Friday, 25th of September 2020
“To reach a port, we must sail – sail, not tie at anchor – sail, not drift.”
– Franklin D. Roosevelt
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Stock markets continued to decline this week as concerns about the coronavirus winter wave underway in Europe caused optimism about the pace of the global recovery to fall precipitously. A roaring August rally has given way to a sharp September sell-off, and the S&P 500 Index is now down for four weeks on the trot. Other markets have seen similarly negative price action during the month, but Europe has been hit particularly hard in recent days as infections mount across the continent. Monday saw the bulk of the sell-off this week as the Euro STOXX 600 Index shed -3.2%. This was the worst daily performance for the pan-European benchmark since mid-June. No major European markets were spared, with the DAX (-4.4%), the CAC 40 (-3.7%) and the FTSE MIB (-3.8%) all losing ground. Meanwhile, the FTSE 100 also fell -3.4% on Monday as PM Boris Johnson mulled new UK-wide social distancing restrictions on households and firms. These have been implemented and they are expected to last for at least the next six months. A London lockdown now seems all but inevitable unless the situation on the ground changes dramatically. Unsurprisingly, this means that pound sterling is in the doldrums once more, with the unresolved Brexit talks also weighing on the UK currency. Sticking with USD certainly seems to be paying off, while our hedges continue to protect portfolios from the worst of the risk-off storm.
Also adding to the selling pressure on Monday was a huge financial sector leak. The data breach has revealed (or rather confirmed) the massive volume of suspicious transactions and trading activity that has taken place at many of the world’s largest banks in recent years, and it prompted a major slump in bank equities on the day. European banks are already staring down the barrel of negative rates (a policy that the Bank of England is also considering) and US banks may yet face something similar if the county has its own winter wave as many scientists now expect. In the depths of a global recession when bank balance sheets are already stretched and profit margins slims, corruption headlines are the last thing that the financial sector needs. That said, the public are somewhat preoccupied with the coronavirus calamity – and a collective rolling of eyes seems more likely than any immediate government action.
Staying on the banking topic for now (specifically the US central bank) the Fed has become increasingly vocal about the need for additional fiscal stimulus to see Uncle Sam through the winter. Fed Chairman Jerome Powell testified before Congress for three full days this week – and he banged the fiscal drum every chance he had. When asked what more the Fed could do for Main Street, he noted that the bank had “done basically all of the things that we can think of” (i.e., “over to you”). Other Fed governors have made similar noises this week, highlighting the need for more government stimulus as soon as possible. Evans went so far as to suggest that because additional stimulus (totalling approximately USD 1tn) was part of the FOMC’s comparatively benign outlook, failing to agree a sizable fiscal package would result in forecasts being downgraded. Leading Republicans and Democrats have both expressed a readiness to sit down for talks, but with a politically charged Supreme Court battle under way (over the replacement justice for Ruth Bader Ginsberg, who died last week), Congress is already preoccupied fighting culture wars instead. What’s more, the US Presidential Election is fast approaching, opinion polls appear to be tightening, Trump’s star is rising, and concessions are not popular with either party’s respective base. The uncertainty and vitriol over the election are both adding to the policy paralysis at a crucial moment for the US economy. This is one reason (among many) to be hedged into year-end.
Another reason is the deterioration of US-China relations, a subject much discussed in this Newsletter. Last weekend, China’s Ministry of Commerce finally released details of its so-called ‘Unreliable Entity List’, a blacklist that restricts foreign investment and trade with companies that harm the Middle Kingdom’s interests, development and sovereignty. The document is considered a Chinese countermeasure for a similar blacklist created by the US over a year ago – and has been long in the making. Although no names have been released, the rules that govern the blacklist give the Chinese government significant flexibility over which companies to include. There is no doubt that many US firms in sensitive sectors will eventually be banned from investing in China as the superpower de-coupling continues. Ironically (or perhaps deliberately) the announcement of this new blacklist coincided with a speech by President Xi Jinping to the UN where he claimed the mantle of internationalism and committed China to net zero carbon emissions by 2060. The Chinese leader seems to be hedging his bets.
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