Beyond Bulls & Bears


Notes from the Trading Desk – Europe

The Digest

Global equities were weaker overall last week, with developments in Europe’s fight against a second spike in COVID-19 infections outweighing more supportive newsflow. The MSCI Global Index closed the week down 0.4%, with the S&P 500 Index down 0.5%, the Stoxx Europe 600 Index down 1.4%, whilst the MSCI Asia Pacific Index outperformed, up 0.8%.1Despite headlines on Brexit, the US election, US stimulus, and the latest round of corporate earnings, there was nothing that moved the needle too much. In the absence of any market-moving news, there was some late repositioning through the week as investors bought year-to-date (YTD) underperformers. Fear was still evident in markets as volatility rose last week. Equity placings continued, with the YTD total now just short of US$100 billion globally.

COVID-19 Cases Continue to Surge

Across Europe last week, a number of countries have reported fresh highs with regards to infections. Germany, the United Kingdom, Italy, France and Spain all reported new record highs last week, bringing in fresh restrictions. Yet, whilst fatalities are on the rise too, reported deaths are still far from when they were at their peak back in spring. Nonetheless, the trajectory in the number of deaths continues to rise, and this has caused national and local leaders to tighten restrictions once again.

In the United Kingdom, we saw stricter rules implemented last week around the country. In England, where cases rose to over 35,000 per day, a new tiering systemallows the government to apply structured, localised restrictions. Swathes of northern England, including Liverpool and Manchester, were placed in “Tier 3”, which applies very restrictive controls across the hospitality and leisure sectors. Scotland, Wales and Northern Ireland also had new, more-restrictive rules introduced last week.

Germany reported a new daily infections record figure on 22 October of 11,287. Germany is widely regarded as having handled the pandemic well so the rise will be a big concern for government leaders.

Meanwhile, commentary from Spain paints a stark picture, with Prime Minister Pedro Sanchez saying on 23 October that the true number of infections in Spain was likely to be a lot higher than was being reported. Spain’s health minister also noted that “drastic” new measures were required to fight the second wave of infections. Spain has now declared a six-month state of emergency, imposing a nationwide curfew.

Elsewhere, the Czech prime minister commented that his people should brace themselves for an “enormous surge” of cases, whilst the Netherlands is expected to commence sending patients to Germany as their health care system comes under pressure.

Over the weekend, the Financial Times reported that Astrazeneca’s vaccine has induced an immune response in the elderly; however, with the official data not yet released, there is a lack of clarity around this report.2 There were also comments this morning from the UK’s Health Secretary Matt Hancock who said we should expect a vaccine rollout in the first half of 2021.

UK Focus

Another noisy week for Brexit, with negotiations between the European Union (EU) and the United Kingdom restarting on 29 October. Overall, things were a little more hopeful given that talks had restarted, with the pound closing the week +1% vs. the US dollar and flat vs. the euro after fading into Friday’s close. The majority of the move higher last week came on Wednesday, with hopes on the rise after it was simply announced talks would resume.

The pound did try to make another leg higher early on 23 October after headlines suggested French President Emmanuel Macron was preparing for a compromise on fisheries. The French government allegedly told the fishing industry that it would get smaller catch from UK waters from 2021. The more positive sentiment on the back of these headlines soon faded, however, with uncertainty prevailing. The latest trade talks have now been extended to the middle of this week. The United Kingdom indicated optimism that a deal would be struck with EU Chief Negotiator Michel Barnier, who was set to leave London but extending his stay until Wednesday, 28 October.

Last week, Purchasing Managers’ Index (PMI) data showed that the economic recovery in the United Kingdom lost some steam in October, with tighter restrictions clearly weighing. Manufacturing and services sectors activity both came in lower than expected, prompting further job cuts. The services sector accounts for 80% of the UK economy and is bearing the brunt of the tighter restrictions.

The United Kingdom did show some resilience vs. the eurozone in the figures, but this is likely to do with the continent seeing an earlier COVID-19 resurgence rather than anything fundamental. It’s also worth noting that the UK economy contracted more than that of any other G7 country in the first half of the year.

The defence space came under pressure last week with UK Prime Minister Boris Johnson’s three-year UK spending “master plan” set to be ditched. UK Chancellor Rishi Sunak told the Prime Minister that the comprehensive review should not go ahead amid COVID-19, dealing a blow to Johnson and his defence plans. Sunak did reveal a revised job support scheme based on the new tiered restrictions.

Week in Review 


European equities underperformed their global peers last week despite staging a late rally on Friday last week. As noted, the situation on COVID-19 cases around Europe remains bleak with infection rates rising in the region. With many countries moving to stricter restrictions in recent weeks, this has naturally weighed on investor sentiment.

Again, Brexit negotiations continue to rumble on, whilst investors in Europe also keep one eye on the political picture in the United States.

The euro was stronger last week, up 1.2% vs the US dollar. Sterling was also better off, trading up 1% vs the US dollar. Rotation into some of the YTD losers set the tone for sector and broad index performance. The German DAX Index lagged on the week, down 2.0%, following some weakness in heavyweights SAP, which we have seen continue this morning, and Deutsche Telekom. The Spanish IBEX Index was the only major index to trade in the green, up 0.6%, following late strength in the banks. That strength came on the back of the rotation into some of the year’s underperformers and on the back of an earnings beat for Barclays, with the sector up 3.7% on the week.

It was the YTD outperformers which lagged through the week, with technology down 4.4% and health care down 3.2%, recording some notable weakness.

There was more of a corporate focus last week as third-quarter earnings season kicked into gear. By the end of last week, 129 Stoxx Europe 600 Index companies had reported, with just 26.5% missing estimates for the third quarter, albeit at a time of severe economic uncertainty. Earnings growth was a positive surprise, up 18%. Despite the broadly better-than-expected reports so far, many stocks have struggled to hold on to their gains. Despite the strength in the banks post-earnings, headlines later in the week suggested the European Central Bank (ECB) remains wary of allowing banks to restart dividend payments.

In terms of data, the focus was the PMIs on Friday, 23 October. The reports were a mixed bag, with the overall European Composite figure falling to 49.4. Unsurprisingly, the underperformance came from the miss in services, with the eurozone figure at 46.2. Services continue to lag with the growing restrictions on bars, restaurants, events and with many office spaces closed.

Manufacturing was strong, however, coming in at a better-than-expected 54.4. Germany mainly drove the strong manufacturing reading, helped by demand from China. What this shows to us is that there is still demand for products and services—a theme since the start of the lockdowns. As we move into the new year, hopefully we should also start to see an improvement in the services data if rates of infection are down and services resume to a reasonable capacity across Europe.

United States

US equity markets outperformed European markets marginally, but still closed last week lower. Despite a lot of noise on the clash over the latest stimulus package and plenty of knee-jerk reactions, no real progress was made. It looks like we are unlikely to see another package until after the election, which likely weighed on markets.

Focus was firmly on US politics as the election draws closer. The final presidential debate took place on 22 October and did little to shift sentiment. Democratic nominee Joe Biden still has a high single-digit lead, according to national polls.

There was an impressive uptick in US Treasury yields last week amid expectations that a Biden win would lead to an inflationary environment given large infrastructure spending anticipated, alongside increased debt supply to finance it. The US 10-year Treasury traded above a key technical analysis indicator, its 200-day moving average, briefly for the first time since 2008, and the spread between the two-year and 10-year Treasury hit its widest level since 2018. This dynamic helped US banks, since they borrow from customers short term (deposits) vs. lending to them long term (mortgages 10-30 years). With this, the financials sector was one of the week’s winners.

As we have discussed recently, other stock winners from a Biden win would likely be the cyclicals and small/mid-capitalisation stocks given an anticipated boosted in infrastructure spending, as well as environmental, social and governance-driven (ESG) stocks (such as clean energy names) helped by Biden’s increased commitment to green infrastructure.

Whilst focus has largely fallen on the increase of COVID-19 cases throughout Europe, the United States also recorded its biggest week of new cases since the summer peak, also producing increased hospitalisations and putting strain on health care systems.

President Donald Trump continues to insist that things are fine, stating at one of his latest rallies that the United States is “rounding the turn” on the coronavirus. Vice President Mike Pence had at least four close members of his staff test positive for the virus this past weekend, but the VP himself has tested negative and will continue with planned campaign events

Despite the ongoing global increase in COVID-19 cases, optimism for a vaccine remains. Last week saw Johnson & Johnson and Astrazeneca restart US trials. Pfizer has said that it cannot request emergency authorization of its COVID-19 vaccine before the third week of November, but pictures of the production line of vaccines have now emerged, which suggests that there is some confidence.

Last week we also saw the first approval of a COVID-19-related drug as Gilead’s antiviral drug remdesivir received marketing approval from the US Food and Drug Administration (FDA).

Third-quarter earnings were another talking point, with things having gotten off to a decent start. Of companies in the S&P 500 Index reporting earnings so far, 85% have beaten expectations. Sales numbers have also been strong, with 78% of companies beating expectations. The bulk of the better-than-expected earnings have come from health care, materials, and real estate.

Asia Pacific

Asian equities traded higher overall last week, with the MSCI Asia Pacific Index closing up 0.8%. The Shanghai Composite Index lagged, down 1.7%, possibly tied to profit-taking from foreign investors. The Hang Seng Index outperformed, up 2.2%.

In terms of sector performance, there was a skew to growth as the financials were up 2.5%, industrials were up 1.5% and materials were up 1.3% last week. Defencive sectors were among the laggards, with health care down 1.6%, energy down 0.2% and consumer staples down 0.1%.

The week started with Chinese macro data. The September gross domestic product (GDP) release was a “miss” versus expectations, but still up 4.9%. Growth in industrial production and retail sales quickened, indicating that the Chinese recovery is gaining steam.

We heard from the governor of the People’s Bank of China (PBOC) last week too, who said he was confident about the prospect of a demand-driven recovery in China. China-exposed economies have benefitted too. Australia’s October PMI print came in at 54.2, illustrating the benefit of exposure to China. Meanwhile, the equivalent report for Japan, an economy more globally exposed, came in at 48.0.

Meanwhile, there were more US-imposed restrictions last week, with the US blacklisting Chinese entities and individuals who had dealt with Iran and, later in the week, the Trump administration designated some Chinese media outlets as foreign missions.

Week Ahead

Brexit negotiations, US politics, and the ongoing pandemic will set the backdrops for markets once again. It’s also a huge week for corporate earnings; 176 companies, representing 46% of the S&P 500 Index market capitalisation will be reporting results, including the five largest companies (AAPL, MSFT, AMZN, GOOGL, FB).

Monday 26  October

Macro: US New Home Sales; German IFO Business Climate, Expectations and Current Assessment.

Tuesday 27  October

Macro: US Durable Goods Orders; Eurozone Money Supply; Chinese Industrial Profits.

Wednesday 28 October

Macro: US Wholesale Inventories; French Consumer Confidence; Japanese Retail Sales.

Thursday 29 October

Macro: US GDP, Initial Jobless Claims; Eurozone Economic Sentiment survey, Consumer Confidence; German Unemployment Claims Rate, Change in Unemployment; UK Mortgage Approvals; Japanese Industrial Production, Jobless Rate; Italian Consumer Confidence; Manufacturing Confidence.

Monetary Policy: ECB Deposit Facility Rate, PEPP purchase target; ECB’s Christine Lagarde speaks; Bank of Japan interest-rate announcement.

Friday 30 October

Macro: US Personal Income and Spending; Eurozone GDP, Unemployment Rate, consumer price index (CPI); French GDP; German GDP, Retail Sales; Spanish GDP; Italian GDP, CPI.

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1. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.

2. Source: The Financial Times, “Oxford Covid Vaccine Trials Offer Hope for Elderly”, 26 October, 2020.

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