Market news 28 September 2020

PMI business surveys slowing at a worryingly early stage in the recovery as services components weighed on by Covid second wave

•  The euro area manufacturing PMI rose from 51.7 to 53.7; however, the services PMI fell from 50.5 to 47.6, weighed on by the re-emergence of Covid-19, dragging the composite down from 51.9 to 50.1.

• German Ifo business climate survey rose for fifth month in a row in September to 93.4pts (vs low of 78.9 in May and long-term average of 96.8pts), driven in particular by manufacturing and trade, whilst services dipped slightly.

• UK composite PMI fell 3.4 points from a 6-year high of 59.1 to 55.7 in September, with some decline in manufacturing (from 55.2 to 54.3) but main drag coming from services PMI (down 3.7 points from 58.8 to 55.1). The GfK consumer confidence survey has bounced in the last couple of months but remains mired at depressed levels (-25, versus a typical boom-time reading between -10 and 0).

 Equities still volatile with direction of travel lower

• After making new local lows, equities rallied through the middle part of the week before staging another sharp sell-off to record another fresh low, only to rebound again into the weekend. US political uncertainty remains top of the agenda, with markets progressively discounting a higher possibility of a contested General Election that fails to produce a clear winner on the night of 3 November / morning of 4 November.

• Analogously, gold continued to decline and the US dollar to recover, with “risk-on” currencies (EMFX generally and Antipodean and Scandis within the G10 unsurprisingly the weakest performers). Government bond yields were little changed on the week. Credit spreads were notably wider, particularly in financial paper, as the weakness in general risk sentiment seems finally to be spilling over into this hitherto resilient asset class.