September 2020
Share markets, exchange rates, commodities, international developments, domestic economic indicators
A pull-back in technology stocks in the USA, possible second wave of Covid-19 infections, fears of a contested presidential election in the USA, talks of an unorderly Brexit and a few more events weighed heavily on financial markets during September.
This trend is expected to continue into at least October – and November if the US presidential election is contested by any one of the two candidates.
The longer-run outlook is a bit different, though. Once a vaccine for Covid-19 is available, the US presidential elections are behind us, economies recover from their lockdowns, and a new set of challenges emerge, financial markets should recover, albeit in different ways.
Indeed, employment numbers in the USA suggest that the economy may recover faster than is currently expected by market analysts. Should this materialize and wage growth occur faster, interest rates may increase faster than is currently expected by analysts, supporting the US$.
Back to September. The US share market (most share markets for that matter) indices were overvalued, driven by the big five shares (Amazon, Alphabet, Apple, Facebook and Microsoft). When excluding these five shares, the indices were at fair value, reflecting the state of the economy.
Indeed, the same exercise all over the world – removing big tech-related companies – paint the same picture. The decline in share indices during September due to the pull-back in these companies’ share prices is to be welcomed as this will better reflect economic fundamentals.
The S&P lost 3.4% in September, still 13.6% higher than a year ago. Similarly, the MSCI All World Equities Index was also 3.4% lower, led by the pull-back in US tech-stocks, aggravated by a second wave increase in Covid-19 infections that contributed to new lockdown restrictions in some countries.
Although the US$ is on a weakening bias, the currency reflected strength during the month as share markets tumbled – due to a flight to safety. This had a negative impact on the price of gold, which declined by 3.9% from month end to month end (the decline was more pronounced during the month, but a recovery occurred at the end of the month).
The price of Brent oil declined by 8.8% due to fears of renewed economic restrictions stemming from a second wave of Covid-19 infections.
In South Africa, the shocking economic growth number (contraction of 16.4% in Q2), coupled with a jobs report indicating that 2.2 million less people earned an income from work in Q2, suggest that policymakers did not know how to contain the spread of Covid-19 infections in a way that will limit the impact on the economy. Signs that some of these workers are again earning an income are emerging, though (e.g. increasing personal income tax collections). But the recovery is much slower than needed, mainly due to the restrictions on companies doing business, which will contribute to a big fiscal deficit.
Courtesy: Multivest Economic Division