yoy, and September’s Unemployment numbers, where expectations are for 3.1% compared to 3% in August. The Jobs-to-Applicants ratio is likely to remain close to 1 – well below the 1.6x level seen at the start of the year. Retail Sales for September on Wednesday are forecast to show a significant -7.9%yoy drop from -1.9%yoy in August, but this is largely a function of consumers looking to beat the sales-tax hike in October 2019 rather than pandemic-related weakness.
- Official PMI data is released in China on Saturday. Following last week’s Q3 GDP results, the Manufacturing PMI for October is expected to continue to point to expansion, remaining at 51.8, while the Non-Manufacturing PMI is forecast to fall marginally to 52.8 from 53 in September.
A useful article from Invesco, reviewing current market issues and highlighting the key economic data in the week ahead.
Please continue to check back for our regular blog posts and updates.
Charlotte Ennis
26/10/2020