AMERICA HAS DECIDED
Although there are a number of states yet to be called, Joe Biden has already gained over 270 electoral college votes to become the United States’ 46th President, Biden is to be inaugurated on the 20th January 2021. Although President Trump has not conceded yet, and vows more legal claims, it is highly unlikely that the incumbent President can remain in office. It is worth noting that a ‘blue wave’ victory by the Democratic Party did not materialize, as the Senate will most likely remain under the Republicans’ control at least until January, and there is a good chance that Republicans will retain a Senate majority thereafter. Financial markets found comfort in the idea that there would be no political deadlock over the outcome of the Presidential election, which could have created policy paralysis and policy uncertainty for a prolonged period.
Because of the excitements that came with the Presidential election, many ignored the release of the latest labour market metrics in US: non-farm payrolls rose 638,000, whilst the unemployment rate fell to 6.9% in October. Fed Chair Jerome Powell noted the improvement in economic activity and the jobs market in his regular post-decision speech, but emphasized downside risks, which could halt the recovery. The Fed continues to be committed to the zero-lower bound for several years.
Now that the US Presidential election is behind us, investors can recalibrate their focus and pay more attention to policy agendas, vaccine news and the upcoming macro data releases.
By the end of the trading week, the probability of a Biden victory became significantly more likely. The greater clarity on the potential outcome and the reduced probability of a political deadlock contributed to the improvement in investor sentiment. As a result of the reduced uncertainties, all major stock indices in the US gained: the Russell 2000 increased 6.9%, the S&P 500 rose 7.3% and the Nasdaq Composite climbed 9%. Furthermore, the building expectations for a decisive Biden victory triggered a broad-based dollar weakness vs. both developed and emerging market currencies
The substantial improvement in investor sentiment in the US triggered a rally in European stock markets. The Italian benchmark was one of the best performers (+11.9% in USD) followed by the German DAX (+10.2% in USD). The Polish country index was one of the greatest beneficiaries of the risk-on investor sentiment, and thus rose 16% in USD by the end of the week.
The European Commission (EC) upgraded the GDP forecast for Poland, to -3.6% in 2020 and revised it to +3.3% in 2021. The EC perceives Poland as one of the most economically resilient countries within the EU.
Emerging Asian stock markets enjoyed the positive effects of the outcome of the US Presidential election. By the end of Friday, the vast majority of stock indices gained. The South Korean benchmark (+8.4% in USD) and Chinese “H” shares (+7.6% in USD) led the pack.
President Xi Jinping presented his long-term view on the Chinese economy. The President’s envisions the Chinese economy doubling in size by 2035. The Chinese Communist Party’s longer-term plans include investing in R&D, technology and green solutions.
PMI’s painted a healthy picture of the Chinese economy, as all of them remained more than comfortably over the 50-point threshold, suggesting that both manufacturing and services activities would continue to steam ahead. The sub-indices measuring new orders (including export orders) indicated further expansion.
Both manufacturing and services PMI’s in India reflected an increasing amount of optimism, as the gauges rose to 58.9 and 54.1 in October, respectively. According to the commentaries, economic activity further strengthened and became more broad-based compared with the previous months. The manufacturing sector recorded the strongest increase in production and sales since 2007- 2008.
The aggregate manufacturing PMI for ASEAN countries improved to 48.6 in October, from 48.3 observed in September. Manufacturing activity in the region was uneven, as Vietnam (51.8) and Thailand (50.8) registered metrics suggesting expansion, whilst gauges in other countries, such as the Philippines and Indonesia, remained in contractionary territory, due to the maintenance of mobility restrictions.
The central bank in Malaysia kept the key policy rate stable at 1.75%. The monetary authority remains on accommodative stance to provide as much impetus to the economy as possible. The central bank expects GDP growth to be in the range between -3.5 and -5.5% in 2020, followed by 5.5-8% growth in 2021.
Investor sentiment in Latin American stock markets significantly improved during the week, as the visibility on the outcome of the US Presidential election increased. The Brazilian (+12.8% in USD) and Chilean (+10.7% in USD) country indices delivered the strongest returns by the end of Friday compared with their regional peers.
Manufacturing PMI in Brazil hit new highs reaching 66.7 in October, as most key components, such as output, employment and new orders further climbed. Over- all, the headline gauge suggests that industrial production grow in October (following the 3.4% YoY growth in September). In contrast, manufacturing PMI in Mexico remained well below 50 in October, reaching only 43.6. The report pointed out that the renewed rise in new Covid-19 cases poses risks to Mexican manufacturers.
The minutes released from the last meeting of the Brazilian central bank, when the Monetary Policy Council (MPC) opted for the maintenance of the key policy rate at 2%. The MPC saw the economic recovery as uneven and identified that the balance of risks to the growth outlook is tilted to the downside. The MPC’s arguments imply that the key interest rate will be kept stable.
Congress in Peru voted in favour of allowing a second round of early withdrawals from pension funds. This time only those are allowed to withdraw funds from their pension accounts who have not worked over the last 12 months. The bill is yet to be signed into law.
The South African Top 40 index delivered a 13.7% return in USD during the week, tracking the risk-on behaviour in global stock markets. The gains by the Egyptian Hermes index was modest, 1.1% in USD by the end of Friday.
The whole economy IHS Markit PMI in South Africa rose to 51 in October. This is was the first time since April 2019 that the gauge rose above the 50-point threshold. The improvement was primarily due to the easing of lockdown restrictions, which contributed to the improvement of domestic demand.
The Egyptian non-oil private sector PMI further improved and hit 51.4 in October, hovering over 50 for the second consecutive month. According to the commentary, the Egyptian non-oil private sector ‘expanded at the quickest rate in nearly six years
This week’s global market outlook is powered by Alquity www.alquity.com