Market Update from the Global Asset Allocation Team – October 2020
The end of the summer brought with it a shift in sentiment. In September, volatility resurfaced as investors weighed a resurgence in global coronavirus cases, the stalemate in negotiations for additional US fiscal stimulus, and looming uncertainty ahead of the US elections – which when taken together sparked some profit-taking after an extended stretch of equity market gains. The good news is that the global economy maintained some notable momentum, with stronger-than-expected economic data revealing a solid recovery taking hold. And at month-end, markets got some relief as US lawmakers appeared to be making progress towards pushing through new stimulus measures in Washington, even as a volatile presidential debate raised concerns about a chaotic election in November.
Global equity markets lost some steam in September and posted their first monthly decline since the pandemic-induced meltdown in March. The tech-heavy S&P 500 and Nasdaq assumed the brunt of the selling pressure and ended their five-month winning streak during the month. The Canadian equity market also declined for the first time since March, albeit more moderately. Looking abroad, international stocks pulled back in the broad exodus from risky asset classes, while emerging market equities also lost some ground but managed to outperform their developed market counterparts as China’s economic revival continued to lead the global charge.
Fixed income markets were relatively quiet in September as some conflicting forces saw government bond yields trade in a tight range. Risk aversion set into the marketplace and capped any material upside in bond yields, even despite further signs of global economic improvement and the Federal Reserve’s more relaxed stance towards inflation. Meanwhile, credit spreads widened in the environment of diminished appetite for risk, which saw government bonds outperform their corporate peers during the month.
The US dollar reversed course and snapped its five-month losing-streak in September, with turbulent market conditions increasing the appeal of the world’s reserve currency. In contrast, the Canadian dollar weakened by the most since March, with the monthly slump in crude prices and broad US dollar strength weighing on the loonie in September. The euro also lost some notable ground, while the pound was pummelled as risks loomed large in the UK, with a rising virus caseload, newly implemented restrictions, mounting job losses ahead of the fiscal cliff, and ongoing Brexit uncertainty making for a worrisome end to the year. Finally, the yuan remained resilient and strengthened to its highest since May 2019 as the Chinese economy continued to lead the global economy out of the Covid-induced doldrums.
Dollar gains fuelled widespread weakness across the commodity spectrum. Gold posted its biggest monthly drop since November 2016 as strength in the greenback eroded the metal’s appeal as a safe haven. Crude oil retreated as new virus flareups across major economies brought into question the outlook for global demand. However, crude recovered somewhat and hovered near $40 at month-end amid optimism over shrinking stockpiles in the US. Finally, copper erased earlier losses and ended the month virtually unchanged after stronger-than-expected US and Chinese factory activity pointed towards robust demand from the top two consumers of the red metal.