LAST WEEK – KEY TAKEAWAYS
Markets: Shares falter as new infections rise
- Global shares fell in the middle of the week as the number of coronavirus cases rose in Europe and the US and politicians continued talks over a further round of support for the US economy (see US section);
- However, the markets recovered some of those losses at the end of the week after an encouraging start to corporate earnings season (see Companies section).
- Omnis view: The second wave of infections has rattled the markets because countries have started to reintroduce lockdown restrictions which will impact economic activity. As long as those restrictions slow the spread, we should not witness a repeat of the market correction in March and April.
UK: JOHNSON HALTS BREXIT TALKS WITH EU
- The pound weakened against the US dollar after the Prime Minister Boris Johnson called an end to negotiations over a free trade deal and insisted the EU had to change its approach before talks could continue;
- Meanwhile, pressure increased on the Chancellor to introduce new measures to protect jobs as the unemployment rate for the three months leading up to August rose to 4.5%.
- Omnis view: Whether the Prime Minister truly intends to walk away from negotiations remains to be seen. The likelihood is that he is using the threat as a bargaining tactic to force a breakthrough, but uncertainty has intensified in the short term as the chances of a hard Brexit have seemingly increased.
US: POLITICIANS STRUGGLE TO AGREE ON FURTHER ECONOMIC SUPPORT
- US shares fell after Steve Mnuchin, the Treasury secretary, said the Republican and Democratic parties remained ‘far apart’ as they attempted to agree on the terms of a new relief package;
- There was mixed news for the US economy as consumer spending grew by 1.9% in September compared to August, but the number of people claiming unemployment benefits unexpectedly rose in the week ending 10th October to 898,000 and inflation (the rate at which prices rise) only increased by 0.2% in September compared to a month earlier.
- Omnis view: Climbing unemployment is a concern for the US economy as the coronavirus continues to spread. A short-term solution is looking unlikely as the Democrats announced that an agreement must in place by Tuesday or it would have to wait until after the presidential election on 3rd November.
CHINA: IMPORTS JUMP IN SEPTEMBER
- Chinese imports (goods produced abroad and sold in China) beat expectations to grow by 13.2% in September compared to a year earlier, while exports (goods produced in China and sold abroad) rose by 9.9%.
- Omnis view: The increase in imports and exports is a positive sign for the rest of the world because China is more advanced in its economic recovery, having been the first country to go into lockdown. It also indicates demand is rising in the vast number of countries that trade with China.
COMPANIES: STRONG START TO EARNINGS SEASON FROM US BANKS
- US banks JP Morgan, Citigroup, Bank of America, Goldman Sachs and Morgan Stanley beat forecasts when reporting profits for the third quarter of the year, although Wells Fargo fell short of expectations.
- Omnis view: US banks set the tone for earnings season, so these results are encouraging. However, the drop in economic activity due to the pandemic means overall profits reported by US companies are expected to decline by 18.4% in the third quarter compared to a year earlier according to research firm FactSet.
LOOKING AHEAD – TALKING POINTS
- Monday- Chinese economic growth in the third quarter, retail sales in September and unemployment rate in September;
- Wednesday- UK inflation in September;
- Friday- Japanese inflation in September; UK retail sales in September; early estimates of business activity in the UK, EU and US in October.
- Netflix is the first of the big US technology companies to report company profits in the third quarter on Tuesday.