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Global Economy & Markets, Weekly Roundup 06/10/20

06/10/2020 - Reports

Global Economy and Markets

US political uncertainty remains elevated ahead of the Presidential elections on November 3rd, albeit US equity markets interrupted four consecutive weekly declines
             
Key Takeaways
 
Global equity markets consolidated in the past week, following a mini correction since early-September. Overall in Q3, the MSCI ACWI index posted a stellar performance, up by 7.7%, albeit (as of October 2nd) being 5% off its peak on September 2nd. Region-wise, markets’ performance was uneven in Q3, with the EuroStoxx largely flat overall (+0.3% | -12.4% ytd), whereas the S&P500 gained 8.5% (+4.1% ytd). The US equity market found support from the heavyweight Information Technology (IT) sector (28% of the headline index’s market capitalization) which gained 12% in Q3 (+27.5% ytd). Having said that, IT has demonstrated a considerable correction from its peak on September 2nd (-9.5% as of October 2nd) when valuations appeared to be running disconcertingly ahead of fundamentals. In the event, the 12-month forward P/E ratio (share prices divided by consensus estimates for 12-month forward earnings per share) stood at 28.7x for the S&P500 IT sector in early September, versus a 15-year average of 15.6x (currently at 25.6x).
 
On the positive side of the ledger, the latest economic data support the view that the US economic recovery post-lockdowns, continues. The slack in the labor market diminished further (see Economics), while September’s PMIs from the Institute for Supply Management (ISM) remained well above the expansion/contraction threshold of 50 (manufacturing: -0.6 pts to 55.4 | services: +0.9 pts to 57.8). In China, PMIs suggest continued strong expansion of business activity in September (see Economics). Finally, in the euro area, the Economic Sentiment index from the European Commission (a composite indicator based on input from business surveys in the sectors of manufacturing, services, retail trade and construction as well the consumer confidence survey) rose by 3.6 pts to 91.1 in September, alleviating the concerns induced by the PMI surveys (composite: -1.8 pts to 50.1) that the recovery may have stalled in the month. In addition, retail sales surprised positively in August, up by 4.4% mom (+4% yoy) versus consensus estimates for +2.4% mom.
 
A key risk remains the course of the pandemic and the respective medical developments as well as the behavioral responses from economic agents, especially the extent to which a possible deterioration of epidemiological data, will lead to a reduction of mobility, either mandatory of voluntary. Another major risk factor is political uncertainty in the US ahead of the Presidential elections on November 3rd and the elections for the US Congress (Senate-R, House-D), with the US President contracting Covid-19, adding to an already challenging political landscape. In the event, note that the vote count is expected to be relatively protracted (as mail-in ballots will represent a high percentage of votes for coronavirus-related safety reasons) and there is a considerable probability that the outcome will be legally contested. In that context, the political dust may not settle earlier than early-January 2021).

That development also raises the concerns regarding the timeliness of the prospective new fiscal stimulus. In the event, last minute efforts are being made in the US legislature for a bipartisan agreement to be reached before the elections. Reportedly, the gap in the size of proposed packages has slightly lessened, albeit remaining vast. Indeed, Democrats’ current standpoint is $2.2 tn (10.4% of US GDP | from $3.4 tn initially), whereas the Republicans may support a package totaling $1.62 tn (7.7% of GDP | standpoint of $1.3 tn – $1.5 tn a week ago and initial proposal of $1.0 tn).