The week ahead: four events worth watching

Stock markets ended on an upbeat note last Friday after a torrid week. Stocks were buoyed by some better than expected earnings releases that gave hope for the economic recovery after a dramatic rise in the number of Covid infections in Europe and the US. The economic future for Europe and the US remains murky as a second wave of Coronavirus threatens the economic recovery that we have seen since June, however, there are some signs of strength, which could give stock markets another boost at the start of a new week. Below we look at four events that are likely to dominate markets in the days ahead. 

1, Chinese economic data 

The week opens with Chinese GDP for the third quarter, retail sales for September, fixed asset investment for September and last month’s industrial production data. Asia, and China in particular, has  led the world’s economic recovery from Coronavirus and there are some big expectations for these numbers. GDP is expected to increase by 5.2% in Q3, up from 3.2% in Q2, this comes after a 6.8% decline in Q1. If the expected figure for Q3 is correct, then China will have had a very speedy recovery from the coronavirus-induced economic caollapse at the start of the year. The September data is also worth watching closely, as it may be used as a comparison to US and European economic data to see how higher rates of coronavirus infection in the West compared to the East, are impacting the economic recovery. Retail sales in China are expected to grow by 1.8% in September, after a record month for imports into China. Interestingly, although China has, so far, been touched lightly by a second wave of Covid infections, especially comparted to the US, US retail sales also increased by an impressive 1.5% in September. Thus, consumption may prove to be immune to the second wave of coronavirus as the world’s economies adjust and learn to live with its threat. If China’s data is in line with expectations or stronger than expected, then we could see a positive boost to risk sentiment in Asia and Europe at the start of the new week, it could also have a short-term positive impact on the Aussie dollar. However, if GDP disappoints then this could send a shiver down the spine of global financial markets as it may foretell more economic woe to come, even in economies that appear to be recovering well from the pandemic. A weaker GDP report for China could boost safe havens such as gold, the dollar and the yen. 

2, US housing market data 

Although the US is less than one month away from a highly contentious Presidential election, a much anticipated fiscal stimulus package has failed to materialise and a second wave of coronavirus infections continues to lead to economic disruption in some states, there have been some positive surprises in the US economic data in recent weeks. We have already mentioned the US retail sales data for September, which suggests that the consumer is willing to spend even in the midst of economic, social and political uncertainty. This week it is the turn of US housing data to shine. Building permits and housing starts are expected to rise by a decent 1.5mn and 1.45mn last month, with existing house sales expected to rise 2.4%. If this estimate is correct, then housing starts would see the largest increase since July, suggesting that the trend remains higher, which could boost Q4 economic growth. The housing market is benefitting from ultra-low mortgage rates, and a surge in people looking to move out of cities into the suburbs. This is proving to be a powerful driver of home sales. Added to this, when people move or buy homes it suggests that they are confident about their economic future, which may also explain the decent increase in consumer spending in the US in recent months. Of course, rising initial jobless claims and the expiry of the US jobless credit scheme suggests that there could be clouds on the horizon, but for those with a job and an income, life appears to be continuing as normal.

3, UK retail sales, Brexit and the pound 

The UK consumer appears to be powering into Autumn, ignoring the risks of more covid restrictions and Brexit uncertainty. Retail sales in the UK are expected to rise by a decent 4.9%, excluding fuel, last month, which would be one of the highest rates since April last year. These retail sales, however, do not take account of the tighter restrictions that have recently come into force in London and parts of Northern England, which may hurt consumer sentiment as we move into the crucial spending period before Christmas. However, at Minerva, we believe that the spirit of the consumer will remain high, regardless of the trajectory for Covid and unemployment, until at least the end of this year, with consumers waiting to reign in their spending to the start of 2021. This could boost growth and corporate results for Q4. Flash PMI reports for October are released at the end of this week, and the market is expecting manufacturing PMI to fall to 53.1 from 54.1, while the service sector PMI is expected to slow to 54 from 56.1 in September. While we could see a sharper slowdown in manufacturing, we believe that recent lead indicators suggest that economists are too gloomy about the service sector, which we believe could surprise on the upside, with some notable exceptions such as hospitality, which we expect to remain in the doldrums for some time. 

GBP/USD fell below $1.30 at the end of last week after Boris Johnson, the British PM, said that the UK was willing to walk away from talks with the EU over a trade deal, with the prospect of a deal being done in time looking unlikely. During the weekend, other government ministers painted a rosier picture, saying that although EU/UK trade talks will not be going ahead in person this week and instead will take place over the phone, a deal could be done if the EU are willing to compromise. Thus, Johnson’s posturing has already been unravelled, and we do not think that his threats regarding the trade deal will have such an impact on GBP this week. If we see some progress on the trade talks, even by phone, combined with better than expected economic data, particularly the service sector PMI report for September, then we expect GBP to end next week above $1.30. From a technical perspective, the fact that GBP/USD did not fall below $1.29 last week, is also supportive for a GBP recovery rally this week. Key short-term resistance lies at $1.3060, the high from 14/10. 

4, US election, the final debate 

In a normal election year, last week’s retail sales report for the US would have given the incumbent candidate a dizzying head start, yet this is no normal year, and although the US retail sales were good, they may not be good enough due to the decline in restaurant and leisure sales along with clothing sales. Thus, although the US economy is still in its covid-recovery phase, it remains a fragile economic recovery as we move into the final weeks of election campaigning. The final debate will be held in Florida on Thursday. The first debate was notable for its bad temperedness and the second debate was cancelled due to President Trump’s covid diagnosis, thus, this debate could attract even more attention than normal. The latest polls suggest that Joe Biden is in the lead with 51.6% of the vote vs. 42.5% for Trump. Biden is also expected to win 279 of the electoral college votes, he needs 270 to win. With more than 26 million early votes cast, which could sway in Biden’s favour, this debate could be President Trump’s last chance to save this election. Thus, it will be worth watching closely. Usually, a win for the Democrats is considered bad news for stock markets due to expected tax increases and higher levels of regulation, however, this time a win for the Democrats, combined with a Democrat controlled Congress could be greeted warmly by investors because it may mean one thing: more fiscal stimulus. Thus, if Joe Biden can do well in this debate and maintain his lead in the polls then we may see gains for US stocks in the coming days and weeks. 

Of course, we would urge caution when it comes to polls and election results since many of the key swing states are still very close. This may keep a lid on the upside for US stocks, particularly value stocks, in the next few weeks. We believe that the next impetus for US stock markets will be a Biden victory, and a win for the Democrats in Congress. If this is confirmed on 4th November, then we would expect a broad rally in US stock markets, including in unloved sectors such as retail, financials and energy, as the markets start to price in a Democratic spending spree.