VIDEO: Market Snapshot September 2020
Our Market Snapshot provides an overview of key events that influenced financial markets over the course of September 2020.
Global equity markets were broadly negative in September, largely due to elevated risk aversion on the back of a second wave of Covid-19 infections in the UK and Europe, and concerns over the extent to which the global economy will recover from the Covid-19 pandemic. In South Africa, a fourth consecutive quarter of negative GDP added to the risk-off sentiment towards emerging markets, while the South African Reserve Bank signalled that no further rate cuts were likely for the remainder of the year, but hinted at two rate increases in 2021.
Looking at global equity market returns (all in US$), the MSCI All Country World Index returned -3.2% for the month. Emerging markets outperformed developed markets, with the MSCI Emerging Markets Index delivering -1.6% and the MSCI World Index returning -3.4%. The Bloomberg Barclays Global Aggregate Bond Index (US$) returned -0.4%, while the EPRA/NAREIT Global Property REIT Index (US$) produced -3.2%.
The spot price of Brent crude oil closed September 9.6% lower from the previous month at around US$40 per barrel. Precious metals lost some of their gains from August, with platinum returning -6.5%, copper -1.8%, aluminium -1.4% and gold -3.6%. Palladium was the only outlier, rising 5.2% for the month.
In the US, investor sentiment was left somewhat muted following the continued failure to contain the spread of Covid-19 infections, and despite comments from the Federal Reserve (the Fed) which suggested that the US economy was showing signs of improvement but still had a long way to go before fully recovering. The Fed left the target range for its federal funds rate unchanged at 0-0.25% with no further changes expected until at least 2023. Revised figures showed that the US economy had shrunk by an annualised 31.4% q/q in Q2 2020, slightly lower than the second estimate of a 31.7% decline. The economic slowdown remains the biggest contraction on record for the US, with the Fed expecting the economy to shrink by 3.7% in 2020 (previously -6.5%) before rebounding by 4% in 2021 (previously 5.0%).
In other economic news, the unemployment rate surprised on the upside after falling to 8.4% in August, below market expectations of 9.8% and marking the fourth consecutive decline after April's all-time high of 14.7%. Unemployment is expected to fall to 7.6% in 2020 (previously 9.3%) and 5.5% in 2021 (previously 6.5%). Annual inflation continued to move closer to the Fed’s target of 2%, increasing to 1.3% in August and beating market expectations of 1.2%. Manufacturing and non-manufacturing activity continued to show signs of improvement, increasing to 53.5 in September and 56.9 in August respectively, while services PMI slowed to 54.6 in September. Retail sales data, meanwhile, was revised lower from 0.9% to 0.6% in August, well off initial estimates of a 1% increase, as the effects of reduced unemployment benefits and financial support for small businesses began to show.
Equities closed the month lower with the S&P 500 returning -3.8, the Dow Jones Industrial 30 posting -2.2%, while the technology-heavy Nasdaq 100 closed the month at -5.7% (all in US$).
South Africa’s GDP shrank by an annualised 51% q/q in Q2 2020, more than market estimates of a 47.3% q/q decline and significantly more that the downwardly revised 1.8% contraction posted in the previous quarter. This marked the steepest economic contraction since at least 1990, as the country’s recession extended into a fourth consecutive quarter. Investors were left having to deal with more sombre news after it was announced that country lost some 2.2 million jobs during the second quarter under the effects of the lockdown. However, this was not reflected in the unemployment rate, which actually improved due to a substantial reduction in the number of people actively seeking work over the period.
Meanwhile, the South African Reserve Bank (SARB) held its benchmark repo rate unchanged at a record low of 3.5% as expected, noting that the risks on the outlook for growth and inflation are assessed to be balanced. The SARB signalled that further easing was unlikely in 2020, but its interest rate model is projecting two rate increases in Q3 and Q4 of 2021. GDP forecasts suggest that the economy will shrink by 8.2% in 2020, (previously -7.3%), before rebounding by 3.9% in 2021 (previously 3.7%) and 2.6% in 2022 (previously 2.8%). Inflation is also expected to increase to 3.3% in 2020 (previously 3.4%), 4% in 2021 (previously 4.3%) and 4.4% in 2022 (previously 4.3%). Annual inflation edged down to 3.1% in August from 3.2% in July, just above the bottom of the SARB’s target range of 3-6%.
The FTSE/JSE ALSI returned -1.6% in September. The only noticeable return came from Financials, which delivered 2.3%. Meanwhile, Listed Property (SAPY index) returned -3%, Industrials -1.5% and Resources -3.4% The FTSE/JSE Capped SWIX All Share Index, which we use as the equity benchmark for most of our client mandates, returned -1.1%. SA bonds were flat at 0% (as measured by the FTSE/JSE All Bond Index), while SA inflation-linked bonds returned -1.5% and cash (as measured by the STeFI Composite) delivered 0.3%.
Finally, the rand appreciated against the major currencies, gaining 1.4% against US dollar, 4.8% against the pound sterling and 3.3% versus the euro.
UK and Europe
In the UK, a second wave of coronavirus infections saw the reintroduction of certain lockdown measures, with Prime Minister Boris Johnson encouraging people to work from home and imposing additional restrictions on pubs, bars and restaurants. The Bank of England, meanwhile, maintained its bank rate at a record low 0.1% and kept its bond-buying programme at £745bn, noting that the outlook for the economy remained uncertain. GDP for Q2 was revised marginally lower from a 20.4% q/q contraction to -19.8% q/q, with private consumption accounting for more than three-quarters of the fall in GDP as the impact of public health restrictions, closures of non-essential shops and social distancing measures continued to impact the economy. Annual inflation is expected to remain below 1% until early 2021, after dropping from 1% in July to 0.2% in August. In other news, the unemployment rate increased to a near-two-year high from 3.9% to 4.1% for the three months ending July 2020.
Much like its UK counterpart, the Euro Area battled with a resurgence of new Covid-19 infections, with Spain, Italy and France particularly hard hit. Investor sentiment remained downbeat after ECB President Christine Lagarde confirmed that the region’s economy would remain under threat from persistent weak inflation amid subdued growth for some time to come. Euro Area GDP was revised higher from -12.1% q/q/ to -11.8 q/q for the three months ending June 2020, with the economy expected to contract by 8% in 2020, before rebounding by 5% in 2021 and 3.2% in 2022. Eurozone inflation posted its first decline since May 2016, dropping 0.2% y/y in August. Unemployment rose to 7.9% in July from a downwardly revised 7.7 percent in the previous month.
For the month, the UK’s FTSE 100 returned -4.9%, the German DAX -3.3% and France’s CAC 40 -4.6% (in US$).
China and Japan
In China, investors were left cautiously optimistic after the People's Bank of China (PBoC) held its benchmark interest rates steady for the fifth consecutive month amid signs that the economy was in the process of a recovery. Non-Manufacturing PMI increased to 55.9 in September from 55.2 in August, signalling the fastest growth in the service sector since November 2013. Manufacturing PMI remained steady at 53.0 in September, while new orders grew at its fastest pace since early 2011 and new export business at its fastest pace since August 2017. Unemployment continued its downward trend, decreasing to 5.6% in August from 5.7% in July.
In Japan, Prime Minister Shinzo Abe, the country’s longest-serving leader, announced his surprise resignation for health reasons, and was replaced by his chief cabinet secretary and expected successor, Yoshihide Suga. Markets took this largely in stride as Suga is widely expected to maintain Abe’s economic policies. The Bank of Japan (BoJ) kept its key short-term interest rate at -0.1% while taking a significantly more hawkish tone on its view of the economy. In its September meeting, the BoJ signalled that the economy remained under pressure, however it had already started showing signs of recovery following the gradual resumption of business activity. This was in stark contrast to the comments made in July where the BoJ described the economy as being in an "extremely severe state". In other positive news, retail sales bounced back from -3.4% in July to a 4.6% increase in August .
Japan’s Nikkei 225 delivered 1.3%, the MSCI China -2.7% and Hong Kong’s Hang Seng -6.4% (in US$).