The start of the fourth quarter has been dominated by surging new Covid cases globally and subsequent hospitalization issues. The Dollar gained an initial safe haven bid with the key event of the year in less than one month away. The third quarter of 2020 saw a bounce back, after the first half and particularly Q2 of 2020 had the most significant impact on the US economy in living memory.
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The Quarterly Market Outlook offers an in-depth overview of the major events and expectations around the globe, the second pandemic wave, progress on treatment options for COVID-19 to geopolitical tensions, the fiscal and monetary relief measures, and most importantly the shape of the economic recovery.
UNITED STATES
The start of the fourth quarter has been dominated by the news of President Trump’s positive Covid-19 test and subsequent hospitalization. The Dollar gained an initial safe haven bid with the election less than one month away. The third quarter of 2020 saw a bounce back, after the first half and particularly Q2 of 2020 had the most significant impact on the US economy in living memory. Over 210,000 US lives have been lost during the spread of the virus, and as we enter Q4 following the strong recovery in Q3, the big fear is that the recovery is starting to falter. Q3 saw over 14 million new unemployment claims registered, less than half of the Q2 figure of over 30 million. Unemployment has declined from over 14.75% at its peak in April down to 7.86% in September, however it remains the on-going issue which will be closely watched into Q4 and 2021, regardless of the outcome of the election.
The strong May and particularly June non-farm payroll data, where job creation peaked at 4.78 million, slowed considerably during Q3 with only 661,000 recorded for September. The dichotomy of a continued rise in unemployment claims on a weekly basis and a rise in new jobs on a monthly basis we identified in Q2 appears to have been resolved during Q3, as weekly claims remained persistently over 1.0 million up to the end of August.
Q2 GDP growth was confirmed at a record decline of -31.4%, when economic and business activities came to a halt because of the pandemic-driven lockdowns. Expectations for Q3 are for an instant bounce back to +31.5%. The Q3 Earnings season kicks off in earnest in mid-October and is expected to see declines for the key S&P500 of -23.5% from the same period in 2019 but with only a -3.3% decline for revenues. The real question remains as to the type and style of the on-going recovery and whether it is sustainable. The sharpest collapse and rebound in history during Q2 and Q3 are expected to peter out during Q4 with growth back down to under 6.0%.
While economic activity will remain sluggish as the Covid-19 crisis persists, the truce with China again came under scrutiny with numerous companies (particularly technology) under the spotlight. The negative rhetoric continued, and even with a change in President it is unlikely to change significantly; indeed both sides appear to have become more entrenched and a second term Trump presidency will be seen as having an even greater mandate. The Fed remains focused on accommodative monetary policy, a rising balance sheet and a significant reluctance to even consider negative interest rates.
The Dollar was in demand as a safe haven currency during Q3 but as global economies continue to recover that demand could cool over the coming months if the economic outlook fails to pick up. The USDIndex fell from highs of 97.30 in July to lows under 92.00 before closing the quarter down 3.5% at 93.86, following the 3.6% fall in Q2. The prospects for the Dollar are mixed as lower growth and lower future interest rate differentials weigh against it, however, with all central banks moving in dovish unison, the Dollar retains its appeal and is likely to pivot at levels under around 95.00. Clarity remains in short supply, as the President’s health, the election, the wider US-China relationship, and the on-going virus all cloud the outlook. A significant fiscal package and a series of available vaccines would add to improved sentiment as, of course, would a clean, clear, and decisive election result.
The USD10YR bond yield has been struggling as a result of the expectations for lower rates for longer, further amplified by the fact that the slowdown is becoming more visible, with the jobs market also showing these conflicting signs. Q3 saw a huge decline in yields from earlier in the year with a nadir at 0.5150 in early August and a volatile rally to 0.7460 by month end before settling under 0.6800 at quarter end.
The USA30, 100 & 500 moved sharply higher to new all-time highs during Q3, as the major technology companies continued to drive the recovery from Q1 lows. The August peak has cooled however, and September proved volatile as although key technical levels were tested and broken, they refused to be breached completely. A fresh stimulus package and the on-going low rates are beneficial to the stock market as it creates room for both price-based and volume-based gains. Earnings reports during Q3 also helped to buoy equity markets with 78% of reporting companies in the US500 beating expectations. However, it is expected that the Q3 reporting season could be disappointing with expectations getting ahead of the reality of the data. Q3 proved volatile and Q4 is likely to continue in that vein.
EURO AREA
In Europe, worries over the spike in the coronavirus, the resumption of containment measures in some areas and localized lockdowns in several areas, the lack of additional fiscal stimulus, and Brexit frictions are all weighing on the optimism. Brexit negotiations entered a decisive stage in early October.
Meanwhile, European central banks including the ECB remain in uber-accommodative mode, but have downshifted into a wait-and-see stance while appealing for more action from the fiscal side where additional stimulus has been more limited, if there at all. The ECB is clearly nervous that the resurgence of Covid-19 case numbers will measurably slow if not halt the still nascent recovery. Consequently, they are readying additional measures in order to be prepared for the worst-case scenario while at the same monitoring Brexit talks. However, even if the Eurozone recovery continues, it will only be with the help of fiscal and monetary support, with the former meaning deficit and debt levels are going to rise.
In Q3, inflation measures meanwhile fell into negative territory due to special factors, including the temporary cut to the German VAT rate and the delay of summer sales in some countries. Part of the negative inflation environment in Europe was also due to still low energy prices, which remained down -7.8% y/y. The ECB may not be ready to add additional stimulus measures, but officials are clearly concerned that the negative inflation rates, which are likely to stay for the final quarter of the year, could lastingly damage inflation expectations and thus lead to real deflation down the line, especially if virus developments weigh on demand once again. For now, that isn’t sufficient to trigger additional easing steps, but there are concerns over the ECB’s potential shift to a symmetric and fixed inflation target to cement the low-for-longer stance in Q4 as part of the current strategic framework review. The ECB tends to follow some of the FOMC’s strategies hence, like the FOMC, such a shift would strengthen the low-for-longer message and effectively commit the ECB to letting inflation run above target for a while following the current period of underinflation.
From the data perspective, the data releases so far point to a recovery in the manufacturing sector, but also suggest that the services sector is starting to feel the impact of the renewed tightening of restrictions since travel and tour operators have already started to feel the pain. In Germany, meanwhile, the largest EU economy, manufacturing confidence by contrast remained negative, although retail sentiment finally turned positive, as did construction sentiment. Still, the negative annual rates highlight that it is a long way back to pre-crisis levels. All in all, a reading that backs the baseline assumption of a cautious recovery, but also highlights downside risks as Covid-19 rears its head again. And the situation will likely be even worse in other countries that rely more on tourism and services in general.
Hence in Q4, nothing is expected to change the overall picture as all Eurozone readings remain firmly in or close to negative territory. In the best case scenario the Eurozone economy will continue to contract this year but bounce back in 2021, partly thanks to an extremely expansionary monetary policy, but with the focus now on fiscal policies and in particular the EUR 750 bln recovery fund, although at least some at the ECB are already pushing for a renewed strengthening of the PEPP and would like to see the exemptions on the distribution of asset purchases widened to other ECB measures.
As the still fragile Eurozone recoveries are anticipated to be disrupted, given the subdued demand and rising trend of economically disruptive Covid-suppressing restrictions across Europe, there should be no fundamental change to the EURO, which faces more downside risks than positive ones. However, it could benefit from dollar weakness (without any significant interruption from the US November elections.) On the stock market front, the GER30 has been sustaining the overall sideways movement in Q3 but could also register some idiosyncratic effects if the weakening in the German economy continues. The FRA40 followed a similar path as the GER30, however NETH25 registered declines from its 7-month peak.
JAPAN
The Yen recorded a strengthening against the USD starting from July by 3.5%. This strengthening was not significant but slow and thin, compared to other major currencies that have experienced high volatility. The Yen was helped by the widespread weakening of the USD and its safe-haven status. JPN225 has also recovered back to its original year price and recorded a 7% increase in the last 3 months. This year, GDP is projected to experience a sharp contraction in line with falling domestic demand amid falling consumption and investment. The postponement of the Tokyo Olympics will have an impact on tourism. The substantial fiscal and monetary stimulus will dampen the decline, although the very high virus case rate throughout August clouded the outlook. It is forecast that the economy will contract 5.1% in 2020, down 0.3 percentage points from last month’s forecast, before growing 2.7% in 2021. In addition, the Yen has political risks of its own in play amid speculation that the newly appointed Japanese prime minister is considering holding early elections.
UNITED KINGDOM
Sterling has been falling hard since early September against the Euro and the Dollar as the United Kingdom has been hit hard by the uncertainty over the Brexit transition negotiations. The discrepancy over the future trade negotiation between the EU and UK has kept the smoother Brexit transition at risk. British Prime Minister Boris Johnson has given an October 15 deadline for a post-Brexit trade agreement with the European Union. He told the European Union that he is prepared to walk away from trade talks rather than compromise on what he regards as a core principle of Brexit, as the feeling grows on both sides that a breakthrough will prove impossible. Meanwhile, the President of the EU council, Charles Michel, emphasized that they will never accept an agreement that goes against the interests of the union. This shows a significant sign that the tension between both parties remains high. Increased risk aversion in the UK and global markets has also pushed the Pound Sterling lower.
The slow decline in Covid-19 virus cases could also have a negative impact for both the Sterling and the UK100, as it would likely hinder investors’ anticipation of a V-shaped recovery and harm both profits and future potential. New cases have been swelling in the UK and Europe. New national restrictions (localized lockdowns) in the UK are currently affecting 15 million people.
The Pound also took a hit as the BoE convened its monetary policy meeting in September and reportedly discussed the effectiveness of a negative interest rates policy (NIRP). Analysts are anticipating that the central bank will announce an aggressive package of interest rate cuts and quantitative easing in November 2020 to stimulate an economy hobbled by the pandemic and the threat of uncertainty on the Brexit transition negotiation. An increase to the central bank’s QE program, with an extra £100bn, is likely to be announced. Investors are expecting increased volatility in the Pound and UK100 until November, when time runs out for the EU & UK to reach an agreement on trade before the UK drops out of the EU’s single market and customs union at the end of the year, as well as the highly anticipated rate setting Central Bank meeting.
GBPUSD has fallen from the sky-high 1.3480 (2020 year high) and is currently traded around 1.2900. EURGBP continues to press higher above 0.9100 and is expected to keep on rising as Brexit tension escalates. The UK100 index has retraced from its post-Covid high at 6511 and currently trades above 5700, while the downside is limited as investors are anticipating fresh government stimulus and possible additional QE program from the BoE, which would limit the impact of the Brexit transition negotiation and Covid-19.
AUSTRALIA & NEW ZEALAND
Uncertainties remain in play following a widespread and synchronized global resurgence in infections. Reinstatement of containment measures have brought about a domino effect on many aspects of affected countries. According to the latest RBA Monetary Policy Statement, heightened activity restrictions and tightening of the JobKeeper program may result in the unemployment rate in Australia peaking at 10% in Q4 2020. The year-ended wage price index (WPI) is expected to remain below 2% through the end of 2022 while ample spare capacity is expected while labour underutilization remains elevated. Inflation is expected to remain subdued between 1%-1.5% following disinflationary effects in the labour market and in the economy, weaker rent growth and household income growth.
Although household income is expected to decline in Q4 2020, an increased saving ratio following prior government fiscal support and constrained consumption may smooth the process, thus maintaining consumption growth. Elsewhere, the RBA forecasted non-mining business investment to stay below its pre-pandemic level while mining investment (except iron ore and coal projects) is expected to start “gradually declining from around the middle of 2021”. Considering all factors above, the Australian GDP is expected to contract by about 6% over 2020. On the flipside, if greater progress is made in suppressing the virus, the RBA has stated that a strong rebound in employment and consumption growth may possibly reverse much of the near-term decline in GDP over 2020-21.
Being one of the countries that appeared to have succeeded in halting the spread of Covid-19, a fresh outbreak in Auckland, the largest city in New Zealand, has prompted the government to reimpose lockdown measures. As such, the RBNZ expects Q4 unemployment to peak at 8.1% following a sharp deterioration in labor demand as the wage subsidy ends and more firms adjust to lower demand. An assumption that border restrictions will remain until the end of the next year shall cast negative economic impacts, such as annual net immigration of working age people to fall to near 0%, house prices to fall by nearly 9% following reduced demand for housing and residential investment, inflation to fall below its 2% target band and finally, 2020 GDP to fall by 5.8% y/y.
Following a sharp depreciation to US$0.55 in March – the lowest level since the early 2000s – the Aussie was seen appreciating until a bullish rejection was met below the 0.7400 handle at the beginning of September. On the other hand, the AUS200 has displayed a bullish appreciation since March, with a rebound from its 8-year lows at 4399, to 6199. Its momentum gradually diminished in the June-August period, leaving its highest price at 6201 before retracing lower to its current level at 5790. Likewise, the Kiwi was seen trading within the 0.6488–0.6797 range in Q3. To date, price rejection has been seen which has turned the pair below the 0.67 handle. It is worth noting that the RBNZ has signaled in its latest meeting the possibility of integrating further monetary stimulus in the near term which includes a negative OCR, Funding for Lending Programme (FLP) and purchases of foreign assets,that may create a new wave of downward pressures on the Kiwi.
CANADA
Due to the second wave of coronavirus infections in a number of major economic countries, CAD fell to a six-week low against USD as investors ditched commodity currencies, while the safe-haven US Dollar expanded on its eight-week high. However, when compared to the other commodity currencies like AUD and NZD, CAD is performing better this week. BoC kept its interest rate unchanged at 0.25% on September 9th, as widely expected. The Committee said that it will continue its quantitative easing program with large-scale asset purchases of government bonds. In September the Trudeau government announced that it will support people and businesses through this crisis «as long as it lasts, whatever it takes» and unveiled its «ambitious plan for an unprecedented reality» amid rising Covid-19 cases.
The Canada GDP Growth Rate shrank by a record 11.5% in Q2, however Canada’s major economic indicators have rebounded in recent quarters, with Manufacturing PMI rising to 55.1 in August from 52.9 in the previous month, and Consumer Confidence increasing to 45.35 points in September from 43.96 points in August. The unemployment rate decreased to 10.2 percent in August 2020 from 10.9 percent in the previous month. One of the factors supporting the economy and the Canadian currency is the rise in oil prices – if the USoil price can hold above $40 per barrel it will be good for Canada’s economy and its currency.
EMERGING ECONOMIES
The emerging countries have been in the spotlight this year as most major emerging currencies managed to sustain/extend gains seen since March, with Yuan one of the biggest gainers of the year. The majority has been supported by the US Dollar decline.
In the first quarter of 2020, with the USD playing the main role of safe haven in the financial markets, most of the emerging currencies lost ground against the USD, however, the Turkish Lira had the worst performance compared to others. TRY lost 2.9% in Q2 (USDIndex lost 1.1%), and while the USDIndex lost 2.7% in Q3, the Turkish Lira fell by almost 11.7%. Q3 could have ended on a positive note for TRY, especially after President Erdogan announced the discovery of a large natural gas reserve off its Black Sea coast, but due to maritime border disputes with neighbors, especially with Greece, as well as the economic crisis caused by the coronavirus, which raised the unemployment rate to 13.4% in the third quarter, the currency was pushed to a historical low against USD. For the rest of the year, the CBRT has changed its policy by raising the overnight lending rate to 11.75% (it was 9.75%) and the 1-week Repo rate to 10.25% from 8.25%. The Turkish government is now in mediation with the EU, trying to start negotiations over its conflicts with neighbors, which – if all goes to plan – will give a break to the USDTRY bulls for now.
Africa is widely expected to be the hardest hit region, followed by India, the Middle East and Latin America as most emerging economies have seen a falloff in exports and a rise in government debt as the virus spreads. The larger economies of South Africa and Nigeria face unprecedented hits to GDP despite the fact they have only partially locked down against the virus. However, USD dollar weakness could counterbalance these downside risks for the Rand. The African Rand (ZAR) has seen a sharp decline in 2020 even though a recovery has been seen the past 6 months. Weaker than expected H1 growth and limited reforms will weigh upon investor sentiment in the risk off environment. Less external demand, challenges to the tourism sector, less private consumption and two months of volatility due to the US election will keep USDZAR volatile for the remainder of the year.
Meanwhile China’s economy appeared to further distinguish itself from the struggling global economy, although the global economy remains a potent source of uncertainty for China’s export-driven growth model. The non-manufacturing PMI rose in Q3, marking the strongest reading since the all-time low in February and consistent with the on-going strength in services. China was the only growing economy in Q2 and in Q3. Due to the solid economic picture the Chinese Yuan has held its position as a good performer against the US Dollar since the beginning of the year. Demand for Chinese assets and a weaker US Dollar were two of the main reasons. 6.8455 is an important level for a USDCNH upside move. Hence in regards to the future of Yuan, the still poor US-China relations are prominent ahead of the US elections. The PBOC is expected to slow its monetary easing in the coming months.
COMMODITIES
Commodities performance was mixed in Q3 but ended with gains extending the year’s rally despite the significant tumble seen in August and September. In general, however, Q3 was very supportive for industrial metals.
Silver had a remarkable recovery in Q3 as it reached 7-year territory, up to $29.83. Silver soared over 38% in August and September to post its biggest monthly gains since 2010. A corrective phase was seen in September that pressured precious metals lower, but overall, it was a successful quarter for the main precious metals. The rally was driven by the growth of industrial activity around the globe in Q3 due to the reopening of the economy but also due to the massive central bank stimulus that resulted in a Treasury yields decrease as well. Also, the grey metal is considered an alternative or addition to gold due to their close correlation, encouraging more money flow in silver. Meanwhile in September the drift on Silver but in general the commodity assets was challenged by still elevated uncertainty, prompting some profit taking. Demand worries weighed on the Reuters/CRB commodity index, as did likely profit taking. The Index fell -4% to 147 by the end of September from its post-March peak of 153 at the beginning of September. For the final quarter of the year, Silver and in general industrial metals could be challenged by declining demand amid the latest rise in Covid-19 cases, while the November election and a lack of additional plans for stimulus could weigh on global economy.
In contrast, Gold was one of the main losers in the metal sector despite its initial 17.8% growth at the beginning of Q3.The same factors as Silver were the main drivers of Gold, however in September the Gold sell off and profit taking were much heavier than Silver. The increased risk appetite in September saw a sell off in Gold over 11%. The rally in US Treasury yields also saw real yields rebound, which weighed on gold. Optimism over further economic stimulus in the US, positive economic data elsewhere and news of a Covid-19 vaccine appears to have prompted investors to pull money from safe havens and put these into riskier assets. As of Q4, Gold is expected to sustain a bullish bias due to its safe-haven characteristic as the US election reflects increasing uncertainty in a political changeover, while a weak greenback is expected. Let’s not forget that Gold is priced in US Dollar. Hence the precious metal will be more affordable as the Dollar gets weaker, while the dovish Fed and its lower for longer rate stance could confirm weak USD. Hence the only thing that looks for now that it could weigh on Gold is the announcement of an effective Covid-19 vaccine, something that could benefit market sentiment.
The price of oil slipped from a $43.76 high to a $36.13 low in Q3 amid spiking Covid cases that weighed on demand. Bloomberg reported a slump in driving in the UK due to new virus restrictions, while noting that commercial flights are at the lowest levels since the middle of August. Meanwhile additional production from Libya added to the total supply OPEC+ exports, a rise which weighed on the USOIL price. In the upcoming quarter, spiking Covid cases around the world have left a big question mark on the demand side of the equation, and with regional lockdowns and the fall in air travel it appears crude has further downside potential on USOIL.
Talk of increased Russian exports could also add further pressure to crude prices.
CRYPTOCURRENCIES
Crises are not always bad; sometimes they can be constructive or highlight some of the available possibilities. Since the beginning of 2020 and the start of the current Covid-19 crisis, many technologies have been really helpful in avoiding restrictions, one of which was Blockchain, the technology which is the base of most of the cryptocurrencies and their transfer system. However, it is not just about cryptocurrencies – it can be used in many different fields, and now, Medical supply, pharmaceutical, and other industries will take it more seriously, as the distributed ledger technology could fix the recent problems in supply and distribution chains.
It was certainly one of the reasons that in the middle of September, the cryptocurrency exchange «Kraken Financial» became the first crypto company to obtain a bank charter. Back in August, BTC, the biggest cryptocurrency by market capitalization, reached over 12K after 13 months. Despite the Bank Stocks fall following the report on the industry’s failure to address Money Laundering, BTC still gained 17.2% in the 3rd Quarter and XRP 38%, however, of the most popular digital currencies, ETH was the winner with a more than 56% gain. Back in August we also had a report from Bloomberg titled «Older Investors Go for Gold, Younger Ones Bitcoin, JPMorgan Says». This title by itself from Bloomberg and JPMorgan could have been good motivation for this field and encouraged more investors, especially with the Blockchain system becoming more useful. What we expect for the crypto market in the rest of 2020 is a leap in infrastructure for further future growth, unlike 2017’s Q4 which was an emotional bubble.
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