Friday, 9th of October 2020
“No one would have doubted his ability to reign had he never been emperor.”
– Tacitus
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The stock market rally gathered momentum this week as President Trump made a rapid recovery from covid-19 and returned to the White House on Monday morning, touting Regeneron’s experimental anti-body treatment as a new cure for the disease (one that is more effective than bleach, at any rate). The Donald’s brief encounter with the virus has clearly convinced him that the pandemic is somewhat overblown; and he is making every effort to persuade voters to focus on other issues ahead of the 3rd November election. Trump has faced heavy criticism over his handling of the virus, and it could yet sink his re-election bid. However, he clearly hopes that a media blitz full of post-recovery optimism will prove just as contagious as covid-19. And, to be fair, investor sentiment is improving. Ahead of the US open on Friday morning, the S&P 500 Index and the NASDAQ were up +2.9% and +3.1% for the week, while the pan-European STOXX 600 Index was up +1.5% over the same four-day period. Emerging markets have also bounced this week with the MSCI EM Index up +3.3% (in USD) with one day still to go.
However, the Donald’s dramatic mask expulsion ceremony on the White House balcony has not been the only thing to lift market spirits this week. Some better-than-expected US economic data played its part as the US ISM services index for September came in at 57.8 vs. 56.2 expected and the employment index rose to 51.8 vs. 47.9 last month; and so too did a more conciliatory tone in talks between House Speaker Nancy Pelosi and Treasury Secretary Steve Mnuchin over the terms of a new fiscal stimulus package (despite the two sides reportedly being no closer to an actual agreement and the White House sending mixed signals about its ambitions). Somewhat counterintuitively, polls that show Biden’s lead over Trump growing also seem to have helped equities this week. One reason may be the simple fact that markets hate uncertainty, and as the odds of a big Biden victory rise, the risk of a less-than-peaceful and highly uncertain transfer of power diminish. Another reason may be that a Biden Presidency would mean that a bigger fiscal stimulus is in the offing (cue market rally) and that even more money will be thrown at America’s problems in the coming months and years. Even Wall Street loves big government these days… the grinding austerity needed to balance the books in the future be damned!
Nevertheless, while market conditions over the past two weeks have been a welcome respite from the declining prices, souring mood, and negative covid-19 headlines we saw in September, the fundamental backdrop has hardly changed month-on-month. We are still mired in the worst economic crisis since (at least) the Second World War, and lockdown measures are back across much of Europe to combat a second wave of the coronavirus that has spread like wildfire. An effective vaccine, if and when it comes, will still need to be manufactured on a massive scale and distributed widely for current restrictions to be eased in any great measure, a process that is likely to take many months. And, in the meantime, restrictions are likely to continue to hamper the recovery, with periodic local clampdowns needed to keep major outbreaks in check. Of course, we have the Fed et al. to pick up the tab for the time being. But no one believes that as months turn to years this will be enough to keep things on an even keel. Eventually there will be a reckoning – and it could come sooner rather than later for some of the weaker economies that have been worst affected. The Eurozone looks particularly vulnerable (as usual), given the enormous debts already owed by most of the Southern European states (many of which are at the epicentre of the covid-19 crisis). And a wave of bankruptcies could tip the Old World into the abyss.
Another trigger for a major dislocation in Europe could be Brexit (at least, if talks fail). Both sides have a lot at stake – from trade to security to whether English sparkling wine can be sold as champagne in the local Tesco Express – and a ‘no deal’ outcome could cause bitterness for years to come. Luckily, progress is finally being made according to multiple sources as both sides soften their positions on core issues (namely, fisheries access and state aid) in the search for a last-minute deal. And we do believe that when push comes to shove, the two sides will get at least a skinny deal over the line. That being said, sterling has seen significant volatility in recent days and weeks, and the downside risk of a ‘no deal’ Brexit reinforced by a particularly brutal covid-19 first wave keeps us from adding exposure to GBP (despite the cheap currency fundamentals). Given the unstable nature of the Eurozone, and the genuine hurt across the Mediterranean, we feel that the EUR is not much better. Therefore, we continue to favour the dollar – even as others question whether the currency’s crown has slipped.
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