Please see below market update received from Brewin Dolphin yesterday evening. The commentary focuses on Brexit, Covid-19 and US stimulus.
Global equity markets were mixed last week. US indices eked out small gains, making it three positive weeks in a row for US shares. Chinese equities also moved higher on encouraging data.
Other markets struggled due to a worsening second wave of Covid-19 and associated containment measures restricting social and business activities.
However, Boris Johnson’s address to the nation on Friday, in which he suggested talks were “over” and the nation needed to prepare for a no-deal Brexit, was largely dismissed by markets; after an initial sell-off in the pound, it then recovered as investors recognised his speech as political posturing.
Indeed, UK shares finished higher on Friday and, at the start of this week, reports were suggesting it was Boris Johnson who is giving ground. He has reportedly agreed to water down parts of the controversial Internal Market Bill, a key part of the legislation governing the British withdrawal that was said to break international law.
Last week’s markets performance*
- FTSE100: -1.61%
- S&P500: +0.19%
- Dow: +0.06%
- Nasdaq: +0.79%
- Dax: -1.08%
- Hang Seng: +1.10%
- Shanghai Composite: +1.96%
- Nikkei: -0.88%
*Data for week to close of business on Friday 16 October.
Share markets start new week on back foot
Equity markets were mixed on Monday. Markets fell across Europe as Covid-19 restrictions continued to spread, and shares in the US were sharply down. At the close, the Dow had fallen 1.44%, and the Nasdaq was 1.65% lower.
Markets were worried by rising Covid-19 cases across the US, and investors are also sceptical about whether a new fiscal stimulus package will be agreed before the election. Democratic House Speaker Nancy Pelosi set a deadline of 20 October for progress to be made towards a deal in the long-running talks. While reports suggest that the “gap is narrowing” on many contested issues, time is running out.
Meanwhile, Donald Trump told a journalist that he was prepared to go higher than the $2.2trillion in fiscal stimulus proposed by the Democrats. If he is serious he will likely face stiff opposition from many Republicans in the Senate who oppose such a large package.
UK Brexit optimism
Currency traders seem to be pricing in a Brexit deal, as the pound rose against the euro and the dollar on Monday. The strength in sterling weighed on the FTSE100, which closed down by 0.6%. The more domestically focused FTSE250, however, gained 0.24% – more evidence that the market believes the UK will avoid a hard Brexit.
Businesses, too, are showing remarkable confidence in a deal. The last time a no-deal Brexit loomed, in March 2019, manufacturers stockpiled goods at record pace in case their supply chains were disrupted. Today, there is no evidence of any such cautionary measures.
Source: Refinitiv Datastream
A choppy outlook for markets
The largely downbeat news flow is causing anxiety for investors even after having been repaid for the courage they displayed in weathering March’s market storm. The prospect of a hard Brexit will be a worry for many, but it should be stressed that most portfolios will benefit from the weakness in sterling and strength in bonds that a no-deal Brexit would provoke. The bigger risk, paradoxically, is that a deal gets done and sterling rallies.
Rising Covid-19 case numbers and a potential disputed US election, however, have the potential to upset markets.
While the market is no longer likely to rise in a straight line, equities remain, perhaps more unequivocally than ever, the most attractive long-term savings vehicle available. There is a higher-than-average chance of volatility in the coming months, but that could lead to excellent buying opportunities and when they arise and we will be looking out for bargain buys on a stock-specific basis.
China revs up its recovery
Economic data out of China on Monday confirmed its recovery is continuing apace. The Chinese economy grew at an annualised rate of 4.9% in the third quarter. The expansion was below expectations but was still well above the 3.2% increase in the second quarter.
The recovery, which has been helped by generous state investment to its industrial sector, now looks to be broadening across the economy, as was hoped by policymakers. Industrial production grew by 6.9% in September, its highest level of the year and equalling the pace of expansion seen last December, before the pandemic began.
In addition, retail sales, which have lagged behind the broader economy, posted their best performance of 2020, rising by 3.3% in September. For context, that is up from growth of just 0.5% in August after seven months of declines.
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