- S&P 500 and Dow Jones fell on the week while the NASDAQ bucked broader selling pressures, adding 1.13%.
- The close lower last week for the S&P 500 marked its fourth weekly decline, the longest weekly losing streak in more than a year.
- Some of the largest YTD underperforming sectors added to their losses and trailed the broader market as Energy, Financials, Industrials, Real Estate, and Healthcare once again lagged.
- Tech was the best performing sector with strength in software names as well as Large Cap.
- Main themes remained largely unchanged as multiple headwinds continued to weigh on sentiment, overshadowing the few bullish narrative talking points.
- Despite the selloff, Gold also came under pressure, declining just under 5% as money managers cut their bullish bets in bullion futures and options at their fastest pace since March.
- The Dollar index posted its best week since early April, gaining 1.50% and adding additional pressure to Gold as a rebounding dollar reduces the appeal of the previous metal.
- Federal Reserve officials continued to stress the need for additional Fiscal stimulus in order to support the ongoing economic recovery.
- Despite the 1.13% move higher in the S&P 500 over the first two days of this week, the index has still fallen more than 4% in September, setting it up for the worst month relative to global peers since 2018.
- In Switzerland, citizens have voted against a proposal ending free movement of people with the European Union (EU). According to the referendum results, 62% voted to keep free movement, while 38% voted against the proposal. The Swiss Market Index was down 3.06% last week.
U.S. equities closed lower on the week, which led to the downside by the Dow closing at 1.75% in the red, followed by the S&P 500 which fell 0.63%. The NASDAQ bucked broader selling pressures and finished higher by 1.13% after Technology buoyed the space and was the standout performer on the week. The close lower for the S&P 500 marked its fourth weekly decline, the longest weekly losing streak in more than a year.
Eight of the 11 sectors finished in negative territory as some of the largest year-to-date underperformers continued their trend of lagging broader markets. Energy, Materials, Financials, Industrials, Real Estate, and Healthcare all underperformed and closed in the red. Energy led the selloff, falling 8.60% as pressure stemmed from oil service names, with the group falling 17.5%. Financials were the next worst performing sector as Banks remained under pressure with the BKX Index falling 6.8% amid continued reports about some company’s involvement in illegal money flows and revenue headwinds which have been attributed to softer than anticipated loan demand. Industrials trailed with airline and machinery-related names amongst the worst performers. Healthcare sold off again after concerns surrounding the future of Obamacare came into focus, with investors de-risking in multiple subsectors. The benchmark gauge of U.S. equities, the S&P 500, and Dow Jones Industrial are poised for their first monthly slide since March.
Tech was the best performing sector, after strength in software names had the group broadly higher. Large Cap names in the Tech space also helped provide leadership, after seeing outsized pressure for much of the month with Apple, Microsoft, Nvidia being the notable gainers. Consumer Discretionary ended higher after strength in Amazon offset softness in many areas tied to the re- opening trade such as cruise lines, automobile makers, hotels, and retailers. Gold lost just under ~5% despite the risk-off sentiment, and treasuries continued their recent stretch of remaining range bound. The Dollar index posted its best week since early April, gaining 1.50% on the week.
The main market themes remained largely unchanged and headwinds continued to persist, leading to the negative sentiment seen over the week which included:
- Waning possibility of a fifth COVID-19 relief package ahead of the election in the wake of Ruth Bader Ginsburg’s death
- High Frequency data that shows potential signs of a stalling recovery
- The continued stress from Fed officials for additional Fiscal stimulus
- The upcoming election and President Trump’s comments refusing to commit to a peaceful transition if he were to lose
- Rising COVID-19 infection numbers across Europe resulting in increased mitigation efforts
- Stricter standards from the FDA surrounding a COVID-19 vaccine, making it less likely to have one in place before the election
- Continued lofty valuations with a lack of general market breadth
That said, even as overhangs remain front and center in U.S. markets, a few key aspects of the bullish narrative remained intact including:
- Large amounts of monetary stimulus
- Coming off of a better than feared earnings season and a quicker than expected rebound for companies
- Potential for a vaccine
Politics remained in focus and continues to be arguably one of the largest overhangs with doubts surrounding another fiscal stimulus bill before the upcoming election and the ongoing uncertainty regarding potential election results. With the passing of Ruth Bader Ginsburg, focus has shifted from a potential bi-partisan fiscal stimulus deal to Democrats attempting to do all they can to stall President Trump’s replacement candidate, Amy Coney Barrett. Even in the absence of a new potential Supreme Court justice, there continues to be skepticism surrounding any progress on a stimulus package. This is due to the stark differences between Democrats and Republicans regarding the size and scope of a potential deal. As mentioned in previous insight pieces, Democrats continue to push for a deal worth around ~$2.2T, while Republicans favor a “skinny deal” worth around ~$1T. At the time of writing this, the stalemate has persisted for multiple months with little to no progress being made on any front.
As we approach the key date of November 3rd, investors have continued to see the tightening of multiple swing-state polls adding to the already high levels of uncertainty. Furthermore, investors continue to remain skeptical of polling numbers given what happened during the 2016 election, with many believing President Trump could potentially benefit once again from the “silent majority” come election day. Given the surge of mail-in ballots, concerns from either side around potential delayed results continue to weight on markets as the President declined to commit to a “peaceful transition of power” if he were to lose. Gaining some attention despite not having much material substance, the President announced his Healthcare plan just a month before the election. President Trump announced the America First Healthcare Plan (AFHP) at a campaign stop in North Carolina on Thursday saying that the plan is built on three pillars depicted as more choices, better care, and lower costs. Though details remained scarce, an anticipated 33 million Americans who currently receive Medicare are expected to receive a card in the mail, worth around $200 for prescription drugs prior to the election.
On Wednesday the S&P 500 traded near its lowest levels in almost two months as multiple Federal Reserve officials continued to stress the need for additional Fiscal stimulus. The need for further aid was echoed by not only Chairman Powell, but Vice Chairman Richard Clarida, Governor Randal Quarles, and Regional Executive Officers Charles Evans, Loretta Mester, and Eric Rosengren. Fed Chairman Powell noted that there was still a substantial way to go in the ongoing economic recovery as initial/continuing claims remain elevated, small businesses continue to fail, and high frequency data including restaurant, gym and public transportation usage remains moderate. The warnings have come as Congress’s focus has shifted to the potential replacement of Ruth Bader Ginsburg on the Supreme Court, dealing yet another blow to investors and highlighting the lack of bipartisanship from Congressional leaders.
Rising Coronavirus infections throughout Europe continued to receive attention and also weighed on global equity markets. Multiple countries reported their highest daily averages in months and some announced new mitigation efforts in their attempts to slow the spread, including tough restrictive measures that could last up to six months within the United Kingdom. Prime Minister Boris Johnson announced bars and restaurants will close at 10PM within the country, while face coverings for passengers using public transportation will become mandatory. Spain’s government asked for curbs on movement to extend across the entire capital of Madrid, putting pressure on local authorities to act. Bank of America noted that the seven-day average of 31,240 stood 30% above the previous peak level in April. Despite the spike in cases abroad, on Friday, Florida lifted all restrictions on restaurants and other businesses and also banned all fines against people who refuse to wear masks.
On Thursday, Federal Reserve Chairman Powell and Treasury Secretary Steve Mnuchin testified in front of the Senate Banking Committee in what was widely watched and dissected. Below are high level highlights from their testimonies according to an article by Bloomberg.
Agreement on additional fiscal support from Congress was pretty widespread among Powell, Mnuchin, and members of the Senate Banking Committee although there was no agreement around size of the stimulus.
The Fed’s emergency lending facilities and their capabilities were in focus. Powell believed their Main Street Lending Program in particular may grow between now and the end of the year from the current less than $2 billion to as high as between $10 billion and $30 billion.
Some Republican members pressed Powell on how Congress might best redeploy some of the unspent funds it committed to capitalize the lending facilities. The Fed chair believes the government’s Paycheck Protection Program for small businesses and additional benefits for the unemployed would be the most beneficial.
Mnuchin mentioned the aid to airlines “literally saved the entire industry” while adding that he and President Donald Trump are finding ways to extend payroll support so that they can limit more layoffs.
Domestic stocks closed slightly lower on Tuesday, giving back some of Monday’s gains in which all major indices closed up by at least 1.50%. The 1.60% advance in the S&P 500 was the largest gain in two weeks for the index, however once again, trailed the Tech-heavy NASDAQ as it added 1.87% in Monday’s session. With the move higher in Monday’s sessions, the NASDAQ 100 capped off the best two days gain since April 14th while the S&P 500 marked its best two day stretch since June 8th. Despite the 1.13% move higher over the first two days of the week in the S&P 500, the index has still fallen more than 4% in September, setting it up for the worst month relative to global peers since 2018.
Markets have been led higher on the week by Technology, Communication Services and Consumer Discretionary, all which have outperformed. Energy remains the only sector in red on the week, falling 0.46% as crude futures fell over 3% in Tuesday’s session, its lowest level in two weeks. The decline came as concerns about rising COVID-19 cases globally reignited demand fears and the potential for prolonged lackluster consumption. Gold prices were able to stop their decline and resumed their move higher above $1,900/oz, adding 1.1% in Tuesday’s session as the U.S. Dollar slipped slightly despite the better economic data that showed Consumer Confidence posted its largest gain in more than 17 years. The increase of 15.5 points in Consumer Confidence was at its highest since April 2003 as American’s grew more hopeful about the job market and outlook for the economy, however still remained below pre-pandemic levels.
While markets finished off their worst levels on Tuesday, it was an extremely quiet session as investors lacked conviction ahead of the first Presidential debate with only 8.42B shares exchanging hands. This is compared to a peak of 19.3B back in late February and continues to be well below the year-to- date average of 11.04B shares. We also saw one of the lowest SPY option volume days this year as many adopted a wait and see mentality.
THIS WEEK INTERNATIONAL
Last week, global equities were down 2.08% after disappointing Flash PMI readings across many regions. Global Value stocks were down 3.78%, while Growth stocks dropped 0.58%. Brent Crude oil price decreased from $43.15 to $41.92 per barrel with no clear imminent catalyst for higher prices due to deflationary pressures from weak demand and global oversupply. The global energy sector was down 7.27% last week, thus polarizing further this sector between “oil bears” and value investors. Despite significant improvements of the World Trade Volume index last summer, the Netherlands Bureau of Economic Policy Analysis reports that global trade of goods is still below levels observed in the past three years. Volatility in emerging markets increased from 22.26 at the beginning of the week to 26.63 at the end of the week, signaling rising uncertainty regarding the economic outlook. Information Technology was the only sector in the green after three weeks of valuation adjustments.
Europe – Last week, the Euro STOXX index was down 4.15%, with banks down 9.58%. Every sector was in the red as investors are more and more nervous regarding unresolved issues such as Brexit, trade negotiations, COVID-19 containment, the job market, and the economy.
In France, Patrick Bouet, head of the National Council of the Order of Doctors said that “the second wave is arriving faster than we thought”. He also warned that the health system will be overwhelmed by the epidemic if nothing is done to prevent it. New regulations taken by the government to slow the spread faced local resistance. In fact, restaurant and bar owners from the city of Marseille demonstrated against forced closures last weekend. The CAC 40 was down 4.99% last week, marking the worst performing week for the French index since June.
In Germany, Angela Merkel commented on the recent surge of daily COVID-19 cases that “if the trend continues as it is now, we’ll have 19,200 infections a day, which is like in other countries”. However, she insisted that the proper way to respond to the epidemic is to contain it while keeping the economy and schools running. The DAX index was down 4.93% last week, with banks among the worst- performing industries.
In Switzerland, citizens have voted against a proposal ending free movement of people with the European Union (EU). According to the referendum results, 62% voted to keep free movement while 38% voted against the proposal. The Swiss Market Index was down 3.06% last week.
The United Kingdom and the EU will attempt to reach an agreement this week following the contentious back and forth between both parties initiated by Boris Johnson. The VP of the European Commission for inter-institutional relations, Maros Sefcovic, said that “the withdrawal agreement is to be respected, not to be renegotiated, let alone unilaterally changed.” British Minister Michael Gove said that the clauses included in the Internal Market Bill are a “safety net” supported by the House of Commons and stressed that those clauses “will remain in that bill”. The deadline to strike a deal is a couple of weeks away. The FTSE All-Share index was down 2.80% last week, with oil equipment services down 13.84%.
APAC – The Shanghai Composite Index was down 3.28% last week, with real estate down 5.28%. President Xi announced at the annual United Nations Climate meeting China’s commitment to be carbon-neutral by 2060 while India and the U.S. remain out of the climate consensus. The Hang Seng index was down 4.99% last week.
In response to the U.S. and China tensions, more and more Chinese companies are looking at Hong Kong as a viable alternative to raise capital. According to Refinitiv, in the last 10 months, eight Chinese companies that originally listed their companies in the NYSE and NASDAQ added their listings in Hong Kong and raised $25.6B. Last year, the Shanghai exchange introduced a market for technology companies similar to the NASDAQ that attracted close to 180 IPOs.
In Japan, the NIKKEI 225 performed relatively better than other markets as it was only down 0.67%. Last week, the newly elected Prime Minister, Yoshihide Suga, spoke with Xi Jinping over the phone as both leaders set the tone for a close bilateral relationship between China and Japan. In fact, China’s foreign affairs minister is expected to visit Japan in October and meet his counterpart Toshimitsu Motegi. Additionally, Suga called South Korea’s president and told him that “relations between the two countries are in a very severe condition right now and we should not leave this unresolved.” Suga’s cabinet kicked off with 65% approval ratings as he retained eight cabinet members from the previous government.
Emerging Markets – In South Korea, the Consumer Confidence Index fell to 79.4 in September from 88.2 previously. It is the largest decline since March. The KOSPI index slid 5.54% last week, with medical supplies down 12.51%. Last month, the government extended the short-selling ban despite the KOSPI rallying 60% from the March lows. The ban was initiated to protect retail investors from a market crash caused by short sellers. The regulators are currently discussing a partial lift of the ban next year in which only blue chip- stocks could subject to short selling.
In Brazil, data from Brazil Central Bank shows that banks have steadily processed more loans this year as demand increased and personal default rate decreased. Last month, outstanding loans increased 1.9% and the personal default rate fell to the lowest level in over a year. Brazil’s President Jair Bolsonaro is contemplating fiscal scheme ideas to finance his social program that will decrease Brazilians’ reliance on these loans. The big obstacle that he faces is that the fiscal responsibility rule states that a permanent expenditure can only be created if matched by a permanent revenue. Additionally, the constitution states that the government cannot issue new debt to finance current expenditures. Brazilian stocks were down 1.31% last week.
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