The latest macro data has been showing that economic activity has continue to recover but at a slower pace. On the employment front, the permanent job losses continue to go up, even though the unemployment rate has continued to fall, standing at 7.9% in September. PMIs also continued to firm into October, both in manufacturing and service sectors. We see strength across a range of different housing indicators. The US Presidential race has entered its final stage with Democrats gaining ground while no clear progress has been made on US fiscal stimulus talks.
Economic data confirmed that the pace of recovery stalled over the summer and momentum remains weak. PMI fell below 50 while consumer prices fell for a third consecutive month. GDP showed a rebound in the three months to September but output remained well-below pre-pandemic levels, with significant divergence among the largest economies. Several governments announced new restriction measures (mostly affecting accommodation and leisure sectors), putting downside risks on the euro area economy for the fourth quarter.
Trade talks and Coronavirus were a dangerous mix and will inevitably do renewed damage to activity. GDP and labor market stand at levels that are below what has historically been thought of a recessionary. Retail sales felt at the fastest pace since June. Nevertheless, mortgage approvals rose to highest level since 2007. The country announced a nationwide lockdown. As at mid-October, the UK’s credit rating has been downgraded one notch to Aa3 by Moody’s, outlook stable. The Agency pointed to the heavy reliance on services along with “the weakening in the UK’s institutions and governance”.
Switzerland’s unemployment rate stands at 3.2% in September, from 3.3 % a month earlier. The economy is slowing with decreasing retail sales and Swiss watch exports. KOF index came in below expectations at 106.6. While Europe’s biggest economies have lost control of the coronavirus spread, Swiss infection rates surpass those of its neighbors. Nevertheless, the government is resisting a lockdown, opting for lighter measures and pointing to individual responsibilities.
Federal Reserve (next meeting: November 5th)
While the September FOMC delivered an historical shift by signaling that the FED would be patient in waiting for an inflation overshoot, minutes published in October showed that the support for such an action was not overwhelming. The FED has repeatedly called for additional fiscal measures, with chairman Powell applying considerable pressure. The Central Bank recently announced the reduction of the minimum loan size from $250K to $100K for the small-business lending program, a $600bn scheme launched earlier this year with the backing of the US Treasury. The US election is likely to overshadow the November FOMC meeting.
European Central Bank (next meeting: December 10th)
While keeping its deposit rate unchanged and holding its emergency bond-buying plan at EUR1.35tr, the ECB signaled it is likely to provide more stimulus before the end of the year in the context of increasing economic risk. President Lagarde said the bank’s staff had started to work on potential adjustments of all instruments used by the central bank, suggesting it may prepare a package of measures for December. The central bank is said to be monitoring the exchange rate although it was not its main concern. We expect the Central Bank to increase its PPEP envelop or to announce additional TLTRO IV starting in March 2021.
Bank of England (next meeting: November 5th)
In September, the BOE failed to hint at imminent QE extension but policy maker G. Vlieghe recently said the central bank will probably have to provide additional support to the economy as the coronavirus crisis and Brexit weigh on employment and investments. Deputy Governor D. Ramsdan said the BOE have plenty of headroom to expand asset purchase if needed. Some MPC members expressed the view that they do not see case for moving to negative rates although they have not ruled them out in the future. The BOE asked banks how ready they are for negative rates. Its main rate stands at 0.1%.
Swiss National Bank (next meeting: December 17th)
SNB spent CHF90bn in the first half of the year to hold down the value of the currency, more than it has spent in the past three years combined. President Thomas Jordan signaled that even larger interventions may be on the cards in the future. The central bank’s balance sheet is close to $1tr in size, for an annual output of just over $700bn. The bank said it will pursue its ultra-expansionary monetary policy for the foreseeable future. On September 24th, the main rate remained unchanged at -0.75%. It is worth noting that rates have been negative since 2014 and are the lowest in the world.
- Virus outbreaks, US elections and stimulus talks along with Brexit negotiations were the main drivers of the markets. During the month, sovereign rates were higher, curves were steeper and credit was tighter. Investment Grade index is now at its tightest levels since the recovery and High Yield is not too far behind. October saw the most issuance in speculative grade bonds in Europe since July. There is just not enough supply to satiate demand and the recent European Union SURE deal has been a good illustration. There is still a lot of cash in the market to be invested, which should act as a strong bid for credit as an asset class.
- With a Biden victory and a Democratic House giving room for greater likelihood of longer than expected fiscal stimulus, the dollar weakened during the course of the month before finding some support when equities reversed trend, heading for their biggest weekly fall since the March turmoil at the end of the month. Gold twice reached USD 1,980 per troy ounce, before settling down at USD 1,877 at the end of the month.
- China boosted foreign access to its huge onshore capital markets at the end of the month, making it easier for international investors to trade in China’s booming capital market. The country approved its new five year plan (2021-2025) with the Dual Circulation Strategy as a central theme. This concept promotes a stronger role of domestic demand in driving growth without closing the door internationally.
- Rising tensions between Turkey and its Western allies along with monetary policy concerns pushed Turkish lira to a record low, breaching the symbolic threshold of eight to the dollar. The currency has fallen about 28% against the US dollar this year in the context of geopolitical tensions. Turkey’s central bank left its benchmark one-week repo rate on hold and instead tweaked the cost of borrowing through an obscure emergency facility. Market participants waited for a credible signal. It is worth noting that the central bank had lifted its benchmark interest rate by 2% in an unexpected move later in September.
- Oman (Ba3/BB-), one of the poorer oil dependent Gulf states, has received $1bn in direct financial support from Qatar. It is worth noting that the country needs oil prices to average $105 a barrel to balance the budget.
- European Union (Aaa/AAA) met with huge demand for a EUR17bn issue (10-year and 20-year) of new coronavirus-related bonds, which offered more income than the Eurozone’s safest government debt. Investors placed bids for more than EUR233bn. The sale is the first under the EU’s EUR10bn SURE programme, which will provide loans to support member states’ efforts to keep workers in jobs during the pandemic.
- Rolls Royce (Ba3/BB-/BB+) issued GBP2bn of six-and seven-year bonds, paying coupons of up to 5.75%, as part of a rescue package that also includes a rights issue of equity (GBP2bn). The UK aerospace group has drawn in government support for a new debt package of up to GBP3bn, in an attempt to bolster its balance sheet.
- Aston Martin Lagonda was forced to pay double-digit interest rates (10.5%) in annual interest on $1.1bn of new bonds as part of a wider refinancing package, which included a GBP125mn equity raise. The company announced closer ties with Daimler, allowing the German carmaker to raise its stake in Aston Martin to 20% by 2023 in exchange for powertrain and electric technology.
- Getlink SE (ex-Eurotunnel) issued EUR700mn worth of five-year bonds with a coupon of 3.5%. The proceeds will serve to reimburse the existing 2023
- CMA CGM (B+) issued EUR525mn worth of six-year bonds with a coupon of 7.5% to refinance its debt due in January next year.
- Tereos, the world second largest sugar company, issued EUR300mn worth of five-year bonds with a coupon of 7.5%.
- French car rental firm Europcar Mobility Group withdrew its outlook for the remainder of the year, as the second wave of the pandemic hitting Europe makes it very hard to predict what the impact on the business will be.
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