Weekly Market Update: Stocks sell-off on COVID-19 second wave fears

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Market Update

Stock markets closed down last week on the back of a COVID-19 case count resurgence. Growth stocks outperformed value stocks as fears of a second wave of the virus caused market participants to raise their expectations of a second lockdown. Banking stocks were particularly volatile as news that the Federal Reserve would roll back some measures on high risk products enacted after the 2008 crisis helped fuel an intra-week rally. However, the sector quickly gave up these profits on Friday on news that the Fed is passing measures to block dividends and share repurchases in order to improve balance sheet resilience. Emerging Market stocks were the best performers for the week, while the US market fell -2.7% in GBP terms. UK and EU stocks fell -2.1% and -1.2% respectively. IT was the best performing sector globally, while Energy suffered. UK sovereign bond yields fell across the week, with the UK 10Y Gilt yield finishing the week at 0.17%. Gold was up +1.6% in US Dollar terms, while Oil fell -3.2%.

CIO Analysis

Despite further improvement in the economic data last week, news of a resurgence in COVID-19 cases around the globe sent stocks -2.5% lower in the Friday session, enough to remind investors that the virus progression is still a central part of the economic narrative. Preliminary PMI data suggest a stabilisation of the global economy as supply chains begin to adjust to new realities. What they can’t tell us, however, is where unemployment – and ultimately consumption – will go. US jobless claims data continues to worry investors, while the picture in Europe is foggy at best, as employment remains heavily subsidised by short-term government money. Even in China, the Party saw fit to change its target from GDP growth to employment stabilisation, suggesting that unemployment pressures in the world’s second largest single economy are cause for significant concern. Central to our investment thesis remains the idea that central banks can prop up markets for a long time, allowing space for the alleviation of economic pressures, as we will talk about in our monthly market webinar tomorrow (click here to join).  However, it seems possible -and even probable – that risk premiums overall will rise for all assets. As long as a universal cure eludes us, the “new normal” will include risks of sudden local lockdowns, limitations in the free movement of individuals and supply chain disruptions. This means that while investors are going to experience even more volatility suppression than in the past for their risk assets, they should brace for short volatility spikes (exacerbated by algorithmic trading) and ultimately the idea that the virus and its consequences may stay with us for a long time.

David Baker, CIO

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