Market news 3 November 2020

European Central Bank signals fresh stimulus to come in December...

• The ECB voted to leave policy unchanged at their meeting on Thursday but, cautioning that recent spikes in COVID-19 cases will likely stall the economic recovery, the Governing Council indicated that it “will recalibrate its instruments, as appropriate” in order to “counteract the negative impact of the pandemic on the projected inflation path”
• Most likely this will involve a further expansion of the Pandemic Emergency Purchase Programme (PEPP), currently comprising €1,350bn “envelope” by perhaps another €500bn in December. President Lagarde said that they will consider all available instruments to support member states, but more focus was given to the PEPP programme and TLTRO-III which would mean additional funding for lending institutions
• The Bank of England is likewise expected to deliver more QE, probably a further £100bn, at its Thursday 5 November meeting

Sharp Q3 rebound in US and European GDP confirmed

• US GDP increased at a record rate +7.4% quarter on quarter in Q3 (annualised +33.1%), retracing much of the Q2 decline as the economy gradually reopened (Q2: -31.4% annualised, consensus: +31.0% annualised). Consumer spending increased at a 40.7% annualised pace, driven by demand for durable goods, and consumer spending on services grew at a +38.4% annualised pace
• Eurozone GDP also bounced back in Q3, +12.7% to the end of September (Q2: -11.8%, consensus: +9.4%). German GDP increased 8.2% over the quarter, taking the 12m GDP reading to -4.3%, French GDP was up 18.2% over the quarter (-4.3% over the year), Italy beat expectations growing 16.1% in Q3 (-8.7% over the year), and Spain rebounded +16.7% over the quarter ( -8.7% over the year)
• Eurozone inflation was stable at -0.3% YoY in October, and unemployment was largely unchanged at 8.3% (although this likely masks underlying labour market weakness). As euro area countries GDP is likely to shrink again in Q4

Markets firmly "risk-off" as double-dip recession fears swirl

• Equities had a poor week, with the MSCI ACWI global index down over 5%. Uncertainty ahead of the US general election was partly to a factor, as were disappointing earnings from a number of bellwether US tech companies, but the primary catalyst was the growing fear of a renewed contraction in growth as the euro area entered a second wave of severe Covid lockdown measures
• It was notable that US treasury bonds afforded no protection against the risk-off move with yields actually slightly higher over the week. German bunds did rally moderately, whilst UK gilts were little changed
• The dollar rallied, in particular again European currencies. Gold was marginally lower