Performance, Oktober 2020
A slew of events impacted the financial markets in October. One of the major events was the resurgence of the Coronavirus in both the US and Europe. The resurgence has come earlier than expected and proves that the development of the pandemic is difficult to predict - even for experts. The growing number of confirmed cases has, especially in Europe, resulted in new, tough restrictions in several countries, and the health care system is also stretched in many European countries. This has investors worried about the economy - particularly because fiscal stimulus talks have stalled in the US, and it appears to be more difficult to reach a stimulus agreement than in the spring. Add to this that in Europe the talks between the EU and the UK have reached a deadlock, which is a cause for concern for many companies. European equities therefore had a very difficult month with declines between 5% and 9% (global equities -2%).
The third-quarter earnings season kicked off in October, and the results are generally fine. Again, both sales and earnings growth fell over the quarter, but the expectations were actually even lower. The earnings season has therefore, seen in isolation, been positive for the market.
US Presidential election
The last major event to influence the markets in October was of course the US presidential election, which is on 3 November. At the time of writing, the outcome of the US presidential election is unclear even though Trump has already claimed victory. Right now, the two candidates are neck and neck. This increases the risk that the election may drag on with recounts in several states and a possible legal battle in the Supreme Court.
The European and US equity markets had a difficult month with the resurgence of the Coronavirus and no political action on new fiscal stimuli. The emerging equity markets, on the other hand, – with China in the lead - performed well in October and closed the month with positive returns. Especially Asia seems to have a tighter grip on the spreading of the Coronavirus.
Bond yields were again in October slightly falling. The yield on a 10-year government bond is now approx. 10 bps lower than at the beginning of the month. Activity on the Danish bond market was moderate, but towards the end of the month when the term of notice for the January payment date expires, we saw considerable issue activity in callable bonds. Coupled with the slightly falling yield level, this resulted in a small underperformance in long-term callable bonds. Bond returns were generally positive in October. However, returns on higher yielding callable bonds varied greatly with returns from –0.5% to positive returns of more than 1%.
The emerging markets are closely watching how the individual countries address and hold up in relation to Covid-19. This may also determine how and how fast the countries come out on the other side. Several countries have via the fiscal policy increased their debt, and this has put many countries under pressure. Despite these challenges, the market performed relatively well with returns of 0.47% on external debt and 1.23% on local debt. The election is over in Ivory Coast, which has lifted the country’s bonds considerably, while the situation in Turkey with an ineffective monetary policy makes investors stay away.
Yield spreads in both investment grade and high yield narrowed marginally during October, mainly driven by a higher probability of a Biden win and the ECB's indication that the asset purchase programme will be increased in December. However, a new round of Covid-19 lockdown measures towards the end of the month put a damper on the optimism. The issuance activity was high, especially in USD high yield where many companies apparently wanted to secure financing for the coming months before the election. For the same reason, we expect some-what lower activity in November and December.