Market Insights-September 21, 2020

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Pound sterling is still a good gauge of how the Brexit talks are going. When Boris Johnson decided to overrule part of the Brexit deal, the pound dropped sharply. But it bounced back last week as some headway was made in the UK’s talks with the EU.

Economic news from the eurozone has been more mixed recently, suggesting that the recovery could be losing steam. That’s why the latest ZEW Indicator of Economic Sentiment for Germany came as a positive surprise. It rose sharply as expectations for the German economy reached their highest level in 20 years.

Despite renewed volatility, hedge funds have managed to preserve their capital and break even in September. Directional strategies have been doing well since April, and now arbitrage – and especially convertible arbitrage – strategies are making a comeback.

The wrong kind of seasonal effect

The summer season, when people were a little less concerned about the COVID-19 pandemic, is gradually coming to an end in Europe as autumn gets under way. Case numbers are rising in most European countries, and the R number is above 1 in many places, which means that one person will pass the virus on to more than one other person. The resurgence in Europe came as people moved around more during the summer holidays and life started to get back to normal. But for the moment, there have been fewer deaths than during the first wave in the spring because younger people are the ones most affected. Governments have responded by bringing in targeted measures to try and stem the virus’s spread.

The situation is less worrying elsewhere in the world. With the exception of India, the pandemic is under control in Asia, and things are improving in Latin America, especially Brazil, one of the countries hit hardest since the virus first appeared at the start of the year. Although things did not look good early on in the summer in the States, the situation has improved significantly since then. Numbers for new infections, hospitalisations and deaths are all heading downwards.

In the short term, investors will be keeping a close eye on how the pandemic evolves around the world. And the upcoming US presidential election could further increase stock-market volatility. We’ve become more cautious on the US stock market in recent weeks, as both valuations and investor optimism are excessive, particularly when it comes to growth and tech stocks. But this enthusiasm is being, and will probably continue to be, dampened. Provided countries in the northern hemisphere manage to keep the pandemic under control and avoid another lockdown, we still expect the global economic recovery to continue – especially if a vaccine or medical treatment arrives soon. In the US, economic indicators are still pointing to an uptick in growth. Business confidence continues to improve in both the manufacturing and services sectors. Residential construction has bounced back considerably – a sign that consumers are feeling more optimistic, mainly because the jobs market picked up over the summer. On top of that, at their recent meetings, major central banks, including the US Federal Reserve, confirmed that they were willing to expand their stimulus packages if necessary.

China – domestic consumer spending finally provides a boost

Markets had expected Chinese exports to fall in Q2. Instead they proved to be surprisingly resilient, moving back into positive territory after dropping 13.4% in Q1. This was mainly thanks to exports to developed markets. Exports to the US were up 0.7% year on year in Q2 after plummeting 25% in Q1. Exports to Japan rose 10%, and those to the European Union also improved compared with Q1, down just 3.4% year on year. The massive stimulus measures introduced by governments in developed countries provided a boost to Chinese exports.

The measures helped to shore up consumer spending in those countries even when people were still in lockdown. The US government, for instance, paid people an extra USD 600 in unemployment benefits each week between early April and July. As a result, US retail sales, which had plummeted 15% year on year in April, quickly started to bounce back in June.

Export growth is now expected to slow. Demand for virus-related medical equipment and home office electronics should gradually return to normal, and the major stimulus packages in developed countries won’t last forever. China’s domestic consumer spending, which has been lagging behind manufacturing and exports, seems to be picking up and has started to support the economic recovery. In August, retail sales were up for the first time since the start of the pandemic, and consumer spending should continue to improve as domestic air travel restrictions are eased and cinemas reopen.


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