Early trading in September saw heavy profit-taking, the US S&P 500 index having just set a record high when it closed on 2 September, the same day it had marked a rise of nearly 11% since the start of the year.
Labouring under substantial profit-taking and certain technicalities, US tech stocks were hit particularly hard, with the Nasdaq composite index correcting by 10% between 2 and 8 September.
These swings brought with them a rise in implied volatility: The VIX index, calculated on S&P 500 options, rose in a few days from 22 to 34, its highest since the end of June.
However, there was only limited contagion to other major stock markets and other risky assets and so the ‘risk off’ phase failed to really take hold.
- Firstly, volatility eased and eurozone indices held up well for most of the month; in Tokyo, the stock market even ended slightly higher.
- Secondly, US equities rose at the end of the period, driven in particular by hopes of an agreement in Congress on new fiscal measures.
Over the month, global equities fell by 3.4% (MSCI AC World index in US dollar terms). Coming after five consecutive monthly gains, the drop reflected concerns about the resurgence of COVID-19. The rise in the number of infected cases and hospitalisation led many countries to beef up social distancing measures: There was a re-imposed lockdown in Israel, local lockdowns in Spain, restrictions on public gatherings and shorter bar and restaurant opening hours in France, the UK and Germany in particular.
The threat of a second wave and such responses reminded investors of the real uncertainties hanging over the global economy – something they had chosen to ignore mostly during the summer. Disappointing activity indicators, particularly in the eurozone, fuelled investor concerns by highlighting signs that the recovery was running out of steam after the mechanical (and rapid) catch-up since May.
Against this backdrop, the renewed commitments from the main central banks to maintain their highly accommodative monetary policies for a long time, or even to take additional measures if needed, failed to fully reassure equity investors.
Recent economic data has been encouraging. Activity is returning to pre-pandemic levels in many sectors of the Chinese economy and the pick-up in demand on Asian exporters is favourable. Moreover, the epidemic appears to be under better control than in major Western countries and other emerging markets. Emerging Asia's better resilience helped the MSCI Emerging Markets index (-1.8% in USD terms) outperform developed markets.
US equities underperformed other major markets. The S&P 500 lost 3.9% and the Nasdaq composite 5.2%. This decline, however, still leaves the Nasdaq up by 24.5% year-to-date (+4.1% for the S&P 500).
European stock markets ended down: -2.4% for the EuroSTOXX 50, which has fallen by 14.7% so far in 2020, reflecting in particular by the weakness in financial stocks.
In Tokyo, the Topix ended up slightly (+0.5%), supported by the Bank of Japan's asset purchases and by the recovery in demand in Asia. The Japanese government's change of leadership, which was quick and smooth, was seen as ensuring continuity in economic policy.
At the global level, cyclical sectors, including some subsectors of technology, outperformed the rest of the market. Energy and banks saw the biggest monthly declines.
The EUR/USD exchange rate, having peered above 1.20 on 1 September, first stabilised at around 1.18 before heading towards 1.16. Market participants had expected comments from members of the ECB Governing Council to end the rapid appreciation of the euro since late May, when the exchange rate was below 1.10.
Market moves in September were a result of concerns over eurozone growth and the drop in equities that led investors to favour the US dollar.
EUR/USD finished the month at 1.1743, down by 1.7% compared to the end of August. Even so, the euro appreciated over the third quarter.
Exhibit 1: Changes in the EUR/USD exchange rate from January 2018 to September 2020
After the ECB's policy meeting on 10 September, there were no changes in key rates, asset purchase programmes or forward guidance. While this had largely been expected, observers were disappointed on several points, and were left with the impression that the ECB's stance was a little less dovish than expected.
This feeling was compounded by various rumours that some council members would have liked the upward revision of the GDP forecast to have been better highlighted. An 8% drop in eurozone GDP is now expected for 2020, while in June the ECB had forecast a drop of 8.7%. This was mainly due to a somewhat smaller decline in Q2.
The ECB's reaction to the euro's gains seemed low key. As is customary, the ECB has talked about the effects on inflation of a strong currency. However, its statements have remained muted and suggest the council is not too concerned about the euro hovering at around USD 1.18. Yet only the day after the meeting, several comments on this topic suggested dissensions among council members.
Against this background, expectations remain high for an announcement in December of a further increase in the asset purchase enveloppes, or a reallocation between programmes – and this despite some comments giving the impression that the envelope of the PEPP (Pandemic emergency purchase programme) may not be fully used.
The investor optimism that prevailed in July and August weakened in September. The difficulties encountered at the start of the month by US tech stocks spread to other risk assets, although without markets reaching for the panic button.
As signs of a second wave of COVID-19 mount, investors seem to have suddenly become aware of the fragility of the global economy. After the slump in activity in the spring and the rapid rebound from May onwards, momentum has recently flagged.
In addition, as the US election approaches and Brexit negotiations enter the final straight, political factors will come more to the fore in the coming weeks.
And among these health, economic and political uncertainties, there are likely to be delays in the adoption of new fiscal support measures in the US and Europe. Equity movements could be erratic in the short term even if a still rather cautious investor positioning is likely to limit the downside.
In the medium term, proactive economic policies should ensure a favourable environment. The message from central banks is clear: The monetary policies put in place will allow long-term rates to remain low for a long time.
Such an environment is supportive of equities and risk assets generally. In addition, advances in medical research should become more tangible over coming months and help boost economic agents’ confidence. This remains crucial for a sustainable recovery that can spread across all sectors.
Beyond possible short-term headwinds, we remain cautiously optimistic and, depending on the signals sent by our proprietary market 'temperature' indicators, we may look at bearish developments as opportunities to strengthen our equity position.
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
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