Weekly Market Update: Global Stocks Fall on Tech, Brexit Negotiations Planned
Last Week Review
Global equities closed out August up 6.2%. Markets have largely trended upward on the back of policy stimulus, vaccine optimism and a continuing (albeit bumpy) economic recovery. Last Thursday, large U.S. technology stocks fell 5.8% in a pullback many investors felt was warranted given lofty valuations after a strong run. A better-than-expected U.S. jobs report was not enough to offset the hit to technology stocks as global equities fell 2.2% last week. Yields held firm, with the 10-year Treasury yield flat on the week.
More Constructive Vaccine News
Three vaccines are in Phase 3 trials, a phase in which some studies note that infectious disease vaccines have had more than an 80% rate of approval. The Centers for Disease Control asked U.S. states to be ready for distribution by November, following the Food and Drug Administration’s stated willingness to expedite the approval process for a safe vaccine. Despite the preparation efforts, it is still uncertain when a safe vaccine will be ready, and more importantly for economic activity, when it will be widely taken by consumers. Nevertheless, markets continue to respond favorably to progress on the vaccine front.
Economic Recovery Continues at Slower Pace
U.S. Purchasing Managers’ Index (PMI) data comfortably exceeded 50 (readings above 50 are expansionary). PMI releases for Germany, the U.K., China and Japan were also supportive of a continued economic recovery. Nevertheless, the pace of the rebound is not as strong as in recent months. The August U.S. jobs report showed that 1.4 million people returned to work, the unemployment rate dropped to 8.4% and average hourly earnings grew 4.7% year-over-year. Most of the job gains came from lower-paying jobs as higher-wage jobs saw little rebound. Europe’s unemployment rate ticked up to 7.9%. Globally, labor markets remain far from pre-virus levels of strength. The stronger-than-expected U.S. jobs report hints that the economy may be able to recover in spite of virus outbreaks, but the pace of gains is slowing and will likely continue to do so without further fiscal support.
Waning U.S. Fiscal Support Puts Economic Recovery at Risk
Some concessions have brought Congress closer to a deal, but party disagreements on the amount of state and local funding is driving much of the outstanding roughly $1 trillion disagreement. The Federal Reserve’s most recent Beige Book highlighted slowing momentum to the strong initial economic rebound. A delay in further fiscal support will only exacerbate this trend. Europe faces the similar risk that a policy lapse aggravates virus-induced economic headwinds, especially as the virus picks up in the region. France revealed a €100 billion injection of stimulus, pushing European equities higher.
This Week Preview
Virus Outbreaks on Watch
Virus case growth in the U.S. has slowed, but new cases in the Midwest and other states are concerning. Increased cases across Europe have prompted localized lockdowns that threaten economic progress. Globally, the virus is ingrained into communities and outbreaks are unlikely to abate until a vaccine is widely consumed. Testing capabilities and social distancing measures remain the most timely and effective tools in the pandemic fight that remains at the center of investor attention.
Investors Seek U.S. Fiscal Action Despite Widening Deficit
The U.S. federal budget deficit is expected to balloon to $3.3 trillion in 2020, a $2.2 trillion rise from pre-virus projections. That said, the deficit increase is less of a concern in an era of ultra-low interest rates. Most investors are eager for more fiscal stimulus in the U.S. Negotiations may continue this week ahead of a ramp up in the November presidential election.
Noteworthy Week for Europe Policy
The U.K. and European Union are expected to continue Brexit negotiations this week. A no-deal outcome is becoming increasingly likely as the mid-October deadline approaches, but economic constraints may ultimately push both sides to come to an agreement. On Thursday, the European Central Bank is unlikely to make major policy changes when it meets, but it’s expected to release growth and inflation forecasts that may provide clues as to future policy steps. In the U.S., inflation data may creep higher, albeit to a very low level overall.
See our latest coronavirus insights.
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