highlights
- U.S. equities finished the week higher as the S&P 500 posted its first gain in four weeks, adding 1.54% over the five days
- Defensive sectors, REITS, Utilities and Financials were the top three best performing sectors on the week
- Value and cyclical names outpaced growth and momentum with all of the relative outperformance coming in Friday’s session with value adding over 2%, despite the S&P 500 only falling 0.96% S&P 500 added 8.47% in the 3Q, its best 3Q since 2010 when it added 10.72%
- S&P 500 added 8.47% in the 3Q, its best 3Q since 2010 when it added 10.72%
- The unemployment rate fell more than anticipated to 7.9% from 8.4%, however Non-Farm payrolls missed expectations
- Nonfarm payrolls showed September added 661K jobs, its fifth straight period of gains
- ISM Manufacturing contracted slightly but remained at their second highest levels since November of 2018
- According to RealClear Politics, Biden was already leading President Trump by 7.2 points nationally and 3.5 points in battleground states before President Trump’s announcement last week that he had contracted COVID-19
- Crude oil jumped over 6% in Monday’s (10/5/2020) session amid a cut in output from Norway and the approaching of Hurricane Gamma in the Gulf of Mexico, which is expected to make landfall on Friday in Louisiana
- Boris Johnson and Ursula Von der Leyen, the president of the European Commission, have agreed last weekend to extend Brexit talks by a month. In a joint statement, both parties “agreed on the importance of finding an agreement, if at all possible, as a strong basis for a strategic EU-UK relationship in the future”. British stocks gained 1.21% last week, with banks up 8.57%.
LAST WEEK
U.S. equities finished the week higher as the S&P 500 posted its first gain in four weeks, adding 1.54% over the five days. The Nasdaq Composite added 1.50%, while the Dow Jones ended 1.88% higher. Value and cyclical names outpaced growth and momentum with the S&P 500 Pure Value adding 3.20%, while S&P 500 Pure Growth added 1.99% with all of the relative outperformance coming in Friday’s session. Treasuries fell and yields rose; however still remained largely range bound closing at 0.70% on the 10-year note, up just under 5bps from the previous Friday’s close. The U.S. Dollar index closed down 0.9%, providing a tailwind for Gold which gained 2.2% on the week. Overall, it was a busy week when looking at the economic calendar but fairly quiet in terms of meaningful news flow.
Friday’s widely watched job report was not as rosy as some had expected and dampened investors outlook for a continued recovery despite the unemployment rate falling more than anticipated from 7.9% to 8.4%. Despite being the fifth straight period of gains, the addition of 661K non-farm payrolls missed the median Bloomberg estimate of 850K bringing the total number of people on payrolls to 141.72M according to the Labor Department report on Friday. Permanent job losses continued to climb at their fastest pace since 2013 despite gains and did little to excite investors on Friday. The ISM manufacturing headline number contracted slightly to 55.4 vs 56.4, but remained at their second highest levels since November of 2018.
When all was said and done, investors saw defensive sectors post outsized gains throughout the week with REITS, Utilities, and Financials among the top three best performing sectors. Financials outperformed with strength in Banks, as well as Asset Manager related names. The banking index rose 5.1% on the week, while Asset Managers gained on reports that Hedge Fund giant Trian (Nelson Peltz) may push for consolidation among some of the industry’s top managers. Consumer Discretionary outperformed again, adding 2.51% on the week after homebuilders and housing related stocks were among some of the largest gainers. Despite gaining 2%, Facebook was not able to carry the Communication Services space after weakness in video related stocks from Electronic Arts (-1.6%), Take-Two Interactive (-3.4%) and Activision Blizzard (-3.3%), while Walt Disney Company (-1.2%) added to the downside pressure after announcing 28K employees would be laid off at Theme Parks globally. The year-to-date winner, Technology, underperformed on the week, but still finished up 0.83% after Semi- conductor names helped offset weakness in other areas. The Philadelphia Semi-conductor index closed up 2.00%, outpacing broader market gains. Energy was the only sector to finish in the red on the week, closing down 2.84%. Adding to that, after a four-month win streak for Crude, both Brent and Crude gave up nearly 8% in September and was the first month-over-month decline since April.
There was no real shift in the overall narrative, causing little change in the way of market themes with both the Bull and Bear cases remaining largely intact. The main justification for the upside move on the week appeared to be the recent bout of weakness equities experienced throughout September. After four straight weeks of declines and more than a 6% move to the downside, the unwinding of trades and profit- taking after the S&P’s best 3Q since 2010 felt as though investors became exhausted.
There was nothing new to note on an additional stimulus package, as little was done to narrow the gap between both Republicans and Democrats. Election uncertainty continued to remain one of the primary overhangs and optimism over a vaccine remained in question. Perhaps, the largest piece of news came later in the week when President Trump tested positive for COVID-19. The initial takeaway was negative for equities given the fact that the President would need to quarantine possibly hindering his re-election push due to the enthusiasm surrounding his live events at a time when swing-state polls are still pretty tight. According to RealClear Politics, Biden was already leading President Trump by 7.2 points nationally and 3.5 points in battleground states.
THIS WEEK
U.S. equities closed near the highs of the day on Monday amid optimism that President Donald Trump left the hospital on Monday evening and returned back to the White House (announced via Twitter) paired with the increasing odds of a fifth stimulus package as lawmakers looked to move closer to providing aid. The Nasdaq Composite, S&P 500, and Dow Jones Industrial Average all rebounded from Friday’s move lower, closing higher by 2.32%, 1.80%, and 1.68% respectively. Despite House speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin speaking by phone Monday, the two sides still remained apart on a deal, however, Fox News continues to report the two are expected to exchange proposals late on Monday evening.
From a sector standpoint, Energy, Technology, Healthcare and Materials outperformed, although all 11 sectors closed in the green to start the week. Energy was the best performing sector as oil jumped over 6%, rebounding from weakness on Thursday and Friday in which the commodity lost 8.04% over the two sessions. The jump came after Norway shut six oil and gas fields on Monday after additional workers joined a strike over pay. The country’s output is now expected to fall by just over 330K barrels of oil a day, or about 8% of their total production. Also fueling gains in oil was Hurricane Gamma, which is supposed to effect U.S. supply and rigs in the Gulf of Mexico, with the anticipation it will make landfall in Louisiana on Friday evening as a Category 2 hurricane. Technology outperformed with strong gains across semi- conductor and hardware names while Healthcare beat the broader tape with biotech related names receiving a boost after Bristol-Myers Squibb announced they would acquire MyoKardia for $13.1B. Financials put in a strong performance in Monday’s session amid rising Treasury yields as the 10 year, 20 year and 30 year Treasury bond yields hit five week highs.
When Monday’s session was done, there was little that made a dent in the risk-on sentiment despite the following headlines emerging:
- CDC issuing a statement saying that “evidence for transmission beyond six feet is more likely in poorly ventilated, enclosed spaces” and “often involved activities that caused heavier breathing, like singing or exercise.”
- NY State Governor Andrew Cuomo ordered schools in certain New York City areas to be closed within a day to stop flare- ups of COVID-19
Also helping push equities higher, were poll results that showed Democratic presidential candidate Joe Biden continuing to expand his lead over incumbent Donald Trump, suggesting that a clean winner may emerge from the November 3rd elections. Joe Biden’s chances of winning the Electoral College rose to a record high 81.2%, according to the latest poll aggregator FiveThirtyEight’s election forecasting model, up from 80.9% predicting that he could win 352 of 538 electoral votes.
Looking ahead, investor attention will turn to the following events this week:
- Tuesday: Fed Chair Jerome Powell and European Central Bank Chief Economist Philip Lane deliver keynote addresses at the NABE conference
- Wednesday: The release of the FOMC September 15th-16th meeting minutes as investors look for language around the necessary conditions which would cause a rate hike
- Wednesday: The U.S. Vice Presidential debate takes place in Salt Lake City
- The House Judiciary Committee’s antitrust subcommittee is expected to release its report on antitrust allegations against big tech next week
THIS WEEK INTERNATIONAL
Last week, global equities were up 1.6%, led by real estate and utilities. Energy was the only sector in the red as Brent crude oil price continued to decline and settled below $40 per barrel at the end of the week. The JP Morgan Global Manufacturing PMI ticked up to 52.3 in September, versus 51.8 previously. The CEO Confidence Index, which measures CEO confidence in the economy one year from now improved as well. The World Health Organization estimates that 10% of the world’s population may have been infected with COVID-19.
Europe – The inflation rate in the Euro area came in at -0.3% in September due to subdued demand and the appreciation of the Euro, which impacted import costs. Christine Lagarde commented that while she expects consumer prices to decline in the coming months, inflation should return in early 2021. The IHS Markit Eurozone Composite PMI dropped to a three-month low of 50.4 in September, down from 51.9 previously. Employment fell for a seventh consecutive month with France and Spain recording the sharpest cuts in staffing levels. The Euro STOXX Index was up 2.08%, led by materials and real estate. Travel and leisure was the worst-performing sector with 1.57% weekly decline.
Germany said that delays in the European Union (EU) recovery fund, which was supposed to be operational by January 2021, may be “unavoidable”. The deal agreed to in July by EU members did not cover the execution of the agreement. In fact, unanimous approval of member states and a simple majority of EU lawmakers are required to allow the European Commission to raise 750 billion euros in debt. Under Germany’s new proposal, a weighted majority of member states will approve any decision to stop fund disbursements to countries due to rule-of-law breaches. In last week’s meeting, Hungary, Poland, Sweden, Finland, Denmark, the Netherlands, and Belgium opposed the proposal. Despite this news, all major European indices were up last week. The CAC 40 Index advanced 2.01% while the DAX index gained 1.76%.
In the UK, Boris Johnson and Ursula Von der Leyen, the president of the European Commission, have agreed last weekend to extend Brexit talks by a month. In a joint statement, both parties “agreed on the importance of finding an agreement, if at all possible, as a strong basis for a strategic EU-UK relationship in the future”. British stocks gained 1.21% last week, with banks up 8.57%.
APAC – In China, The Caixin China General Manufacturing PMI was 53.0 in September, down from 53.1 in August. Manufacturing companies surveyed reported that stronger external demand boosted sales. Most companies did not anticipate the surge in new orders, which resulted in an increase in the backlogs of work. Operating expenses increased in September due to raw materials cost inflation. According to Caixin Global, employment did not decline for the first time in eight months. The Shanghai Composite Index was down 0.04% last week. Industrials advanced 0.55%, while utilities were down 0.87%. The German Chancellor, Angela Merkel, warned China that Europe will start limiting China’s access to its market for trade if there is no market access from the Chinese side, insisting that “trade has to be two-way street”. China has not yet replied to the statement.
In Japan, The Au Jibun Japan Manufacturing PMI rose to a seven month high of 47.7 in September, versus 47.3 previously. According to IHS Markit “the latest decrease in production was modest in comparison to the rate of contraction seen during the second quarter of the year”. New orders fell at the slowest pace since January and employment numbers stabilized in the manufacturing sector. Margins remained under pressure due to rising costs of raw materials and transportation. Bloomberg Economics cut its Japan 2021 GDP forecast from 3.2% growth to 2.6% due to “a drag from extended virus-containment measures and fading support from pent-up demand”. The NIKKEI 225 was down 0.75% last week.
Emerging Markets – As Jair Bolsonaro’s, the Brazilian President, environmental policies face more and more global backlash, Brazil is looking at privatization as a way to secure funds to protect forests and rivers. Martha Seillier, Special Secretary of the Investments Partnerships Program, said that “as big funds are increasingly seeking ESG portfolios, we have very significant green investment proposals”. However, the Brazilian Real has been the worst-performing emerging market currency as investors remain cautious on the country’s outlook. Brazilian stocks were down 3.08% last week.
South Korea plans to adopt new fiscal rules in response to recent national debt expansion due to COVID-19. The government proposal will limit the debt-to-GDP ratio at 60% from 2025 and set consolidated budget deficit ratio at 3%. The limits will be lifted in case of war, major natural disaster and global economic crisis. South Korea’s debt-to-GDP ratio currently stands around 44%. The KOSPI Index was up 2.15% last week, led by textile and wearing apparel, up 5.51%. Transportation equipment was up 4.87%.
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