Commentary on financial market developments – October 2020
Highlights:
- EU: second wave of coronavirus
- USA: Q3 corporate earnings season and presidential campaign finale
Commentary:
Negative news outweighed positive news in October and market tensions also rose. All of this was reflected in stock valuations, which mostly lost value in the major equity markets. Similarly, oil did not fare well and also weakened significantly for the second consecutive month.
The rise in tensions reflects the rise in the VIX volatility index, which reversed its trend and headed upwards in October.
Arguably, nervousness reached its highs at the beginning of spring this year, when the coronavirus pandemic broke out in full force. Since then, the situation has been calming down, but in October the trend reversed (at least in the short term) and nervousness is on the rise again. The reasons for this can be seen in several factors that are bringing uncertainty to the market.
A second wave of the coronavirus epidemic has begun in Europe. The Czech Republic is at the forefront of the second wave, however, quickly followed by other European countries. All countries are following a more or less similar course of action and are reacting by gradually closing down their social life and hence their economies. The second wave is all the more difficult because households and businesses are already exhausted from the first spring wave. The question is when the second wave will again spill over into other parts of the world, and this will bring the aforementioned uncertainty to the markets. After the first wave, it was widely expected that the world economy would recover quickly, but it is not happening; on the contrary, the world economy is taking another hit.
To this, if we stay in Europe, we can add Brexit, where the UK still has no agreement with the European Union and is heading for a hard exit. That is another uncertainty in a pretty dramatic 2020.
The US presidential election brings further uncertainty. We will know the outcome in early November. In October, the campaigns of the two candidates were finishing, but they were accompanied by quite a lot of confusion caused by the coronavirus and also by the intransigence of the two now irreconcilable camps of Democrats and Republicans. This can be illustrated by the fierce debates between the two candidates, when after the first heated debate, the next one had to switch to switching off the microphones of the candidates who had not yet been interviewed. Moreover, the current President Donald Trump fell ill with coronavirus at the height of the campaign, only to recover quickly. So the end of the campaign has been hectic, with both parties combined also spending a record $14 billion on the election, more than double that of the last election in 2016.
The mood is not improved by the ongoing Q3 earnings season for US companies, on which the full impact of the coronavirus crisis has already been felt.
Apparently, the uncertainty index will not calm down in November either. It can be expected that the second wave of the coronavirus will continue to spread to other countries and regions, and there is a risk that the outcome of the US presidential election will be contested by one of the candidates, which could put further strain on American society.