Omnis Market Update - Ewing Associates

02ND NOVEMBER 2020

Last Week – Key Takeaways

Global shares fell as the number of coronavirus infections in the US and Europe continued to rise, and many European countries were forced to reintroduce lockdown restrictions in an effort to contain the spread;
There was further bad news for US shares as technology companies, which had been driving the markets since the correction in March and April, dropped despite beating profit forecasts (see ‘Corporate earnings’).
Omnis view: The markets are concerned that new lockdowns will slow economic activity and prolong the global recovery from the pandemic. However, a correction of the same magnitude as earlier in the year seems unlikely at this stage as authorities and businesses are better equipped to deal with the surge.

US shares temporarily rallied after figures released on Thursday showed the country’s economy grew by 33.1% in the third quarter compared to the previous quarter, its fastest pace in 75 years.
Omnis view: Growth bounced back strongly in the third quarter, thanks in large part to the impact of the trillion-dollar relief package launched in March, but the economy still has not recovered to pre-pandemic levels. President Trump tried to capitalise on the news on the campaign trail, although whether it is enough to overcome Joe Biden’s lead in the polls remains to be seen.

According to figures published on Friday, the EU economy beat expectations to grow by 12.7% in the third quarter compared to the previous quarter;
Meanwhile, the euro weakened against the US dollar after the European Central Bank (ECB) decided to leave interest rates unchanged and said it would take further steps to support the region’s economy as many countries returned to lockdown.
Omnis view: As Europe entered the pandemic before much of the rest of the West, including the US, the return to negative growth in the third quarter is somewhat ominous. The ECB held fire this time, but it is likely to introduce additional measures soon.

The Bank of Japan also left interest rates unchanged following its meeting on Thursday, and it lowered economic growth forecasts for 2020 but upgraded the outlook for 2021.
Omnis view: Japan largely has the pandemic under control which has allowed economic activity to pick up again, so the central bank was not expected to take any action. That said, the markets will welcome its continued supportive policies.

Facebook, Amazon, Apple, Alphabet (parent company of Google) and Microsoft beat forecasts when reporting earnings in the third quarter;
However, shares in all but Alphabet fell as they issued cautious outlooks for future profits due to the uncertainty caused by the pandemic.
Omnis view: US tech firms have performed strongly since the correction in March and April, so the gloomy forecast weighed on the markets. Overall, US companies are expected to report a drop in profits of 9.8% in the third quarter compared to a year earlier, a big improvement from the start of earnings season.