Weekly Market Update: Global Equity Volatility Continues, Chance of U.S. Fiscal Stimulus Dwindles
Last Week Review
Global equities closed out the second straight week of losses, falling 1.2% last week. Large technology stocks continued to decline, although the sector as a whole is still roughly in line with the broader equity market over the past month. A stretch of market volatility has beset equity markets in recent weeks. U.S. equities ended last week down 2.6% after falling 2.9% last Tuesday and gaining 2.0% the next day. Other areas of the market are not signaling a sustained market downturn. Credit spreads have been fairly stable, with high yield spreads rising under 20 basis points in September, despite pressure from a decline in oil prices.
Stable Europe Pandemic Deaths Partially Neutralize Virus Resurgence
Western Europe surpassed the U.S. in new virus cases. The resurgence is a disappointing development for a region that brought the virus to relatively controllable levels last spring. That said, virus-related mortalities remain far from peak levels due to younger patients, enhanced testing and better treatment efforts. Deaths are believed to have the most meaningful effect on consumer behavior, government restrictions and overall economic activity. On the vaccine front, AstraZeneca (AZN) paused late-stage trials of its experimental vaccine after a participant experienced an unexplained illness. The pause does not appear to be a significant setback, but it is an early example of how the road to broad-based availability of an effective vaccine may be bumpy.
European Central Bank Leaves Policy Unchanged
The European Central Bank made no major policy changes at its meeting and press conference comments hinted at some comfort with the pace at which Europe’s economy is recovering. The bank did not see a need to quell euro strength after its recent rise, noting no reason to overreact to exchange rate developments as it conducts its own strategy review. Europe’s economy has recovered relatively nicely from virus-driven lows, but economic risks from a virus resurgence and no-deal Brexit outcome remain on the horizon. Brexit talks continue to break down. The U.K. threatened to walk away from key parts of the withdrawal treaty, prompting the European Commission to portend legal action. The threats may be part of negotiating strategy, but the window to strike a deal is narrowing.
U.S. Inflation Ticks Up to Low Overall Level
The U.S. core Consumer Price Index came in at 1.7% year-over-year, just ahead of expectations of 1.6%. The Fed’s recent adoption of an average inflation targeting policy pushed investor inflation expectations slightly higher, but inflation is unlikely to come easily nor quickly after decades of low levels. China’s Consumer Price Index ticked down to 2.4% from 2.7%, as inflation remains subdued in most major economies across the globe.
This Week Preview
Virus Remains a Key Economic Risk
There has been a spike in new virus cases in college towns as students have returned to school. However, deaths have remained fairly stable in those areas — a similar phenomenon to the rising cases and stable mortalities in Europe. Declining mortality rates should create less fear around the virus and thus aid consumer spending. Investors are hopeful mortalities will not rise.
Fed’s Next Move to be Closely Scrutinized
The Federal Reserve is not expected to make major policy changes at its meeting this week. Following its dovish strategy shift, investors are hopeful the central bank will provide examples of concrete actions it will take for further accommodation. To guard its credibility, the central bank is expected to allude (at a minimum) to near-term forward guidance and enhanced quantitative easing rules. The Bank of England and Bank of Japan will also meet. No major policy changes are expected as monetary policy remains crucially accommodative globally.
Prospect for Pre-Election U.S. Fiscal Stimulus Dwindles
The likelihood for another rescue package before the U.S. election continues to decline, although many investors expect some kind of agreement to be reached. State and local funding remains a sticking point in Congress negotiations, raising the prospect for a smaller package focused more directly on the consumer. Further support through more executive actions is another possibility, although the economic impact from such stimulus would likely be limited.
See our latest coronavirus insights.
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