It’s been a bad week for markets, with equities down pretty much across the board. No help from bonds either with yields rising in the UK, US and Europe since this time last week. UK investors suffered in particular, as a strong pound further reduced the sterling value of overseas investments, most of which are unhedged. All in all, a bad combination.
There is a huge amount of analysis and speculation over the US election, which is just a week away – assuming it’s not contested. If Biden were to win, there would likely be fewer tariffs, and most certainly less of the chopping and changing that we’ve seen under President Trump. Biden would focus more on human rights in China, and elsewhere, and would also revive the Environmental Protection Agency – effectively neutered by Trump. We at BMO Global Asset Management would welcome this from an ESG viewpoint, but we would also need to be mindful that some equity sectors would suffer.
A Congress ‘clean sweep’ or gridlock?
Presidents can do much in the fields of regulation and foreign policy, but legislation requires Congress, and to control that the Democrats would have to regain control of the Senate. If they fail to gain the Senate, there would be gridlock. Their massive fiscal package would have to be slimmed down, and that would disappoint markets. But the Democrats would also struggle to raise taxes, and the markets would be relieved if taxes were to stay low.
PMIs show service sector divergence between the US and Europe
Aside from the US election, we got the important Purchasing Managers’ Indices last week. These are the best real time indicators of the economy, and last week’s numbers highlighted the huge difference between the US and Europe when it comes to services. They came in strong and stronger than expected in the US, weak and weaker than expected in Europe. To add to Europe’s woes, SAP, one of Europe’s few big tech companies, disappointed on the earnings outlook and the shares were down 20% at one point. All of this reflects the virus, or rather the response to it, which is damaging the economy in Europe much more than in the US. And although Europe has seen that the growth in new cases has stopped accelerating, it is still too high and threatens to overwhelm hospitals.
All-important vaccine trial results imminent
This all increases the attention on the Phase III trials of vaccines. Pfizer could report any day now. Their results would be very early stage, but still hugely influential. Trial results for the Oxford vaccine should follow soon after and they would be more comprehensive. In a rare leak of the Oxford trial results, the FT reported that it produced a strong immune response in the elderly. This is good news but there was no reference to the all-important efficacy rate. This is what investors should look out for. An efficacy rate above 50% would be very good news, and the higher the better.
Option prices suggest increased short-term volatility
Last week I suggested we might get a 5% correction in equities given the deadlock over a US stimulus package and the bad news on the data, the virus and lockdowns in Europe, but I also said that that would be a buying opportunity. Well, markets did fall but by nothing close to 5%. With two massive events approaching – the US election and Phase III vaccine trail results, we could see some big moves, and option prices reflect this. I’m bullish for the longer term, but right now I’m sitting on my hands.