Weekly market recap: addicted to stimulants

Despite coronavirus rise, global equities see one of their best gains since the start of the crisis.

FacebooktwitterlinkedinmailFacebooktwitterlinkedinmail   by Tertius Bonnin, 9th October 2020

Since July, there have been in excess of 30 attacks of small boats in which killer whales have rammed Spanish fishing boats with most taking place off Spain’s north-west coast. Attacks have reportedly spread down the peninsula’s coastline, with boats being targeted in Portuguese waters and even in the Straits of Gibraltar. One woman who was aboard a targeted vessel accused the mammals of a “totally orchestrated” attack.

Investors and traders will have been elated last week as the probability of policymakers orchestrating a fresh boost for the US economy rose. Asset class returns are below; risk-assets had a cracking week as the US President raised his offer to House Democrats for a new stimulus package.


Figure 1: Asset class total returns in base currency

Source: Bloomberg, EQ Investors


Despite coronavirus case numbers continuing to rise and fresh economic data painting a dire picture for the world economy, last week saw global equities notch one of their best gains since the start of the crisis. Many point to how the market is currently buoyed by vast amounts of central bank and government spending, and that the fresh scent of new stimulus has one again acted to turbo-charge asset prices across the board.

The latest moves in equity markets came as US President Donald Trump upped his offer for a new fiscal package following weeks of negotiations between US Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi. However, Trump’s $1.8 proposal still falls short of demands from the Democrats who have been pushing for a $2.2 trillion deal, far in excess of the $1 trillion ceiling proposed by some Senate Republicans. Some commentators are pointing out that Trump’s willingness for a deal is driven by the fact the US Treasury is currently sitting on a record cash balance (financed by the Fed’s government bond purchasing), and for him to benefit electorally any stimulus package should be agreed prior to the election.


Figure 2: Having flooded bond markets with supply, the US Treasury’s cash balance currently sits at around $1.7 trillion, equivalent to the GDP of its neighbour Canada Figure 3: Meanwhile, the US Federal Reserve has rapidly increased the size of its balance sheet in recent months as it implemented new quantitative easing programmes
Source: Bloomberg Source: Bloomberg


Meanwhile, markets have broadly ignored economic data releases on the other side of the Atlantic that made for grim reading. Data released by the UK’s Office for National Statistics revealed economic growth figures for August came in significantly short of expectations despite the UK Chancellor’s Eat Out to Help Out scheme which has sparked concerns of slowdown in the economic recovery.

A few months ago, we looked at the potential trajectories for economic recovery which we have recreated in Figure 5. While we appear to have avoided the worst case scenario (a flat recovery as illustrated by Scenario 3), the economy risks moving more in line with a Scenario 2 than a Scenario 1 which would mean economic output remains permanently below pre-crisis trend. Any permanent reduction to GDP in the long run will undoubtedly have significant implications for the public purse and for millions of UK workers.


Figure 4: While the UK economy has rebounded from its lows following a coronavirus lockdown… Figure 5: …the rebound appears to be showing signs of weakness which could have serious implications for public finances
Source: Bloomberg Source: Bloomberg


STAT OF THE WEEK: 19% – the proportion of businesses that intend to use working from home as a model for the future (ONS).

DATA CORRECT AS AT: 09/10/2020

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Contact Tertius

    Tertius Bonnin

    Tertius joined EQ in 2016 and is responsible for covering global and thematic equity investment ideas. He also sits on both the fund selection and strategic asset allocation committees while also supporting the portfolio managers across a range of other responsibilities.

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