It was a week of consolidation for global equities as some investors could not resist finally buying into the first decent pullback in stocks for some months. The S&P 500 edged down another 0.6% for the week – marking the fourth weekly loss in a row – though the Index did manage to bounce solidly on Friday. The tech-heavy NASDAQ-100, however, rose 2% last week, the first weekly gain in four weeks. The $US continued to firm, which in turn hurt gold prices, even though bond yields fell further.
Fundamentally, however, the news was mixed, with further decent gains in U.S. indices of manufacturing and non-manufacturing activity in September – though worrisome news with regard to rising COVID-19 cases in Europe, the growing risk of a messy U.S. Presidential election and stalled efforts at a new U.S. fiscal stimulus package. As it turned out, the worst fears of a return to lockdown in the United Kingdom were not realised, though there was a substantial tightening in social distancing restrictions.
France and Spain are also weathering a serious second wave but as yet authorities remain reluctant to re-instigate the harsh shelter-in-place lockdowns seen earlier this year. This now is the central issue for markets – will countries be able to endure return waves of COVID without full lockdown, which in turn will seem to depend on whether we get similar spikes in death and hospitalisation rates seen earlier this year (which so far is not the case). If so, the fledgling global economic and equity market recovery can continue – if not, we face the risk of a ‘double dip’ recession, a more serious equity market correction, and yet more macro-stimulus.
This week global markets will nervously watch Europe’s COVID situation, while in the U.S. politics and payrolls will dominate. We get the first of three Trump-Biden debates on Tuesday, though it’s unclear which candidate the overall market most prefers (each has his own risks and benefits). There’s also renewed hope of more fiscal stimulus, given the Democrats on the weekend offered a less costly $2.4 trillion package (though still a bit more than the White House wants). On Thursday the market will also be hoping for a decent dip (from 870k to 850k) in still stubbornly high weekly jobless claims. The week ends with September payrolls, which are expected to reveal another solid 850k gain in U.S. jobs and a dip in the unemployment rate to 8.2% (from 8.3%) – which while good, still suggests a slowing in the rate of jobs growth in recent months, with still just under half the 22 million jobs lost in March and April yet to be recovered.
Talk of an RBA rate cut and an easing in bank lending restrictions helped push local stocks higher last week, though the $A took a tumble. In light of a dovish speech by Deputy RBA Governor Debelle, I, along with several other economists, pencilled in an RBA rate cut to 0.1% at the upcoming October meeting. That said, likely ‘well-sourced’ media reports have played down that risk, so it’s still debatable whether the RBA moves as early as next month – though I still see such a move as more likely than not in the months ahead, especially if the $A firms up again.
Banks stocks, meanwhile, enjoyed an extraordinary surge on Friday following the Government’s decision to water down responsible lending laws (to the effect, essentially, of allowing lenders to assess loans on a minimum level of likely future spending by borrowers, not on the actual level of their spending in the past). In other words, the Federal Government has agreed to enshrine in legislation a recent court ruling that said just because someone enjoys wagyu beef and a nice shiraz prior to getting a loan, does not mean they can’t be counted on to eat meat pies and drink cask wine once they need to start making loan repayments.
In other key news, Melbourne announced a further partial easing in its lockdown – though tough restrictions remain in place. This week we’ll get updates on building approvals (Wednesday), house prices (Thursday) and retail spending (Friday). These are likely to show a continued gradual recovery in the economy – supported by stimulus and reduced restrictions in most States other than Victoria.
Have a great week!