Equities
US equity markets are treading water somewhat with Trump’s positive coronavirus test throwing the US election into turmoil. Investors had already been bracing themselves for market volatility following Mr Trump’s repeated refusal to commit to a peaceful transfer of power in the event that he loses the election.
US-presidential and economic uncertainty were already drivers of volatility, but decisions by France, UK and other European governments to U-turn on economic reopening in the face of concerns about a Covid-19 second wave, have added to investors global concerns.
Wall Street’s VIX volatility index is currently at 20, above its long-term average of about 28 but well down from the 50 values achieved during March at the height of the Covid-19 crisis.
US equity markets however remain close to all-time highs although signs that the pace of the US jobs growth was slowing hurt equities last week. In July and August, the US economy created an average of 1.6 million jobs per month, compared with the 661,000 in September.If jobs continue to be clawed back at September’s rate, it would take another 16 months for the 11 million workers displaced since February to return.
Fixed Income
A gap has opened up in how banks and the bond market perceive the health of Corporate America, with banks setting aside billions against bad loans whilst bond prices reflect strong corporate health, suggesting a dramatic recuperation from the Covid-19 shock.
The yield spread between corporate bonds with the lowest investment grade rating has tightened from 5 percentage points (500 basis points) in March to well under 2 per cent now – as narrow as it was early last year.
Generally, government bond yields remain close to all-time lows (remember low yields equals high prices due to the price/yield inverse relationship) with the US 10-year bond being 0.68% yield-to-maturity (annual rate of return), the UK 10-year government bond yielding 0.23% and German a negative – 0.50%).
Foreign Exchange
USD: Investors are being forced to rethink their bearish outlooks for the dollar after mounting worries about a messy US election stoked a recovery in the currency. The currency fell 10 per cent from its coronavirus peak to its low in August. Investors had turned negative on the US Dollar because of the US Federal Reserve’s aggressive response to the pandemic since March – the central bank’s sharp cuts to interest rates reduced the reward for holding dollar assets.
But months of an unknown outcome in the race for the White House could unsettle markets and send investors scrambling for the safety of the ‘greenback’. Note: The US Dollar, as the world’s No 1 reserve currency associated with the world’s largest economy, always performs well in a crisis.
GBP: A more positive tone to trade talks between the UK & EU ahead of this week’s round of talks has bolstered the British Pound as Boris Johnson and the EU are preparing to kick off an intensified period of Brexit trade talks in a last-ditch effort to overcome stubborn disagreements in fishing rights and state aid.
The Bank of England issued a clarification of the bank’s stance on negative interest rates (currently rates are 0.10%) saying it had not decided on whether or when to set rates below zero for the first time. Note: The European Central Bank has had negative interest rates (-0.4/-0.5%) for a few years to encourage banks to lend out into the economy rather than encourage banks to deposit funds with the Central Bank. If the UK does move to negative interest rates this may hurt the Pound as the reward/return for holding Sterling assets is reduced.
Commodities
Oil: Prices slipped below $40 a barrel to hit the lowest level since June as traders bet the recovery in a market hammered by the coronavirus has run out of steam. But prices are still well above the March $20 per barrel values.
Gold: The gold price remains well supported at $1,900 per ounce but down from recent highs of $2,060. Gold, of course, is a safe haven asset (paying no interest) and does well in times of global distress. Gold will also do well if inflation ‘takes off’ after the unpresented global monetary stimulus this year. Whether the global economy remains week, or rebounds bringing inflationary pressures, is a significant question for investors over the next 12 and 24 months.
Miscellaneous
M&A: A resurgence in mergers and acquisitions activity led to the busiest summer for blockbuster deals in three decades, i.e. large fees for investment banks, as executives reshaped companies to cope with the virus and private equity groups pounced on targets. The combined value if $5bn-plus deals worldwide soared to $456bn in the three months to September.
The M&A market was largely dormant in the second quarter. The second quarter was a capital markets quarter i.e. issuance of bonds and equities, and the third quarter has been a quarter for M&A. Overall for the year though, M&A is down at 2013 activity levels.
