Weekly market update - 26th of October 2020
Written and accurate as at: Oct 26, 2020 Current Stats & Facts
The Australian and US equity markets have remained mostly resilient, falling slightly last week. Albeit, despite a second Covid-19 wave in the US and Europe and a lack of tangible progress on a US fiscal package.
Investors continue to reduce their exposure to growth stocks in favour of value and cyclicals. Some of this rotation is attributed by expectations of a Democrat sweep in November’s election, leading to more massive fiscal stimulus. Government injection has also encouraged US bond yields to break higher.
Key near-term risks include a challenged election result in the US and the potential for rising cases and hospitalisations in Europe, leading to greater lockdowns. On the plus side, the potential removal of election uncertainty and the scope for more stimulus remains supportive for markets. New data from vaccine tests are likely to be available this week.
Covid update
Case numbers are climbing in the US and Europe, the latter driven by a surge in France. US hospitalisations are up by a third from recent lows, while in France the rate is half that of the previous high.
The critical factor to watch is whether the increase in hospitalisations leads to more lockdowns. This surge is causing greater risk in Europe than the US, where hospital capacity does not appear under pressure. There is also scope for further policy support in Europe, via an extended asset-buying program from the ECB and a credit-funding program.
There may be important news on a vaccine this week with Pfizer due to report interim indications. The consensus expectation is for a vaccine success rate of 70-75%. Anything better would make a material difference in the appeal, and the time it takes to contain the spread of the virus.
Economic outlook
The US economy continues to hold up well despite the second wave of cases, uncertainty around the election and the lack of a fiscal package.
Housing remains a decisive factor. House prices in the US are rising materially, driven by cyclical and structural elements. In combination with a rally in equities, this has led to new highs for consumer net worth, which is likely to support further consumer spending.
Europe is more of a concern. There are signals that the rising numbers of cases are having an impact on activity. PMIs in the Eurozone and the UK has rolled over in October.
Election outlook
With a week to go, the presidential race has not seen any significant shift in betting odds or polls. There are some signs the senate race may be a bit closer than previously thought increasing the likelihood of a further surge in fiscal stimulus.
Market outlook
Expectations of a fiscal splurge after a Democrat win have encouraged bond yields to continue creeping higher. They have broken through recent resistance levels, and the curve has steepened. A steeper yield curve and higher bond yields are positive for financials, which performed better this last week.
The Australian market mostly held onto its month-to-date gains. Banks continue to bounce back, mainly driven by investors closing down underweights. Banks were up 1.2% for the week and 11.2% for the month compared to a 6% gain for the broader market.
Trading updates from AGM season, coupled with loosening domestic restrictions, were generally supportive for some of the more cyclical parts of the market. Defensive stocks generally underperformed as people rotated into banks and cyclicals.
Gold miner Evolution (EVN, -6.1%) was the weakest in the ASX 100, ahead of Magellan Financial (MFG -5.0%) and Amcor (AMC, -4.7%).
Crown (CWN, 3.1%) fell on news of an AUSTRAC review into potential failures on anti-money laundering controls. There is a sense that much negativity around the stock is already in the price.
BlueScope Steel (BSL, +9.2%) was the best performer in the ASX 100 following an earnings upgrade. This was driven by increases in demand in Asia and Australia as activity picks up. A potential widening of US steel spreads (given recent steel market consolidation) may provide an additional tailwind.
Qantas’s (QAN, +8.1%) AGM update was marginally positive, flagging improved cash flow as a result of more substantial freight figures.
Orora (ORA, +7.5%) indicated that demand in the US was no worse than expected, relieving market fears.
Oz Minerals (OZL, +6.0%), South32 (S32, +5.2%), Santos (STO, +2.9%) and Cochlear (COH, +5.5%) did not deliver much in the way of AGM surprises but painted a reassuring picture.
QBE (QBE, +0.1%) announced its UK chief Richard Pryce as interim CEO. The market considers Mr Pryce as a safe pair of hands which may help alleviate an issue that has weighed on the stocks despite peers in the US reporting good numbers.