Over the period under review, uncertainty increased. In Europe, the epidemic spread in France, Spain and the UK, forcing authorities to enforce stricter social distancing measures. France and the UK opted for a gradual increase in targeted measures. The UK’s prime minister, Boris Johnson, even talked about a new lockdown. Measures in Madrid are now affecting more and more people. While the pace of the spread seems to have fallen back in little in recent days, these new restrictions will weigh on the economic recovery, especially against a backdrop of disinflation. In August, inflation was negative in 12 eurozone countries and the first indications for September showed the trend was gathering speed. Inevitably, obstructive behaviour from countries like Hungary and Poland in budgetary talks can only increase uncertainty as the introduction of the €1.8 trillion stimulus package might be delayed. At the same time, relations between the UK and the EU continued to worsen, increasing the risk of a no-deal.

The European Commission has launched legal proceedings against the UK for flouting the EU exit treaty signed in January this year.

The US is faced with similar uncertainties.

Democrats and Republicans have still failed to reach an agreement on a new stimulus plan. And yet time is running out: withdrawing current subsidies will hit consumption and business in the fourth quarter. And the divisive nature of the presidential election campaign is not helping matters. Joe Biden’s lead in the polls remained intact after the first televised debate but Donald Trump’s ambiguous comments mean it is unclear he would accept defeat graciously. The mood has also been complicated by the appointment to the Supreme Court of a conservative, Amy Coney Barrett to replace Ruth Bader Ginsburg. And to cap it all, Donald Trump tested positive for coronavirus and is now in quarantine.

Against this background, markets turned risk-off in the first three weeks of September. Risk asset performance was negative and safe haven assets like gold and government bonds failed to act as hedges. Growth rebound assets were particularly badly hit with some returning to March lows. Only the US dollar managed to rise. Market moves were reinforced by end-of-quarter rebalancing. Over the past week, indices rebounded but not very convincingly. In our view, this uncertain mood should mean more short term volatility on markets. Looking further out, however, market confidence should return as visibility improves after the US elections. Earnings growth momentum is still intact and central bank liquidity remains abundant. We are maintaining our neutral stance on equities with a preference for Europe and China. We are still neutral on corporate debt and positive on hard-currency emerging country debt.

 EUROPEAN EQUITIES

Developments in the ongoing epidemic continued to dictate equity market moves. Trading turned choppy at the end of the period, mainly because of signs that a medical solution might be delayed. To make matters worse, investors had to contend with fresh Brexit tensions and mixed economic data in the US. Markets were then stunned to hear that Donald Trump had tested positive for Covid-19.

Sector trends were largely unchanged. Aerospace remained under pressure as commercial air traffic fell to a 3-month low. Revenues at Air France plunged 70% in August. At the other end of the scale, Morrisons, the UK’s fourth largest supermarket, said it was hiring 1,000 people to meet e-commerce demand after its partnership with Amazon. On-line shopping in supermarkets has doubled since the lockdown and is now is running at 15% of overall sales. It could double again in the next few years. Total announced plans to cut oil production while increasing natural gas and renewable energy output.

The first indications on third quarter company results were reassuring. STM’s sales, for example, should be driven by rising auto and smartphone sales. The group also upped guidance for the full year. H&M also said it had seen positive trends. Meanwhile, France’s 5G frequency auctions were good news for operators as prices looked reasonable compared to amounts paid in other European countries.

 US EQUITIES

US markets made strong gains for the period with the Dow Jones up 3.73% and the S&P500 4.13% better. The Nasdaq jumped 6.13%.

The upcoming presidential elections appear to be the short-term catalyst. For some analysts, markets brushed off the first, tumultuous debate between Donald Trump and his Democratic rival Joe Biden because neither had room to develop campaign programmes, leaving open the possibility that the result might only be revealed well after the November 3 vote. Nevertheless, in a CNN poll carried out by SSRS, 60% of viewers thought Joe Biden had won, with only 28% for Donald Trump. 12% said it was a draw.

Elsewhere, the House of Representatives voted in favour of a fresh stimulus package, this time for $2.2 trillion. Some progress between Democrats and Republicans has been made but the White House is still holding out for $1.6 trillion. The Republican-majority Senate is therefore likely to vote against the package and send everyone back to the bargaining table.

ADP said private sector jobs had increased by 749,000 in September.

United Airlines signed an agreement to avoid furloughs for 2,850 pilots up to June 2021 at the earliest. Devon Energy and WPX Energy are to merge. Bankruptcies in the energy sector accelerated. This week it was Oasis Petroleum’s turn. JP Morgan Chase agreed to pay $920 million for manipulating prices on metal and Treasury bond markets, the largest ever fine for such an offence. Nikola continued its descent into hell with two women accusing its founder of sexual harassment. Luxury giant LVMH launched a legal counter-attack against Tiffany, claiming that its decision to back out of the acquisition was justified by the US jeweller’s poor pandemic management as well as a French government request.