Market Update – 10th September 2020.

There has been a universal picture of doom and gloom across the media so far this week, thanks to UK/EU political posturing over Brexit; concerns over the end of the government’s Job Retention (furlough) Scheme; the resurgence in coronavirus cases (and associated localised restrictions); and continued weakness in US equity markets.

However, for all the noise and negative news headlines, the FTSE-100 has actually risen over 200 points so far this week – clearly vindicating why we have consistently said it is important to look past the negative news headlines and instead maintain a long-term perspective.

Although US equity markets have continued to weaken this week, for example, the technology-laden Nasdaq index is down nearly 10% from its high last Wednesday (2 September 2020), the decline has been predominately focused on the technology stocks that had risen strongly of late, such as Apple, Alphabet (the owner of Google), Amazon and Tesla – in fact, while Tesla has fallen over 25% since the start of the month, it is still up over 300% since the start of the year – and as we said in our last update (please see here), we believe that these falls simply reflect some froth coming off equities after their recent gains, rather than the start of a deeper equity market correction

While we don’t want to appear blasé or pollyannaish, the unprecedented level of government and central bank stimulus will mean the global economy will recover strongly and this is currently outweighing all the other concerns out there.  In fact, this economic recovery was clearly reflected in data on Monday (7 September 2020), which showed Chinese exports in August were 9.5% higher than they were in August last year.

Likewise, it would be churlish not to accept that equity market volatility will remain elevated in the short-term – especially as we get closer to the US Presidential election on Tuesday 3 November 2020, which has all the hallmarks of being contentious.  Thanks to the coronavirus outbreak we expect a record number of postal votes – and as such, vote counting could easily drag on for several days after the election and, if the vote is exceptionally close (as it was in 2000, between George Bush and Al Gore), it could end up being decided in the courts.

Regarding Brexit negotiations, while Boris Johnson has set a deadline of 15 October 2020 to reach a Brexit deal with the EU, so it can be adopted by the European Council during their meeting on 15-16 October 2020, the European Council also plan to meet again on 10-11 December 2020 – so we would not be surprised to see negotiations go past the October deadline (and we know from history, the EU likes going down to the wire during negotiations).

We have a big end to the week, with both the ECB’s monetary policy meeting and US jobless data due.  We expect the ECB will talk dovishly even if they don’t talk about cutting interest rates and will put more emphasis on economic growth than inflation, given we don’t believe Eurozone inflation will be a problem for the foreseeable future (it has been trending downwards for the past 2 years and is currently negative 0.2%), while the recent strength of the euro against the US dollar could well hurt exporters and in doing so, slow the Eurozone’s economic recovery.

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