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Monthly Market News September 2020 - Market trends

Johan Gallopyn - Investment Desk Analyst
In September, the American technology stocks' weak performance stood out, after having driven the US stock markets to new records in the previous months. The dollar strengthened, but gold lost territory.
Our expert, Johan Gallopyn, provides an analysis of the trends in September.

Equity market trends: a moment of weakness for growth stocks

September was a negative month for most of the equities markets. This evolution constituted a change from previous months, particularly for American investors, as the American stock markets had closed positive (in USD) for five months in a row. Growth stocks (and predominantly technology) drove the American equity markets to record highs since the low in March but pushed the broad S&P500 down in September. The famous top 5 (Facebook, Apple, Amazon, Microsoft, Alphabet/Google) lost, on average, 15% between the highest and lowest point of the month. There was no specific reason for this evolution. Still, the valuations of those equities became relatively high in the meantime, and during the past months, capital flows into these values were high.
European equities were somewhat weaker as well but continued to fluctuate around the level of the past few months. However, Europe seems to become the new hotspot of the corona pandemic with higher infection rates in various countries, mainly France, Spain, and the United Kingdom. These infection rates revive fears of a more considerable impact on economic activity. Nevertheless, there was more positive news about developing a corona vaccine (Pfizer expects to have a vaccine potentially by the end of this year). But investor sentiment wavered somewhat due to the American Congress, which couldn't agree on extending the support measures. Some regarded the recent meeting of the Federal Reserve as a disappointment. The presidential elections in the US also contributed to investor uncertainty.

Bond market trends: flatline

The German and US benchmark bondbenchmark bond rates have shown a horizontal trend since April, around -0.50% and 0.65%, respectively, and this did not change in September. The purchasing programs of the central banks maintain market stability. The increase of the euro puts downward pressure on the Eurozone's inflation, thus undermining the monetary stimulus of the ECB. It only increases the likeliness of the expected extension of the bond purchasing program later this year.
The spreadsspreads of the southern countries within the Eurozone narrowed even more. In September, regional elections in Italy showed that the opposition party Lega's position is not getting stronger, which raises the hope for some political stability in the country.
The corporate bond spreads increased slightly in September, modestly for the qualitative corporates ('investment grade') and somewhat more pronounced for the 'high yield' segment. This evolution was particularly the case in the second half of the month, in line with the general trend of higher risk aversion seen in markets.

Central banks: meetings offer little news

During its first meeting after the announcement that it will redefine its inflation objective (to average inflation of 2% for an indefinite period), the Federal Reserve provided an update of its prognosis for the policy rates (the so-called 'dot plot'). The average expectation assumes that the rates will remain at their current level close to zero until the end of 2023. The Fed did not give any indication of an extension of its purchasing program for bonds.
The European Central Bank appeared not to be too concerned about the euro's appreciation and its negative impact on inflation. The Japanese central bank kept its policy unchanged as well and commented rather positively on the economic situation.
The expectation is that next year, Prime Minister Suga, the successor of First Minister Abe, will replace two directors of the Bank of Japan (whose mandates are terminating) by new members who support an accommodative monetary policy. Wait and see if this will result in lower interest rates.

Currencies: strong Chinese currency

After several weaker months, the dollar picked up in September. The Federal Reserve did adjust its inflation objectives but did not accompany this with additional monetary action. Moreover, with the prospect of 'turbulent' presidential elections in the US, investors are looking for 'safe currencies', and the dollar is still considered one. At the same time, the euro has not weakened either. The currency strengthened against most of the other currencies, except for the yen. The Swiss central bank repeated that it is prepared to increase the markets' interventions to reign in the currency's strength. The Norwegian and Swedish krona were weaker after prudent comments of the central banks.
The British pound weakened considerably against the euro. The currency moved towards the lower end of the bandwidth in which it fluctuates since the Brexit referendum in 2016. The negotiations between the EU and the UK continue to be challenging. The Internal Market Bill of the British government threatens to hamper the conclusion of a trade agreement. The bill would allow the government not to apply parts of the withdrawal agreement regarding Northern Ireland, resulting in a hard border between the Irish Republic and Northern Ireland after all.
The Chinese currency renminbi grew stronger in September and continues its upward trend of the past few months. Since May, the renminbi has risen 5% against the dollar. Compared to other economies, China's faster recovery, the interest advantage against other significant currencies, and the very favorable external position (surplus on the current account) supported the currency.

Commodities: oil price lost territory

The 'gold rush' that drove the gold price to new historical records in August seems to have died down. Implied inflation expectations in the US had possibly moved too high in previous months and softened somewhat in September. Also, no monetary stimulus announcements by central banks and a slightly stronger dollar resulted in profit takings on gold.
The oil price lost considerable territory mainly in the first half of the month but could hold 40 dollars a barrel. Due to the global resurgence of the coronavirus, there are concerns that oil demand recovery will flatten. At the moment, the demand is still 5% below pre-corona levels. Moreover, there are signs that some Opec+ members lack discipline in adhering to production restrictions.
Industrial metals lost some ground in September after their upward trend since the lows of March. Industrial activity in China continues to improve, but the dollar's rise put a damper on prices.
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