Financial markets had a turbulent October, as optimism on a global economic recovery was challenged by Europe’s second wave of Coronavirus and as investors became cautious in the lead up to the US presidential election. Despite a strong start to the month, some share markets posted declines at the end of October. However, the Australian market delivered a positive return – with the ASX 300 up 1.9%. By month’s end, the Australian Dollar (AUD) traded at 70.25 US cents.
KEY DEVELOPMENTS IN AUSTRALIA
However, Australian economic data released in October was disappointing – reflecting, in part, the negative impacts of Melbourne’s lockdowns. Employment declined in September, with a 25,000 fall in full-time jobs following a three-month increase. As expected, the Victorian job market was particularly poor for the month. After a strong recovery, retail trade (which reflects retail sales in Australia) fell by 4% in August, while business confidence proved weak in September despite previous improvements.
On the Australian policy front, there were two announcements in October. The first was the Federal Budget, which contains a number of measures to support the financial stability of the economy over the next 12 months during the pandemic, including stage-two tax cuts. The other significant policy announcement was a revamp of the Reserve Bank of Australia’s (RBA) monetary policy framework. The RBA also indicated at its October meeting that it retains a firm easing bias – meaning, the RBA is willing to consider making changes or implementing new measures to help ease economic conditions, such as cutting the cash rate. At its November meeting, the central bank lowered the cash rate to an all-time low of 0.1%
KEY DEVELOPMENTS GLOBALLY
Market volatility was driven by an uptick in new Coronavirus cases across Europe, fears of potential new lockdown measures, as well as political developments in the US – particularly in the lead up to the presidential election announcement. After intense negotiations in October, the major political parties also failed to agree on new financial stimulus. Now, it’s possible that more stimulus may not be passed until January, when a new congress commences its term.
SOURCE: FACTSET
Indeed, Europe experienced a sharp escalation in the number of new Coronavirus cases in October, resulting in several governments imposing fresh lockdowns and social-distancing measures. For example, France, Germany and England imposed month-long nationwide restrictions targeting non-essential services. This began to negatively impact social mobility and sectors such as retail, restaurants and tourism. But it must be noted that these measures are milder and may therefore have a lesser economic impact compared to the global lockdowns in March.
Despite the rising number of new cases, global economic data continued its uneven but upward trend. The Global Purchasing Managers’ Index (PMI), a leading indicator of global economic activity, stayed above 50 in both the manufacturing and services sectors for the third consecutive month – suggesting the economic recovery is intact and consolidating at the global level. The recovery was confirmed by stronger-than-expected growth in September quarter US GDP, which rose 7.4% over the last quarter. However, both country and sector level data was a little different. For example, in the services sector, both the US and China have staged solid recoveries, while the European recovery has been weaker and less consistent.
LOOKING AHEAD
In the meantime, while an uptick in new Coronavirus cases may be worrisome, the most likely outcomes of the second wave in Europe include regional economic weakness, some risk aversion among investors, as well as “technical” market corrections similar to the 8% decline the S&P 500 experienced in early September – not the total collapse markets experienced in March. Although financial markets are wary, we remain cautiously optimistic as to the outlook for world financial markets. Our base case scenario is that the global economic recovery will continue at an uneven pace with occasional episodes of weakness – supported by world governments and central banks.
Colonial First State remains in close communication with our skilled investment managers and is constantly monitoring market and economic developments. So no matter the state of markets, you can feel confident knowing our team is actively reviewing conditions and keeping you informed – each step of the way.
Disclaimer
Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (Colonial First State) is the issuer of super, pension and investment products. This document may include general advice but does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement (PDS) and Financial Services Guide (FSG) carefully, assess whether the information is appropriate for you, and consider talking to a financial adviser before making an investment decision. The PDS and FSG can be obtained from colonialfirststate.com.au or by calling us on 13 13 36. Past performance is no indication of future performance.
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