The Cambridge Weekly Update
A question of time horizons
A US presidential debate that nobody would want to watch twice was followed by reports that COVID reality has finally caught up with a US president who insists that only he can determine what is real and what is fake has made for a dramatic October start. The UK’s domestic perspective was not much less unnerving, with public divisions over the most appropriate reaction to the second COVID-19 wave growing by the day, while economic pressures are doubled up by the seemingly never diminishing uncertainties over a ‘deal-or-no-deal’ Brexit.
If there is one thing capital markets investors dislike, it is uncertainty, which we have in abundance. On balance, however, we can see improvements in what will drive economic and market fortunes beyond the immediate short-term time horizon. The noises coming from Westminster that negotiation progress with the European Union (EU) is being made, reconcile with our observation that 1) both sides have an even bigger economic interest in reaching amicable economic divorce terms than before, given the imperative of swift economic recoveries on both side, and 2) because of the UK’s regrettable underperformance – both in terms of public health and economic damage sustained from the epidemic – there should be less appetite from the UK government to risk a crash Brexit scenario.
Taking stock of market returns up to September
Against all expectations, and despite considerable intramonth volatility, September turned out to be decidedly dull for investors. After a five-month rally had left global stock indices around or above their pre-pandemic highs, the turn of Autumn sent a chill through capital markets.
Selling pressure built up early in the month, as COVID cases spiked around the world once more. The fear was that we were in for a repeat of March, where the spread of the virus and ensuing global economic shutdown sent markets into a panicked frenzy. But this time, level heads prevailed. While asset prices traded either sideways or down throughout the month – depending on the region and currency basis –no ‘sell everything’ fever took hold.
In sterling terms, the best regional performer – by some distance – was Japan. Japan’s Nikkei 225 climbed 4.6% in September, with the MSCI Emerging Market index the next-best performer at 1.9%. US equities, having done so well in the recovery rally from April, fell 0.4%. Most interestingly, Technology (the market darling of the last few years) was the worst-performing US sector. The tech-heavy Nasdaq index fell 1.7%, as investor optimism for the all-conquering mega-caps began to wane. Still, even after letting off a bit of steam, US tech remains up 28.4% year-to-date.
US election market impact – not straight forward
By any standard, last week’s US Presidential debate was ugly. With just over a month until Americans head to the polls, the Trump/Biden clash was packed with pithy insults, but exceedingly light on policy. President Trump characteristically tried to steamroll his challenger, constantly interrupting Biden by attacking his political record and his personal faculties. The Democratic nominee, on his part, managed to avoid any of the big gaffes that have plagued his campaign, and even managed to deliver the night’s most memorable soundbite: “Will you shut up, man!?”
Judging from the betting markets, it was Biden who walked away from the fight in better shape. Betfair Exchange puts the odds of a Biden victory at around 60%, up a meaningful 5%. Indeed, the polls on candidates’ policies and performance also point to higher marks for Biden. But talk of him ‘winning’ this debate may be a little hasty. Nobody really won here, and it is unlikely that the showdown did much to change anyone’s mind decisively.