The Lowdown │ Global Markets to 13 September 2020

The Lowdown Global Markets to 13 September 2020

Published September 14, 2020


  • Last week’s pullback in technology stocks was inevitable after such an extraordinary rally
  • New government socialising rules in a bid to tackle rising Covid case numbers
  • In the US, Trump enjoys a surge in the polls: the election is not a done deal
  • The UK government and the EU clash over new legislation: Brexit rumbles on
  • Against a backdrop of Covid, the US election and Brexit, the financial markets are likely to remain volatile

Global Market Summary

Over the last month, many of the growth and US technology stock prices that have performed so spectacularly throughout the pandemic have fallen dramatically. But a meaningful correction was inevitable in the wake of such an extraordinary rally.
The US FANG-plus index has fallen by 13% over the past five days. Nevertheless, it is still up 62% since the start of the year against the more widely represented S&P 500, which has recorded a 3% rise over the same period.
Many of these companies have obviously benefited considerably from Covid-19 and the measures which have been implemented to tackle it. This has not only fuelled investor buying: significant options betting has also helped to push up stock prices over the past couple of months.
In a recent report, Japan’s Softbank was referred to as the “NASDAQ whale”: it has purchased billions of dollars’ worth of individual stock options in big tech companies over the past month. This call option buying provided an upward lift to the market, since the sellers of those calls then had to buy back the stocks, making the market’s advancement a self-fulfilling prophecy.
However, since its unmasking as the “NASDAQ Whale”, Softbank’s share price has tumbled. To date, the company has not issued any comments about its actions.
Events in three other areas have disturbed and confused the markets. First of all, Covid data has been rather nuanced: cases are on the rise again across Europe (including the UK), resulting in a further round of government rules and guidelines being introduced. In the US, on the other hand, falling daily numbers and fewer people being hospitalised have been a welcome relief.
Secondly, in spite of the ongoing health crisis, Trump has enjoyed a surge in the polls, indicating that the race for the White House is far from over. Furthermore, there are mounting concerns that a close race could lead to a contested outcome: in previous US elections, this has created a period of higher stock-market volatility.
And thirdly, with the prospect of a return to significantly higher inflation rates still looking very far off, signs of a gradual increase in US inflation are slowly being priced into the markets. This could put further pressure on equity prices as bond yields rise.
Equity returns, however, will be dominated by earnings prospects for 2021. These are slowly improving and any further good news about the global economy or the development of a vaccine would constitute a significant boost as the world economy reopens for business.
In the UK, the latest economic data revealed that the economy had grown by 6.6% in July and 18.0% from its low. But output remains far below pre-pandemic levels. On a more positive note, the economy has expanded for the third month in a row. There was more good news for the UK’s tormented shopkeepers: retail sales growth accelerated in August as consumers ventured out to improve their homes by upgrading their furnishings and appliances.
Brexit, of course, remains the key issue for the UK, and the recent highly controversial draft legislation outlining how the government wants to trade within its borders post-Brexit has been strongly condemned by the EU. Even former prime ministers Tony Blair and Sir John Major have stepped into the fray and accused the government of embarrassing the UK.
In addition to the increased likelihood of a “no-deal” Brexit, sterling slumped on the back of these developments. In the meantime, the UK has succeeded in striking its first major post-Brexit trade pact with Japan. But many see this as little in the way of consolation for being locked out of the EU.
The financial markets are likely to stumble through the next few weeks. There will be more mixed outcomes as uncertainty in relation to a second wave of Covid continues and the conclusions of both the US presidential election and Brexit remain extremely unclear.
The direction in which Wall Street is headed tends to set the scene for global markets. In three of the last six US presidential election years, the S&P 500 Index has delivered negative returns between the end of August and election day in November. And the years which saw negative returns were also years that resulted in a change in presidency. Even in the other three presidential election years, market returns were low in the run-up to the election.
But for investors who have remained loyal to the markets since March, global equity returns have been phenomenal, confirming that a good crisis should never be allowed to go to waste. As frightening as the markets have looked during the Great Financial Crisis, the Eurozone crisis and the current pandemic, they have always demonstrated great resilience. Perhaps more importantly, however, technological innovation in many varied areas is what has continued to guide the world.