Global equities pulled back last week, interrupting the rebound we’ve been enjoying so far this month after the September correction. The theme of the past week is ‘unresolved’. U.S. fiscal stimulus talks are ongoing and as yet unresolved. Ditto the UK-EU post-Brexit trade deal talks. The global COVID-19 crisis also remains unresolved, with rising cases and a return to a range of social distancing restrictions across Europe. Some good news came with a larger than expected drop in U.S. weekly jobless claims and ongoing generally good U.S. earnings reports.
Most critically for global markets, however, while a third wave of COVID-19 cases is mounting in the U.S., to record highs, there remains a very low political appetite for renewed restrictions – in part because death and hospitalisation rates remains well down on that seen earlier this year (see charts below). Of course, if the case count in the U.S. keeps exploding then the currently lower death and hospitalisation rates could easily become far less tolerable. Indeed, markets have yet to focus on the risk of potentially greater Washington tolerance for lockdowns should Biden be elected President.
Also of note last week was a chunky lift in long-term bond yields, despite equity weakness, with U.S. 10-year yields reaching their highest level since early June. This appears odd, but is perhaps in anticipation of a major U.S. stimulus package irrespective of who wins the Presidency next week. Rising yields saw the beleaguered global financial sector lift modestly last week, in a rare display of outperformance.
In terms of the week ahead, markets will remain focused on whether an election-eve U.S. stimulus deal can get done (never say never, though this looks increasingly unlikely). Focus will also remain on the polls, and especially whether a late swing to Trump (as happened last time around) becomes evident. COVID concerns will also continue to linger, with some risk of a further dramatic tightening of restrictions in major economies such as the UK and France. U.S. Q3 GDP on Thursday should reveal a sizable 30% bounce back in annualised growth (after a 30% slump in Q2), though this is already well-anticipated by the market, with focus now on the Q4 pace of recovery. This is also a bumper week for U.S. Q3 earnings reports, with major tech companies such as Apple, Facebook, and Alphabet delivering their (likely good) results on Thursday.
There was little in terms of major local news last week, with preliminary September retail sales slipping back 1.5% after recent solid gains. Otherwise, local talk remains fixated on whether Melbourne can ever extricate itself from lockdown, and the tsunami of policy measures now widely expected to be unveiled by the RBA next week. The S&P/ASX 200 index was largely flat last week and is still flirting with the top end of its range since early June. Despite the recent stumble in global technology stocks, the local tech sector – as evident in the ATEC ETF – continues to power ahead.
The local market enters the new week somewhat disappointed by further delays in the re-opening of Victoria. The Q2 consumer price index result on Wednesday, meanwhile, will likely confirm very subdued underlying inflation pressures (core annual inflation is likely to drop from around 1.2% to 0.8%) – which will only highlight the huge task ahead for the RBA in trying to get inflation back into the 2 to 3% target zone, and likely very long wait before local interest rates are lifted again.
Have a great week!
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