It was another wild week driven by geopolitics, local lockdowns across Europe, chaotic US stimulus negotiations, Brexit uncertainty. World equities went on a roller coaster ride swinging from losses to gains.
The major indices climbed for the third week in a row as several manufacturing surveys were higher and stronger than expected September retail sales lifted stocks. The University of Michigan’s preliminary gauge of October consumer sentiment also surprised moderately on the upside. However, the number of people filing new applications for unemployment benefits has remained stubbornly high, rising to 898,000, a two-month high.
On the earnings front, several banks reported rather upbeat results boosted by strong trading and investment banking revenues. Over the next two weeks, 282 companies representing 69% of the S&P 500’s market capitalization are set to report. Analysts polled by FactSet and Refinitiv currently expect overall third-quarter earnings for the S&P 500 to fall over 20% on a year-over-year basis, as prolonged shutdowns were detrimental to earnings growth this year.
Meanwhile, policymakers are increasingly signaling that a pre-election new fiscal relief package is unlikely.
Japanese stocks retreated for the week. Japanese Prime Minister Yoshihide Suga asserted on Friday that the country's economy is still in a "severe state." Meanwhile, the government is looking into a third stimulus package which will likely be partially funded in the fiscal 2021 budget.
Chinese equities rallied after investors returned from the national Golden Week holiday. China’s exports beat market forecasts and grew for the fourth straight month in September (up 9.9% YoY) while imports rose 13.2%. Strong export data were mainly driven by mechanical, electrical, and hi-tech products. In currency news, the People’s Bank of China (PBOC) cut the forex risk reserve ratio for forward contracts — from 20% to zero, according to a central bank statement.
In Australia, the ASX had a solid week. Hopes for additional monetary easing by the Reserve Bank of Australia, including a November interest rate cut, spiked after a speech by Philip Lowe. Investors also cheered data that showed a smaller than expected increase in Australia's unemployment rate in September.
European stocks fell deeper as several European cities adopted local lockdowns. Brexit-related uncertainty and the dissipating prospects of U.S. fiscal stimulus before the November 3 presidential and congressional elections also weighed on sentiment. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.78% lower. On the positive side, the week saw the first third-quarter results and the picture so far is encouraging. On the data front, Eurozone industrial production was up 0.7% in August, Germany’s CPI was down 0.2% YoY in September. European Central Bank (ECB) Chief Economist Philip Lane said in an interview with The Wall Street Journal that “the next phase is going to be tougher” for the European economic recovery.
If the economic recovery is delayed, “investor optimism may wane” Tobias Adrian, the IMF’s director of the monetary and capital markets department, wrote in a blog post.
“As long as investors believe that markets will continue to benefit from policy support, asset valuations may stay elevated for some time. Nonetheless, and especially if the economic recovery is delayed, there is a risk of a sharp adjustment in asset prices or periodic bouts of volatility,” Tobias wrote.
All signs point to a very tough winter and an increasingly challenging quarter ahead.
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