Last Week in the City: A Goldilocks US election

Garry White, Chief Investment Commentator, provides a round-up of the market movements and the global investing outlook this week ending 6 November.

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  1. Garry White

Equity markets rallied this week, led by Wall Street, as market watchers analysed the unfolding US election with a distinct sense of relief.

It was looking likely that there would not be a Democrat “clean sweep”, with the Republicans likely to retain the Senate. With Capitol Hill divided in this manner, some investors think that taxes will not rise as sharply as they would under a Democrat-controlled Senate. It will also ensure that the Federal Reserve keeps markets liquid and functioning properly.

So, the US election result has got a touch of the Goldilocks about it. A divided government is likely to result in the watering down of the most radical policies on the agenda. So, the result is likely to be ‘not too hot’ – and ‘not too cold’ either. The next occupant of the Oval Office will be revealed over the weekend, unless legal wrangling introduced by Donald Trump prolongs the finalising of the result.

But this investor positivity evaporated at the end of the week. The second wave of the Covid-19 virus is clearly building – and this caused equity markets to stall. The US became the first country to top 100,000 infections in a single day on Thursday and Fed Chair Jerome Powell warned that mounting infection rates were a risk to the recovery.

Nevertheless, the UK blue-chip index – which hit a six-month low in the previous week – jumped 5.8% over the week by mid-session on Friday. The FTSE 250 added 4.4%.

 

One development that struck Charles Stanley Investment Manager Gareth Hayward as he looked back at his near 40-year City career has been “the cult of shareholder value”. He explains how this can lead to some rather unhelpful outcomes in his article, The cult of shareholder value.

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It’s time to talk: How to have a conversation about money with your family
Conversations about money are rarely easy or straightforward – so it’s not unusual to feel reluctant or nervous if you’re considering a conversation with your family about money. We have tips and ideas so you can get these important dialogues rolling in this week's article, It’s time to talk.

 

Covid-19

The second surge of Covid-19 is clearly underway.

Fresh restrictions introduced across the UK are expected to act as a drag on growth and the Bank of England expects the economy will shrink by 11% in 2020. France warned of a “violent” second wave of infections, as it joined European countries including Italy and Poland in reporting new highs in daily infections. The US became the first country to top 100,000 infections in a single day on Thursday.

Chancellor Rishi Sunak extended the UK’s furlough scheme until the end of March next year. Mr Sunak said the scheme will pay up to 80% of a person's wage up to £2,500 a month. He told the Commons that the government will review the policy in January. The chancellor said his intention was "to give businesses security through the winter" to protect jobs.

Short-haul airline easyJet said the new lockdowns in England, Germany and France had forced the group to scale back its already-reduced flying schedule. It will now fly no more than 20% of capacity until at least the end of this year.

US Presidential election

At the time of writing, it appeared that Joe Biden would beat Donald Trump in the US Presidential election, but it was too close to call confidently. Mr Trump launched legal challenges in five key US states, alleging that election officials were counting fraudulent votes. As a result, the winner of the election could be unclear for weeks.

It appears that the Democrats will fail to get a ‘clean sweep’ of the Presidency, the House and the Senate. If a President Biden ultimately emerges, his agenda is bound to be limited. We take a look at the implications in this week's article, US election uncertainty and lockdowns.

If Joe Biden wins the US presidential election, what will happen to relations with China? Garry White takes a look in this week's article, How would a Biden administration deal with China?

Economics

The governor of the Bank of England Andrew Bailey vowed to do "everything we can" to support the UK economy amid a resurgence of Covid-19 cases. Mr Bailey said it was important that policymakers acted "quickly and strongly" – as the Bank announced a further £150bn of support. Tighter lockdown rules, including new restrictions in England, are expected to lead to a slower, bumpier recovery. Policymakers also kept interest rates on hold at a record low of 0.1%. Another recession is not expected, but unemployment is likely to sharply rise.

US jobs data was worse than expected. Non-farm payrolls rose 638,000 in October, compared with an economist consensus view of 600,000. The Unemployment Rate dropped to 6.9% from 7.9% in September – and came in better market expectations of 7.7%.

The Federal Reserve has kept monetary policy steady with interest rates at rock bottom and no changes to its bond purchases, as chairman Jay Powell warned the rise in coronavirus cases around the world was “particularly concerning”.

Central banks need to step up to the plate and help to offset the serious impacts of the virus. However, the Bank of England has left us in the dark about how much quantitative easing we can expect month-by-month as 2020 passes into 2021. We argued that it’s time for better communication and action in this week's article, Central banks need to help to offset the virus impact.

Indonesia fell into its first recession in 22 years as the Covid-19 pandemic hit one of its most important industries – tourism. Authorities in Indonesia have predicted that 3.5m people could lose their jobs due to the virus-initiated downturn. Indonesia currently has the highest infection rate in the region.

Geopolitics

The Chinese president called for more co-operation in international trade. Xi Jinping said China will import more than $22 trillion worth of goods over the next decade. He has also called for a more constructive approach to an open global economy – and hit out at "protectionism" – which was a not-so-veiled attack on Donald Trump.

President Trump raised barriers for Chinese companies seeking to invest or raise money in the US that will stay even if he does not win a second term, US reports noted. The Committee on Foreign Investment in the United States (CFIUS), an interagency panel that reviews foreign investments for potential national security risks, has tightened its scrutiny of Chinese deals under President Donald Trump.

China’s first draft of its next Five-Year Plan has a focus on socialism at its core. But the country is also looking to become more self-sufficient, as tensions with the US rise. We take a look at what China is planning to do next in this week's article, China plans to be more self-sufficient.

M&A

There was a takeover bid for RSA Insurance from a foreign consortium that consisted of Canadian peer Intact Financial and Denmark’s Tryg. The offer, which could see the British insurer broken-up, valued the company at about £7.2bn – and sent its shares soaring by half. RSA has large operations in Canada, Ireland and Scandinavia.

Bakery brand Hovis has been bought by Endless, a UK based mid-market private equity firm, for an undisclosed sum. The company confirmed that the terms of the agreement had been approved by both the Gores Group and Premier Foods, Hovis’ current owners.

UK industrial software provider Aveva Group said it intends to raise £2.84bn through a deeply-discounted rights issue. The money will be used to partly fund the acquisition of SoftBank-backed peer OSIsoft.

IPOs

In a surprise last-minute decision, the biggest IPO in history was postponed in China. The flotation of Ant Group, a Chinese tech giant backed by Alibaba billionaire Jack Ma, was suspended by regulators. Chinese authorities cited "major issues" as the reason behind the eleventh-hour suspension. The suspension puts in doubt the future of the $34.4bn share sale, part of the $313bn dual listing of this giant financial technology (fintech) payments company. The move followed a regulatory interview between the Chinese Financial Stability and Development Committee and Mr Ma, the company’s ultimate controller. The committee’s chair, Vice Premier Liu He, said fintech companies needed to be better regulated amid an ongoing global debate about whether these businesses should be regulated as financial companies or technology companies.

Dividends

Despite the substantial economic repercussions of Covid-19, dividend hunters continue to invest in the green revolution. Ben Johnson looks at income from environmental assets in the article, Despite Covid-19, dividend hunters continue to invest in the green revolution.

Energy

Brent crude futures bounced by 6% over the week to trade at about $39.70 a barrel by mid-session on Friday. This followed two weeks of sharp falls, but gains were tempered at the end of the week on concern about the outlook for demand should further lockdowns be announced globally.

Property

UK house prices rose 7.5% year-on-year, according to the UK's biggest mortgage lender Halifax, as movers increasingly demanded bigger homes. The Halifax, part of Lloyds Banking Group, said the typical home now costs more than £250,000 for the first time. Changing priorities and working from home has led to some people looking for more domestic space. However, the lender said the economic fall-out from the coronavirus crisis would put "downward pressure" on prices. It said this would come in early 2021, and the month-on-month increase in property values had already started to slow.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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