VIDEO: Market Snapshot October 2020
Our Market Snapshot provides an overview of key events that influenced financial markets over the course of October 2020.
Global equity markets were broadly negative in October, as governments across the UK and Europe imposed new national lockdown restrictions in a bid to combat a second wave of Covid-19 infections. Other factors weighing on investor sentiment included the failure by the US government to launch a fourth stimulus package to help boost the economy before the Presidential election on 3 November, and concerns around the extent to which the pandemic will impact global economic growth. In South Africa, investor sentiment remained muted following Finance Minister Tito Mboweni’s Medium-Term Budget Speech, which painted a grim picture of the local economy, and President Ramaphosa’s economic reconstruction and recovery plan, which lacked the necessary detail to inspire investor confidence.
Looking at global equity market returns (all in US$), the MSCI All Country World Index returned -2.4% for the month. Emerging markets outperformed developed markets, with the MSCI Emerging Markets Index delivering 2.1% and the MSCI World Index returning -3.0%. The Bloomberg Barclays Global Aggregate Bond Index (US$) returned 0.1%, while the EPRA/NAREIT Global Property REIT Index (US$) produced -3.1%.
The spot price of Brent crude oil closed 8.5% lower from the previous month at around US$36 per barrel. Precious metals were mixed in October, with platinum returning -2.4%, copper 1.3%, aluminium 4.8%, gold -0.5% and palladium -4.9% for the month.
In the US, negotiations over a fourth stimulus package reached a stalemate. President Trump announced that they would resume following the national election in November. The US economy expanded by an annualised 33.1% q/q in Q3, beating market forecasts of a 31% increase and marking the biggest expansion on record. This followed the steepest economic contraction in US history, after Q2 GDP declined by an annualised 31.4% q/q. Minutes from the Federal Reserve’s (Fed’s) September meeting indicated that there was still a great deal of uncertainty surrounding the outlook of the US economy, with a second wave of new Covid-19 infections weighing on economic activity. The Fed expects GDP to contract by 3.7% in 2020, before rebounding by 4.0% in 2021 and 3.0% in 2022.
In other economic news, annual inflation edged up to 1.4% in September from 1.3% in August, still well below the Fed’s 2.0% target. The unemployment rate declined to 7.9% in September from 8.4% in August, bringing the total number of unemployed persons to 12.6 million, while retail sales growth increased to 1.9% in September, well above market forecasts of a 0.7% rise.
Equities closed the month lower with the S&P 500 returning -2.7%, the Dow Jones Industrial 30 posting -4.5%, and the technology-heavy Nasdaq 100 -3.2% (all in US$).
In South Africa, President Ramaphosa unveiled his economic reconstruction and recovery plan in which he outlined the government’s approach to revive the economy and create jobs. Sentiment, however, was muted following the announcement, with global ratings agency, S&P, stating that the plan lacked detail on the necessary reforms to aid a proper recovery.
Meanwhile, the FTSE/JSE All Share Index reached a four-month low following Finance Minister Tito Mboweni’s Medium-Term Budget Statement, which painted a grim picture of the economy and the country’s financial position. Forecasts indicate that the economy is expected to contract by 7.8% in 2020, before rebounding by 3.3% in 2021 and 1.7% in 2022, while government debt is expected to jump to 81.8% of GDP in 2021/22, before hitting 92.9% in 2023/24. The allocation of R10.5bn to the heavily-indebted South African Airways also raised eyebrows, and scepticism surrounded Treasury’s proposal to freeze the public sector’s wage bill over the next three years in a bid to reduce government expenditure.
In more positive news, manufacturing PMI rose to 60.9 in October, pointing to a third consecutive month of expansion in factory activity and the quickest pace on record. Retail sales, meanwhile, increased 4.0% in August, above market expectations of 3.5% and well above the 0.6% posted in July.
The FTSE/JSE All Share Index returned -4.7% in October. The only positive return came from Industrials, which delivered 0.4%. Meanwhile, Listed Property (SAPY index) returned -8.5%, Financials -5.8% and Resources -10.8% The FTSE/JSE Capped SWIX All Share Index, which we use as the equity benchmark for most of our client mandates, returned -4.2%. SA bonds delivered 0.9% (as measured by the FTSE/JSE All Bond Index), while SA inflation-linked bonds returned 1.2% and cash (as measured by the STeFI Composite) delivered 0.3%.
Finally, the rand appreciated against the major currencies, gaining 2.4% against US dollar, 2.2% against the pound sterling and 2.7% versus the euro.
UK and Europe
In the UK, Prime Minister Johnson reintroduced a nation-wide lockdown in a bid to tackle a second wave of Covid-19 infections and help alleviate the mounting pressure on healthcare workers. The lockdown, which will run from 5 November to 2 December, will see the closure of all non-essential services including retail stores, pubs and restaurants.
Turning to Brexit news, investor sentiment was lifted somewhat as negotiations were reported to be making good progress. Traders were left with a sense of optimism that a free trade agreement between the UK and the EU could be secured by early November, however both sides still remain divided on several key issues, including a level playing field and fisheries. Meanwhile, the UK formally signed a trade agreement with Japan, marking its first significant post-Brexit deal.
Elsewhere in Europe, Germany and France joined the likes of Italy and Spain after they announced new national lockdown measures to stem the tide of rising Covid-19 cases. In more positive news, the Eurozone economy grew by an annualised 12.7% q/q in Q3, recovering from a record slump of 11.8% in the previous quarter and significantly beating market expectations of a 9.4% increase.
For the month, the UK’s FTSE 100 returned -4.7%, the German DAX -10.0% and France’s CAC 40 -5.0% (in US$).
China and Japan
In China, The People's Bank of China injected CNY120bn into the financial system to help maintain reasonable liquidity in the banking system. The PBoC also left its benchmark interest rates steady for the sixth straight month, while maintaining borrowing costs on medium-term loans amid continued efforts to support the economy. The Chinese economy grew by an annualised 2.7% q/q in Q3, below market expectations of a 3.2% increase and well off the 11.7% expansion posted in Q2.
Turning to Japan, the Bank of Japan downgraded its GDP projection for the current fiscal year (ending in March 2021) to -5.5% from -4.7%, however, upped its forecast for the 2021 fiscal year to 3.6% from 3.3%. Among economic indicators, manufacturing and services PMI continued to show signs of growth, increasing to 48.7 and 47.7 respectively for October, their highest readings since January this year.
Japan’s Nikkei 225 delivered 0.1%, the MSCI China 5.3% and Hong Kong’s Hang Seng 2.8% (in US$).