In October, two themes dominated the markets: the corona virus's resurgence and the United States' presidential elections. The bond rates in the United States and Europe moved in opposite directions.
Equity market trends: a month in two stages
Following a negative month of September, equity markets recovered in the first half of the past month. The S&P500 was even able to reach a level that was hardly below the record of early September. At the beginning of the month, the idea dominated that an agreement about a US stimulus package was still possible before the elections. Also, investors seemed to be reconciled with the prospect of a victory for Democratic presidential candidate Biden. In the second half of the month, the increasing corona infections - not only in Europe but also in the US - cast a shadow on the equity markets. In Europe, where lockdowns are most stringent and the economic impact will be most significant, stock markets show the weakest performance. The emerging markets and, in particular, the Asian stock markets were the outperformers. Contrary to the previous months, growth equities did not outperform value equities, and both reported similar performances. One may attribute this trend to the higher bond rates (in the US) and positioning in anticipation of Biden's possible election. The publications of the quarterly results also played a part. Stock market prices sometimes responded lukewarm to the results of growth companies, even when those results exceeded expectations. This evolution indicates that the bar for those companies is high.
Bond market trends: divergence European and American bond returns
Where interest rates for reference bonds in Germany and the United States would usually develop in the same direction, this was not the case in October. The European 10-year rates dropped by 11 bps due to fear of the lockdowns' economic consequences in several European countries. The confirmation of the European Central Bank that it will extend its monetary support contributed to the downward trend. In contrast, the American rates rose by 19 bps. The American rates continued to rise due to hopes of a fiscal stimulus package, even though the democrats and republicans did not manage to reach an agreement in congress before the elections. The possibility of a larger stimulus package after the elections in the case of a Biden victory continues to exist. The spreads of both the southern countries within the Eurozone and the corporate bonds remained relatively stable. In both cases, the spreads rose slightly towards the end of the month. This evolution follows the general trend towards a higher risk aversion in the markets.
Central banks: unchanged
As expected, the European Central Bank did not change its monetary policy in October. However, it indicated clearly for the first time that it will provide more monetary support in December. The size (currently 1,350 billion euro) and the term (presently up to the end of June 2021) of the emergency purchasing program PEPP will also most likely extend, as the coronavirus's resurgence and the new containment measures will threaten the recovery of the economic activity and further delay achieving the inflation target.
No new announcements regarding monetary policies are expected from the Federal Reserve in its meeting in the first week of November. The economic figures continue to be relatively favorable in the US.
The Japanese central bank commented quite positively on economic prospects. The monetary policy was unchanged, which will continue to be the case in the months to come.
Currencies: Chinese currency continues its advance
The British pound slightly recovered after signals that the negotiations between the EU and the UK continue despite the mid-October 'deadline' expiring. A (limited) trade agreement is still an option. 'Safe haven' currencies such as the Japanese yen and the Swiss franc gained slightly against the euro (both approximately 1%).
The Chinese renminbi continued its advance owing to the swift economic recovery from the corona pandemic. The currency reached its highest level against the dollar in over two years. The expectation of Biden's victory may have contributed to the appreciation because this may mark a less confrontational trade conflict between the US and China.
Emerging markets' currencies lost ground at the end of the month due to the general 'risk-off' sentiment amongst investors. In a positive sense, outliers were the Mexican peso (at the prospect of a victory for Biden), and in a negative connotation, the Turkish lira. The latest currency reached an all-time low (against the dollar) due to the geopolitical tensions the country is involved in (Nagorno-Karabakh, possible sanctions from the US, conflict with France) and the weak fundamentals of the currency. Successive rate rises could not stop the fall of the currency.
Commodities: copper, the green metal
Gold prices remained relatively stable in the past month and fluctuated around 1,900 dollars per ounce. On the one side, there was still hope of additional stimulus measures in the US, if not before, then after the elections. On the other side, the slightly increasing bond rates in the US caused higher opportunity costs, not supporting the gold price. Towards the end of the month, the precious metal could not benefit from the increased risk aversion amongst investors due to a firm dollar. The Brent oil price dropped below 40 dollars per barrel. The rising number of corona infections in the northern hemisphere increases fears of slower recovery of the demand. The International Energy Agency (IEA) warned that if disruption of demand due to the pandemic continues for a more extended period, this could result in a permanent change in consumer behavior. This trend would mean that demand will be permanently affected. The OPEC+ is considering delaying the phasing-out of production restrictions. An extra 2 million barrels per day would be placed on the market in January in the current schedule.
The prices of industrial metals held up well in October and were able to compensate for their drop in September. Demand from China is strong. In particular, copper prices reached their highest level in over two years. Copper prices benefit from 'green' investments because the metal is essential for the energy supply's electrification. China announced last month that it wants to be CO2 neutral by 2060, and a victory for Biden in the American presidential elections could mean a shift to investments in renewable energy.