Last week, the S&P500 ended the week -5.64% in a sell off that was mirrored across equity markets. Brent crude also fell 10.3% wow on concerns the spread of the virus and lockdowns would impact demand. USTs benefited from a risk off bias earlier in the week but then succumbed to selling pressure into Friday’s close as a possible Democrat ‘blue wave’ and large stimulus package unnerved some investors. Over the week the 10-year US Treasury yield rose 4bps to 0.88% while the 2s30s spread widened 2bps to ~150bps.
Concerns about rising virus infections in the US and Europe, the failure to agree a further fiscal stimulus in the US and the added uncertainty ahead of the US election this week were some of the factors weighing on markets. While polls favour Biden to win the Presidency and USTs traded as if a ‘blue wave’ would sweep through Congress and the senate, a contested election is not out of question, and it is less clear whether the Democrats will win control of the Senate. Against this backdrop, positive economic data such as US 3Q GDP which exceeded expectations growing at 33.1% (quarterly annualised), albeit with GDP still ~3.5% below pre-pandemic levels, received a muted response. The path of the virus remains a concern, particularly for Europe where France and Germany were forced to announce more stringent lockdowns, a clear risk to the economic recovery. Thus, while the Eurozone 3Q GDP data was positive registering 12.7% qoq, ahead of expectations of 9.6% qoq, the focus was very much on the impact of further lockdowns on Q4 growth. Following the ECB meeting on Thursday Christine Lagarde said there was ‘little doubt’ the ECB would act in December: this helped European sovereign bond markets: for example the 10 year bund yield moved further into negative territory ending the week at -0.628%. Similarly, the Bank of Japan kept interest rates and asset purchases unchanged with the post meeting statement noting: “For the time being, the Bank will closely monitor the impact of the novel coronavirus (COVID19) and will not hesitate to take additional easing measures if necessary”.
In the week ahead, aside from the path of the virus, investor attention will be focused on the US election on November 3rd with Biden ahead of Trump in the polls but with the negative scenario of a contested election not out of question. This is followed by the FOMC meeting on 5th November and a post-decision press conference hosted by Fed Chair Jerome Powell although no major policy changes are expected at this meeting. Elsewhere, the BoE is also due to meet on Thursday and with the announcement over the weekend of a full lockdown in England from Thursday there is an expectation that it will increase its asset purchase target by £100bn to £845bn as soon as the next meeting.
Key US data releases include the October releases for US Markit manufacturing PMI and ISM for manufacturing on Monday. Later in the week the ISM services index for October is also due for release and on Friday the October non-farm payroll data is due with 600,000 jobs expected to be added. In Europe, with more lockdowns in progress, the focus will continue to be on the path of the virus. Datapoints of interest include a slew of October PMIs for manufacturing and services including Germany, France, Italy, Spain and the Eurozone plus September industrial production data for Germany and Spain later in the week. The European Commission is also due to release its updated set of economic forecasts on Thursday. ECB speakers due to appear over the week at various events include Luis de Guindos, Isabel Schnabel, Fabio Panetta and Yves Mersch.
In Asia, China’s PMIs continue to be a focus: over the weekend the official manufacturing PMI for October edged lower from the prior month to 51.4 but this remains in expansionary territory and was ahead of market expectations. The official non-manufacturing PMI increased to 56.2 beating market expectations helped by the longer golden week holidays. Earlier today the Caixin Manufacturing PMI exceeded expectations rising to 53.6 from 53 the prior month. The Caixin PMI for services is due later in the week. Elsewhere, the RBA meeting on Tuesday will be watched given expectations they will announce further stimulus to support the economic recovery.