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WeekWatch – ‘US equities steadied last week after their recent fall’ September 2020

WeekWatch – ‘US equities steadied last week after their recent fall’ September 2020

US equities steadied last week after their recent fall, which had been prompted by a decline in the share prices of some large technology companies. The fall hasn’t led to a wider sell-off in other markets, and it’s also smaller than the large drop in March, when investors were reacting to COVID19 fears and the onset of national lockdowns.

Rather, investors see recent events as a natural correction to the record-breaking growth in the share prices of large technology companies since global stocks declined in March. Those gains have been
so large that even after last week’s losses, the S&P 500 index of large US companies is over 2.5% higher than at the start of the year.

It might be that stock market investors felt they were overdue another decline, because the drop in spring this year, while severe, was extremely short-lived. The drop in the S&P 500 in February and March was technically a bear market, but from peak to trough lasted only 33 calendar days and 23 trading days. That’s the shortest bear market ever.

Meanwhile, the world is closely monitoring news about vaccines or other treatments for the virus. Investors were unsettled last week when one of the most promising vaccines under development, a joint effort between AstraZeneca and the University of Oxford, halted trials after one of its participants fell ill. Although common in this stage of the vaccine-development process, it serves as a reminder of how challenging it is to develop a vaccine at speed. The trial has since resumed.

Vaccines matter to investors because the world’s economic recovery depends on how quickly a COVID-19 cure can be developed. Until then, markets will remain volatile as they react to good or bad news about how different countries are responding. In the UK, for example, a new restriction on gathering sizes comes into effect today, prompted by fears of a second wave – although there was heartening news last week that the economy expanded by 6.6% in July. India and Latin America are now focal points for the virus, and account for a high proportion of daily deaths. But in the US, only a handful of states have reported an increase in cases in the past week.

In the absence of a cure, there is some good news for investors because many countries around the world are recovering well in economic terms – often despite their high case numbers.

“About 25% of the emerging market countries that we invest in will report positive GDP growth this year – which is quite stark compared to the GDP numbers presented in the developed world,” notes Polina Kurdyavko of BlueBay Asset Management, co-manager of the Strategic Income fund for St. James’s Place.

She adds that China is leading the pack with its COVID-19 response: “China is the only country which has had a stellar response, in terms of the shape of the economic recovery as well as dealing with the pandemic.”

High levels of support from governments and central banks have been keeping markets steady throughout the pandemic. So, announcements from the world’s major central banks, like one that came from the European Central Bank (ECB) last week, are especially important for investors during the COVID-19 era. Christine Lagarde, head of the ECB, said last week that the bank will hold interest rates where they are for now, adding that there won’t be any additional stimulus in the short term. She nodded to the fact that the Euro has grown stronger in recent months, and to concerns that its strength might hamper the continent’s recovery. Meanwhile, investors will be watching the US central bank, the Federal Reserve, when it meets again this week.

Elsewhere in Europe, Brexit negotiations between the UK and the EU have become even more strained. Last week, the UK government revealed plans to override parts of its existing treaty with the EU, the Withdrawal Agreement, which among other things concerns customs regulations between Northern Ireland and the Republic of Ireland.

Because it bypasses the existing agreement, the planned move has been criticised heavily for breaking international law. It has also prompted a sharp response from Brussels, which threatened legal action unless the prime minister makes changes to the proposal. The value of the pound fell as investors digested the prospect of the talks collapsing, but the FTSE-100 index rose, partly because the large companies that make up the index earn much of their revenue in foreign currencies (so stand to gain when the value of sterling drops).

There is still time to reach an agreement, and last week’s tension could be resolved. But with the lack of a trade agreement already weighing on UK equities, the news increases the chance of the two
sides failing to agree a deal.

BlueBay are fund managers for St. James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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