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Another rocky month for politics – and markets

Rockhardplace

For financial professionals only

It’s been a busy month. It started with a bang after official tweets confirmed US president Donald Trump had tested positive for Covid-19 and the White House had become something of a Covid hotspot. After just one weekend in a military hospital, Trump was out and ready to pursue his campaign trail once again. That’s what you call a V-shaped recovery.

The remainder of the month followed a theme of hope and despair over Brexit, US stimulus, vaccines and lockdowns, all while we anticipate a controversial and bitter US Presidential election. The overarching concern across numerous countries has been the spike in Covid-19 cases, leading to fears over a possible second wave becoming a reality. Record case numbers kept coming in October prompting governments to act. Attempting to reduce the infection rate while protecting economies and jobs is a tough ask which calls for clear and decisive action. All of this led to a continuation of September’s stuttering global recovery from the March lows.

A mixed bag for market performance

Within equities, Asia and Emerging markets led the way last month, the only regions to post positive returns in local currency terms. Both were up around 2%. China seems to be on top of the virus for now and is expected to be the only G20 economy to grow in 2020 with a 2% growth forecast, compared to a global economic contraction of 4.4% according to the International Monetary Fund. Interestingly traditional safe havens didn’t come to the fore last month with our basket of fixed income asset classes, gilts, index linked gilts, corporate bonds and global strategic bond returns ranging between -0.5% and 0.7%.

October’s Brexit news was a twist on the well-known Hokey Cokey with leading negotiators in and out of talks to little avail followed by the UK Prime Minister declaring the UK out of negotiations altogether, only to resume a week later. This led the pound to its largest daily gain since March, however given the inverse relationship between the pound and FTSE 100, we saw the benchmark decline. The middle of November appears to be earmarked as the next Brexit deadline after several ‘constructive’ conversations and a possible breakthrough on fishing rights, one of biggest obstacles. Overall, UK equities continue to toil relative to other regions and is on its way to posting its worst annual return since 2008, down 22% so far YTD.

Like Brexit, negotiations over a US stimulus package between the Republicans and Democrats fluctuated with glimmers of hope, but overall made very little progress. Hopes of passing a bill before election day are now over and this has weighed on the S&P 500 throughout the month. Big tech has also been volatile with Google accused of anticompetitive practices to help maintain its monopoly. Google obviously rebuked the claims and posted good gains towards the end of the month on the back of positive advertising revenue, however its big tech peers led the S&P to a negative month.

What we know now

We know this pandemic isn’t going anywhere soon. Enhanced lockdown measures weighed on markets in October and will likely continue to do so through the remainder of the year. All of this while Brexit and US elections are playing out. Hopes are pinned on a vaccine, however the immunisation race has been equally volatile with a number of trials postponed in October due to patient reactions. There were also reports of possible treatment trials being paused due to safety concerns.

All of this suggests more uncertainty ahead as both good and bad news stories are plugged with impunity. As October ends, we face the prospect of more lockdowns across much of Europe and the UK just as many businesses were beginning to find their feet after the first lockdown. While a vaccine is important there remain questions over its efficacy and the ability to distribute in a timely fashion.

Diversification is key through these uncertain times. It’s difficult for markets to price such uncertainty, but we hope to at least have some clarity over Brexit negotiations and the US election over the coming days and weeks.



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