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- Most developed markets declined as hopes for more U.S. fiscal stimulus waned in the runup to the presidential election in November.
- The pandemic appeared to worsen in many regions, leading to concerns about renewed lockdowns weighing on the economic recovery.
- Chinese stocks posted modest gains as the country's economy expanded amid far fewer concerns about the coronavirus.
The large-cap benchmarks gave up early gains and ended lower for the month on rising coronavirus worries and waning stimulus hopes. Small-cap shares outperformed and recorded gains, while mid-caps rose more modestly. Value stocks outperformed growth shares but remained significantly behind for the year-to-date period. Within the S&P 500 Index, information technology and energy shares performed worst, while utilities and communication services shares recorded positive returns. Late in the month, the Cboe Volatility Index (VIX) reached its highest level in several months as stocks fell sharply.
Bonds also recorded losses during the month, as the yield on the benchmark 10-year U.S. Treasury note touched its highest level since early June. (Bond prices and yields move in opposite directions.) Demand for credit-sensitive bonds generally remained strong, however, and high yield bonds recorded modest total returns as coupon payments offset price declines.
Expectations for Fiscal Stimulus Drive Sentiment
Shifting expectations for an imminent fourth round of fiscal stimulus in 2020 to support the recovery appeared to play a major role in driving sentiment in October. Apparent progress in negotiations early in the month between House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin raised hopes for a deal, but stocks pulled back after President Donald Trump tweeted that the economy was “doing really well” and that he had instructed his representatives “to stop negotiating until after the election.” The president soon reversed course and stated that he supported a stimulus bill even larger than the USD 2.2 trillion package supported by the Democrats. Opposition to a new package of such size appeared to harden in the Republican-led Senate, however, and stocks moved steadily lower late in the month as it became clear that a deal would not be reached prior to the election.
President Trump’s seemingly rapid recovery following his diagnosis with COVID-19 (the disease caused by the novel coronavirus) and hospitalization at the start of the month appeared to boost sentiment, as optimism grew about the new antibody (Regeneron’s REGN-COV2) and antiviral (Gilead’s Remdesivir) treatments he received. The pandemic outlook darkened over the following weeks, however, as overall case counts in the U.S. reached new highs, while hospitalizations also began to climb. Partial lockdown measures were renewed in some states, and high-frequency data such as restaurant reservation levels indicated that consumers were growing more cautious.
Broad Economic Data More Encouraging
The month’s broader (if more backward-looking) economic data seemed generally more encouraging. After stalling for several weeks, jobless claims began falling again later in the month and hit new pandemic lows. Retail sales rose at a solid clip in September, reversing August’s weakness, and personal income and overall spending both rose more than expected. The manufacturing sector appeared to remain in good shape, with core capital goods (excluding defense and aircraft) orders hitting a six-year high. The housing sector remained a standout, with single-family construction and overall building permits reaching new 13-year highs, while existing home sales hit their highest level since May 2006.
The month brought the release of many third-quarter corporate earnings reports, but the market’s focus on economic and political issues may have muted the impact of earnings. As of the end of the month, analysts polled by FactSet expected overall earnings for the S&P 500 to have declined 9.8% versus the year before, less than half the drop expected on September 30, before the first earnings reports were released.
Shares in Europe fell the most since March, as investors worried that lockdowns aiming to control the coronavirus’ spread could push the eurozone economy into a double-dip recession. Political uncertainty in the U.S. ahead of elections also weighed on sentiment. In local currency terms, the pan-European STOXX Europe 600 Index ended 5.19% lower. Major indexes also dropped sharply: Germany’s Xetra DAX Index tumbled 9.44%, Italy’s FTSE MIB gave up 5.64%, and France’s CAC 40 suffered a 4.36% pullback. The UK’s FTSE 100 Index lost 4.92%.
Efforts to Stem Coronavirus’ Spread Weigh on Economic Outlook
Germany and France decreed partial nationwide lockdowns for a month to stamp out a surge in coronavirus infections. UK Prime Minister Boris Johnson said similar measures would be imposed in England early in November, although many businesses and schools will remain open. The UK plans to continue its jobs-support program, which could soften the blow to the economy. France extended a state of emergency until February 2021. Parts of Italy and Belgium imposed sweeping restrictions, closing hospitality and leisure businesses and imposing curfews. Spain also prolonged a state of emergency for six months, enabling regional governments to curb residents’ mobility, impose curfews, and close their borders.
The economic outlook weakened as major nations imposed stricter measures to contain the coronavirus’ spread. Although the eurozone economy rebounded at a faster-than-expected rate in the third quarter, economists and policymakers focused on forward-looking data that showed declines in consumer and business confidence. Key purchasing managers’ indexes also suggested that a slowdown in the services sector caused overall business activity to contract during the month. Manufacturing, however, continued to recover, growing at the fastest rate in two-and-a-half years, as a revival in the global economy stimulated demand for exports.
ECB Signals Possible Policy Change in December
The European Central Bank (ECB) left its monetary policy unchanged, keeping its deposit rate at -0.5% and the size of its emergency bond-buying program at EUR 1.35 trillion. The ECB said risks were “clearly tilted to the downside,” largely due to COVID-19 and associated containment measures. Policymakers said that in December they would carry out a “thorough reassessment of the economic outlook and the balance of risks” and “recalibrate...as appropriate, to respond to the unfolding situation.” As to which factors might influence its decision, the ECB stated that it would “carefully assess the incoming information, including the dynamics of the pandemic, prospects for a rollout of vaccines, and developments in the exchange rate.”
ECB President Christine Lagarde acknowledged in the accompanying press conference that the economy was losing momentum faster than expected and fueled the expectations for a policy change with her comments.
“We have little doubt,” Lagarde said, “given what is expected as a result of the risks that we are seeing, that circumstances will warrant the recalibration and the implementation of this recalibrated package.”
EU and UK Continue to Work on Post-Brexit Trade Deal
The European Union (EU) and the UK conducted intensive negotiations on a post-Brexit trade deal before the end of the transition period on December 31. An update on their progress was expected in early November. An EU diplomat quoted by the Reuters news agency said that the issues related to economic fair play, fishing rights, and how to settle disputes remain sticking points. However, the news agency noted that both sides have signaled a readiness to compromise on fisheries.
Japanese stocks were volatile in October and recorded losses for the month. Within the Japanese equity market, as measured by the MSCI Japan Index, growth stocks held up better than value shares, and large-caps generally outperformed small-caps.
Yen Strengthens in Risk-Off Environment
The yen strengthened versus the U.S. dollar and traded at about JPY 104.5 per U.S. dollar at the end of October. Both the yen and the greenback benefited from increasing demand during the risk-off environment at the end of the month.
Despite the yen’s recent strength, Aadish Kumar, a T. Rowe Price international economist, does not believe that the currency has reached levels that are likely to weigh on the Japanese economic recovery. However, in his view, if the yen continues to appreciate and trades below JPY 100 per U.S. dollar, it could pose a risk to the export sector. According to Kumar, the Bank of Japan (BoJ) has signaled that it is not worried about the recent appreciation and the bar for action remains high. He doesn’t expect any policy action from the central bank unless the currency strengthens to the JPY 95 per U.S. dollar level over a short period.
Third Stimulus Package Proposal in the Works
The Japanese government is looking into a third stimulus package to boost consumption, which has faltered during the global pandemic. Prime Minister Yoshihide Suga has asked for specific recommendations for the proposal in November, so that a draft of the package can be created by year-end and submitted to the next ordinary Diet in January. The third supplementary budget in fiscal 2020 is expected to include more government subsidies for domestic travel, an extension of the “Go To” program, additional spending, and tax relief for struggling businesses. Japan’s government has already passed two supplementary budgets totaling approximately JPY 57 trillion (USD 540 billion) in fiscal 2020. The third supplementary budget is expected to be partially funded in the fiscal 2021 budget, which will be discussed in the January Diet.
BoJ Lowers Its Short-Term Growth Forecast as Recovery Continues
At its October meeting, the BoJ lowered its economic growth outlook for the remainder of fiscal 2020, which ends in March 2021. The central bank said that a recovery in demand for services may take longer than it forecast in July, but the policymakers revised their growth outlook higher for fiscal 2021. The BoJ’s statement also noted that inflation is expected to be negative in the near term as a result of the pandemic.
As expected, the central bank kept interest rates unchanged at the meeting. The BoJ’s short-term policy rate is set at -0.1%, and the bank said it will continue to purchase 10-year Japanese government bonds (JGBs) to keep the longer-term benchmark rate close to 0%. At the end of the month, 10-year JGBs were trading with a yield near 0.04%.
Chinese equities were resilient as investors continued to face far fewer concerns over COVID-19 and the economy. Markets surged on reopening after the Golden Week holiday before subsequently losing steam. The Shanghai Composite Index posted a marginal gain of 0.2%, while the CSI 300 Index rose 2.4%, boosted by large-cap growth names ahead of the Ant Group initial public offering (IPO) (see below). In the domestic bond markets, the 10-year government note’s yield peaked mid-month around 3.25% before easing back to close at 3.20%, a monthly increase of just three basis points. (A basis point is 0.01 percentage point.)
China’s Economy Grows by 4.9% in Third Quarter
On the economic front, China reported that real gross domestic product (GDP) expanded by 4.9% in the third quarter from a year earlier. The GDP report, along with September’s monthly economic indicators, was further evidence that China’s economy is gaining momentum after the coronavirus crisis hit in the first quarter of 2020. Industrial output in September grew by 1.2% month-on-month to stand 7% above its pre-pandemic level. This is much better than the U.S. and Europe, where production remains below pre-crisis peaks. China appears to have done enough to reflate its own economy, though positive spillovers are most likely to be felt by Asian neighbors, unlike in 2009 when the whole world benefited.
A More Transparent Renminbi
The renminbi (RMB) continued its gradual appreciation trend against the U.S. dollar in October. It opened stronger after the national holiday at the start of the month, followed by a flat trend to close at RMB 6.69 per U.S. dollar, a gain of 1.4%. The People’s Bank of China (PBoC) made two policy adjustments in October: (i) the foreign exchange reserve charge on banks’ forward currency deals was abolished, and (ii) the counter-cyclical factor (CCF) from the PBoC’s daily fixing formula was suspended. The CCF had allowed the PBoC to dampen periods of excessively rapid currency depreciation by scaling back the opening daily fixing of the RMB. These adjustments were seen as a small step toward a more flexible currency regime and as a sign the PBoC wants to avoid too rapid an RMB appreciation in the near term.
Fifth Plenum Meetings Set the Course for the Next 15 Years
Politics were in focus as China’s Communist Party held its fifth plenum in Beijing, where party leaders outlined their 14th five-year plan for economic and social development. Guidelines for the latest plan focused on President Xi Jinping’s “dual circulation,” sustaining higher-quality growth through encouraging domestic markets, innovation, and reform. Party leaders also released modernization targets for the next 15 years, including raising China’s per capita GDP to the level of “moderately developed countries.” Beijing views boosting domestic demand, upgrading supply chains, and seeking self-sufficiency in key technologies as ways to hedge against external uncertainties, including what it sees as an increasingly hostile U.S.
World’s Biggest IPO Set for November, Then Delayed
Markets in the second half of October were gearing up for the IPO of Chinese fintech giant Ant Group. The company, an offshoot of Chinese e-commerce giant Alibaba, aimed to raise around USD 35 billion through selling an 11% stake in a dual Hong Kong-Shanghai listing. Ant has the potential to shake up the traditional bricks-and-mortar banking industry. The deal’s heavy oversubscription in late October revealed the continuing attraction of Chinese tech companies to global investors. However, in early November, Ant surprised investors by postponing its IPO just two days before launch. This followed a meeting with Chinese regulators who announced new regulations for online microlenders.
Other Key Markets
Mexican Government Focuses on Energy
Mexican stocks, as measured by MSCI, returned 2.34% versus 2.08% for the MSCI Emerging Markets Index. The peso appreciated close to 4% versus the U.S. dollar, lifting returns in dollar terms.
Early in the month, President Andres Manuel Lopez Obrador (AMLO) and his administration presented the country’s new infrastructure plan, which includes 39 private-public partnership (PPP) projects worth nearly USD 14 billion. The targeted sectors include communication and transportation, energy, water, and environment. On energy, there are five PPP projects listed for USD 4.6 billion being promoted by state-owned oil company Pemex and the Federal Electricity Commission (CFE).
The energy sector, particularly Pemex, seemed to be increasingly top of mind among Mexican government officials. During the month, AMLO reiterated his willingness to strengthen the position of Pemex and CFE, including via constitutional reform if necessary. According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, Pemex’s third-quarter financial results showed that it was a challenging period for the company regarding cash flow and indebtedness. With limited liquidity on hand, Gifford believes that the government will need to step in soon with more financial support, as it did in 2019.
Stocks Sink in Turkey
Turkish stocks, as measured by MSCI, returned -12.55%. The market fell about 5% in local currency terms, and an 8% drop in the lira versus the U.S. dollar exacerbated losses in dollar terms. Following a September increase in the one-week repo auction rate to 10.25%, investors expected the Turkish central bank to follow through with another rate increase on October 22. Central bank officials, however, decided to leave the one-week rate unchanged. They also kept the overnight lending rate at 11.75%. However, the central bank widened the spread between the overnight lending rate and the late liquidity window facility rate from 150 to 300 basis points, effectively boosting the latter from 13.25% to 14.75%.
Based on recent Turkish central bank actions and statements, including an increase in its year-end 2020 inflation target to 12.1%, T. Rowe Price sovereign analyst Peter Botoucharov believes that the central bank will need to pursue further monetary tightening. However, he thinks the bank will continue its unorthodox practices, such as using multiple liquidity channels to push “effective” funding costs higher, which is likely to be less helpful in taming inflation. Central bank actions have already lifted effective funding costs by more than 550 basis points since mid-July.
Brazilian Government Struggles With Spending Cap
Stocks in Brazil, as measured by MSCI, returned -2.53%. Shares fell slightly in local currency terms, and a 2% drop in the Brazilian real versus the greenback reduced returns in U.S. dollar terms.
Early in the month, government officials were plainly frustrated as they struggled to find a way to help lower-income individuals with more financial assistance while observing the limitations of the country’s mandatory spending cap. According to a constitutional amendment that took effect about four years ago, the growth rate of Brazil’s government spending is not supposed to exceed the country’s inflation rate over a 20-year stretch.
T. Rowe Price sovereign analyst Richard Hall believes that the Brazilian government is in a “policy corner” and can only achieve, at best, two of the following three possible outcomes:
(1) preserve the existing spending cap
(2) avoid politically difficult reforms to mandatory government spending items
(3) increase social transfers to reduce the negative impact from the end of the “corona-voucher program”
However, due to the approaching municipal elections, Hall believes that fiscal initiatives and reform efforts are unlikely to make any progress in the near future.
Major Index Returns
Total returns unless noted
As of 10/31/2020
Figures shown in U.S. dollars
|U.S. Equity Indexes|
|Dow Jones Industrial Average||‑4.52||‑5.38|
|Nasdaq Composite (Principal Return)||‑2.29||21.61|
|Global/International Equity Indexes|
|MSCI Emerging Markets||2.08||1.15|
|MSCI All-Country World||-2.41||-0.68|
|Bloomberg Barclays U.S. Aggregate||‑0.45||6.32|
|Bloomberg Barclays Global Aggregate ex-USD||0.46||5.26|
|Credit Suisse High Yield||0.39||-0.23|
|JP Morgan Emerging Markets Bond Global||‑0.12||0.25|
Past performance cannot guarantee future results.
Note: Returns are for the periods ended October 31, 2020. The returns include dividends and interest income based on data supplied by third‑party provider RIMES and compiled by T. Rowe Price, except for the Nasdaq Composite Index, whose return is principal only.
Sources: Standard & Poor’s, LSE Group, Bloomberg Barclays, MSCI, Credit Suisse, Dow Jones, and JP Morgan (see Additional Disclosures).
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