The ASX 200 rose during October in spite of elevated volatility sourced from the coronavirus and the impact of the US elections.
Much of this growth was buoyed by the resurgence in the share prices of the big four banks following the government’s relaxation of certain restrictions on lending standards.
The S&P 500 had the biggest one-day fall since June on the penultimate trading day of October. However, there was a sharp bounce back the following day. The VIX’ ‘fear’ index also jumped and we do not expect the market to settle down at least until after the US election is over.
There have been a number of spectacular ‘beats’ by companies of their forecast earnings so far in the September quarter reporting season. We believe this situation was caused by companies and analysts being overly pessimistic in write downs of earnings early in 2020. Importantly, December quarter expectations have been revised upwards but some big companies declined to give ‘guidance’ for earnings in 2021.
There has been a lot of focus on the mega-cap tech companies and many of these easily beat expectations. However, the share prices of Facebook and Twitter went in opposite directions on their news. Twitter beat earnings’ expectations but missed on the growth in the number of users, so its share price was hit hard in after-hours trading.
Bonds and Interest Rates
The RBA cut its overnight interest rate to 0.10% from 0.25%. It now has no more ammunition left on that front since negative rates have largely been ruled out. It can, however, attempt to influence longer term rates such as the three-year rate.
The US Federal Reserve is all but done on its policy initiatives. It is accommodating fiscal policy that is needed to combat coronavirus until effective vaccines and treatments are widely available.
The price of oil and our dollar against the US dollar fell in October. Gold prices fell a little as did the price of iron ore.
The Federal Budget was handed down in the first week of October. It was quite stimulatory with modifications and additions to the previously launched Jobseeker and Jobkeeper programmes. It also cut income taxes for some individuals and announced an increased spend on infrastructure.
The jobs data released in mid-October refer to the month before the budget. It showed that the unemployment rate climbed one notch to 6.9% and 29,500 jobs were lost. The government initiatives might help reverse that soft result and help the labour market continue to recover.
CoreLogic announced that capital city house prices reversed the previous falls, except in Melbourne, which had been in lock-down.
Consumer prices rose sharply in the recent quarter by 1.6% but this gain was largely due to the reversal from the previous quarter resulting from the childcare subsidy being granted and then removed. Over the year, CPI inflation stood at 0.7% which was well below the 2% to 3% target range of the RBA.
The economic recovery in China continues. The latest economic growth data was a slight miss at 4.9% compared to an expected 5.2% over the year however the quarterly growth was a very respectable 2.7% for the quarter.
Retail sales and industrial output both exceeded expectations but fixed asset investment met expectations at a very modest 0.8%. With there being excess capacity in China, renewed asset investment is not yet required.
The US election has dominated market attention in recent months. Both sides made all sorts of claims in the presidential and vice-presidential debates which might come back to haunt them.
Biden stated that he ‘will shut down the virus” and that this will be his mission “from day one”. While this is a laudable objective it is all but impossible without effective drugs to combat the virus. Trump continued his often-unsubstantiated claims.
It was reported that there were 661,000 new jobs created in the previous month. While this is about three times a typical strong month before the virus it shows substantial slowing down of growth during the rebound. Around 10 million jobs lost in the shut-down are yet to be replaced.
The future of the US economy is still up to how the virus impacts public health and policy – and the outcome of the election, particularly if the outcome is contested. But, thus far, the rebound in 2020 has been considerably stronger than most people predicted in the early months of the pandemic.
The UK government continues to struggle to resolve the Brexit deal before the end of the year, However, the dire predictions of a ‘hard Brexit’ a couple of years ago are largely gone. The ECB is considering further stimulus measures as France and Germany go back into lock-down.
Rest of the World
South Korea, swift to react to the pandemic, posted a September quarter economic growth figure of 1.9% beating expectations of 1.7%. For the year, growth was down at 1.3% but again better than expected at 1.9%.