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Monday Digest 12 October

12 October 2020

Overview: debt markets buoyed by the promise of QE

After September’s unsteadiness, capital markets have regained their composure and continue to drift upwards in October. This poise stands in stark contrast to the flow of bad news. In the US, the White House has become a COVID hotspot, similar to many regions across Europe and the UK. Meanwhile, the Brexit negotiation noises have been loud enough to make those worried about the economic impact of the pandemic feeling even more queasy.

But markets everywhere are behaving as if none of this really matters. Almost every indicator that we look at tells us investors are increasingly confident about an upward path for economic growth over the medium term. Investors seem convinced the pandemic will not end up as a new debt crisis (followed by another era of austerity). Long-dated government bond yields have gradually risen across the board, five basis points (bps) in Germany and France, 15 bps points in the UK and a substantial 20 bps in the US – usually a sure sign that things are looking up, not down.

These positive signals go beyond the auspicious government bond markets. Corporate credit spreads have declined, and cyclical stocks are also performing well, beating the more defensive large-cap growth stocks which did so well during the post-March stock market recovery phase. Globally, small- and mid-sized stocks have outperformed large caps, a trend which has been going strong for several weeks. Equity analysts have responded to the reasonable start of the third quarter earnings reporting season by raising sales and earnings expectations. In other words, the starting point for profits is stable and next year’s earnings growth visibility is improving. This may be more than enough to offset the downward pressure on valuations from a rise in long yields.

The fact that markets are currently not panicking over the beginning rise in medium-term yields tells us two things: first, that economic growth (and tax receipts) in the short-to-medium term will likely exceed the interest governments are required to pay on the COVID debt, and second, that markets are also taking the US Federal Reserve (Fed) Chairman Jerome Powell at his word. Here, the belief is that the Fed will continue to respond benevolently to more issuance of both government and corporate debt when these want to borrow to invest. This requires a long-term commitment to capping longer-term yields by means of – you guessed it – quantitative easing.

Some will criticise this as an irresponsible undermining of capital market freedom, and an erosion of the public trust in value of money through sustained financial repression, long beyond the pressures of the COVID‑19 crisis. Others will describe it as the only way to return the global economy to a sustained growth path, by dealing with the universally-raised debt levels around the world in the same way that western societies did with their war debts after World War II.

Fishing for positives in the Brexit negotiations.

We are now officially in Brexit ‘crunch time’. Britain’s official transition period of European Union (EU) membership still only lasts until the end of this year, and, according to Boris Johnson, any deal needs to be agreed this week if it is to take effect on 1 January. The government has repeatedly tried to beef up its negotiating position with the ‘credible threat’ of a no-deal scenario. But recent noises from Whitehall have been more conciliatory. Reports suggest there has been a breakthrough on state aid – an issue so emotive the government felt it may need to break international law over. Hot topics remain on areas like fisheries, an area of low economic impact (but a key Brexiteer talking point), and a relatively high emotional value in parts of the EU; and even here negotiators seem hopeful. Michael Gove has gone as far as to say he sees a 66% probability of a deal happening. Gove’s positivity seems to have fed through to currency markets. Sterling was able to stabilise its recovery from September lows, and the options market has been similarly optimistic.

All countries involved are still labouring under the economic pains of the global pandemic, which has frozen businesses and put individuals in desperate need of support. Ensuring stability of trade terms with our nearest and dearest trading partners, rather than opening a second ‘front’ for the wider economy, is therefore even more vital than it was before. This goes for politicians in both Westminster and Brussels. That said, the incentive is not quite equal on both sides of the Channel. Not only has the UK seen more cases, deaths and longer-lasting restrictions than most on the continent, its economy has been much harder hit. UK economic activity contracted 20% in the second quarter of 2020, significantly worse than the 12% fall in the Eurozone. Last week’s release of GDP figures for August revealed slowing month-on-month growth of just 2.1%, also below expectations.

However, there are some bright spots for the UK. Employment, the cornerstone of Britain’s consumption-led economy, is still holding up reasonably well, according to official statistics. September saw the strongest monthly increase in hiring in almost two years. In all regions except London – which is still languishing – hiring activity and intentions are looking positive. What is more, economic surprise indices for the UK are now performing better than most major economies. In the Eurozone, the initial recovery hopes have tailed off, with the strong bounce-back losing steam. The same is true for business sentiment surveys, which have tailed off in Europe but are holding strong here. With new restrictions coming into force, and a still greatly uncertain virus outlook, it is far too early to get excited about Britain’s recovery prospects. But if Brexit worries can be put to bed, after plaguing both business and investor sentiment for years, it would go some way to improving things. Posturing aside, the incentive to strike a deal is certainly there for both sides.

Big tech’s ‘big five’ faces a post-Election reckoning

This pandemic has done wonders for the stock prices of tech’s ‘big five’. People all over the world have relied on Amazon, Apple, Alphabet (Google), Microsoft and Facebook for shopping, communication, entertainment, business and social interaction. But controversies around Facebook’s electioneering, Amazon’s poor workplace standards and Apple’s monopolistic practices have dirtied big tech’s ‘do-no-harm’ public image. And, with these companies wielding huge amounts of power in their respective domains, the public backlash has increasingly spilt into the political sphere. The ‘wild west’ of unregulated tech markets feels ripe to be tamed by politicians, with tighter rules surely set to come.

By rapidly building scale, the big five have dominated and used their leverage to suppress competition. Part of the issue for regulators is that they need to rethink the concept of monopoly. Monopolies in the past have been hoarders and price-setters, hurting consumers. But Amazon are not hiking prices for consumers – far from it. Instead, while the online retailer has been able to lower prices for consumers, they have also pushed down prices paid to end-producers. Regulators are now perking up to the idea that this new style of monopoly is not as benevolent as it may have seemed. And, without its ability to exert price pressure in this way, big tech could lose some of its shine.

Judging by last week’s US House Judiciary Committee report, things could look very different for tech companies when that regulation arrives. The Democrats have offered detailed and extensive proposals to beef up antitrust law to force more competitive practices, including: requiring online marketplaces to be independently-run businesses or establishing rules for how these marketplaces can run; blocking online platforms from ‘playing favourites’ with content providers; requiring users to carry information from one platform to another; directing antitrust enforcers to assume tech acquisitions are anticompetitive; and allowing news publishers collective bargaining with online platforms.

The timing of this report – just before an election and after months of upheaval and hardship, but with record-breaking big tech profits – is crucial. But it also comes as the big four have started changing as well. Over the past two years (but even more so this year) Apple, Amazon, Google and Facebook have started generating a huge amount of free cash flow. That is, they have stopped focusing as much on reinvesting every $ for growth and are focusing instead more on generating profits. These are effectively the signs of businesses maturing. The fact that a more comprehensive regulatory environment is also set to come could change the way America’s tech superstars are seen. These companies still are – and will continue to be – huge winners. But if capital markets and the economy itself became less concentrated in them, that would surely be a positive.
 

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2 October 2020

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A recovery on hold

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18 September 2020

Taking a step back to look forward

14 September 2020

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11 September 2020

Frictions and Contradictions

7 September 2020

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4 September 2020

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Big tech gets bigger while the Fed takes the easy option

24 August 2020

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21 August 2020

Fed leaves investors with a sinking feeling

17 August 2020

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14 August 2020

COVID II the sequel – as scary as the original?

10 August 2020

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7 August 2020

Living with COVID- settling into an interim ‘new normal’

3 August 2020

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31 July 2020

Summer Sunshine Beckons, But Politics Still Cast A Long Shadow

27 July 2020

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24 July 2020

PPE = Politics, Pressure and Economics

20 July 2020

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17 July 2020

Discomfort of disappearing safety nets

13 July 2020

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10 July 2020

Fast and freewheeling

3 July 2020

H1 2020 offers meaningful lessons

29 June 2020

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26 June 2020

Support - but for how long?

22 June 2020

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19 June 2020

A new normal

15 June 2020

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12 June 2020

Stock markets suffer altitude sickness

8 June 2020

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5 June 2020

Markets are enjoying an uncomfortably benign pandemic

1 June 2020

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29 May 2020

Optimistic markets despite second wave lockdown threat

22 May 2020

Just as the sun comes out, clouds appear in the East

15 May 2020

US-China cold war: Threat or blessing?

7 May 2020

Most welcome, if feeble, signs of pulling together

1 May 2020

Lock-down, Open-up

24 April 2020

Trial and error

17 April 2020

Lifting lockdown remains a delicate balancing act

10 April 2020

Fading threat of financial crisis re-opens old divides

3 April 2020

Unprecedented quarter or calm before the storm?

27 March 2020

Extraordinary: : bear and bull market all in one month

20 March 2020

Government ordered recession

13 March 2020

Notes on a crash: the short, medium and long term view

12 March 2020

Forced sellers and other distractions

9 March 2020

Oil price plunge adds pressure to stock markets

6 March 2020

Coronavirus market update

28 February 2020

From all-time high to serious market correction

21 February 2020

Bubble trouble

14 February 2020

V-shaped recovery for Valentine

7 February 2020

Markets show no fear - should they?

31 January 2020

Headwinds and tailwinds

24 January 2020

Consolidation ahead?

23 January 2020

Tatton Teaser - How are central banks fuelling stock markets?

17 January 2020

All central bank liquidity or improved outlook too?

10 January 2020

So far so good

3 January 2020

2020 starts with a Trump card

20 December 2019

2010/2020 - One decade back, one forward

13 December 2019

Brightening horizons

13 December 2019

General Election Comment

10 December 2019

Tatton Teaser - Property fund suspension

6 December 2019

Wobbly kick-off to the Festive Season

29 November 2019

Markets are driving the markets

22 November 2019

Markets pause for reality check

15 November 2019

Tatton Teaser - US downturn downtime

15 November 2019

Swilling cash eases the market mood music

8 November 2019

Recession concerns retreat

1 November 2019

Crucial October period safely behind

30 October 2019

Tatton Teaser - Bonds improving?

25 October 2019

Slowly turning

21 October 2019

Tatton Teaser - Orderly Brexit?

18 October 2019

Brexit breakthrough versus Brexit fatigue

11 October 2019

Atmospheric Improvements

4 October 2019

Stall speed economy fears spreading

27 September 2019

Ominous US-Dollar strength

20 September 2019

Diverging economic trends - catalyst for trade war resolution?

13 September 2019

Market sentiment rebound

6 September 2019

Choppy water but no storm, yet

30 August 2019

Fattening 'tails'

23 August 2019

Populism Politics Reversing Austerity?

9 August 2019

Bond Markets Unnerve Equity Markets - Again

2 August 2019

The Elephant And The Little Old Lady

26 July 2019

The Quick And The Not-So-Quick

19 July 2019

...'Twere Well It Were Done Quickly

12 July 2019

Positioning for a summer of wait and see

5 July 2019

Liquidity drives stock markets to new highs – for how long?

28 June 2019

The middle of the year - a tipping point?

14 June 2019

Mixed messages

7 June 2019

The return of the central bank put?

31 May 2019

Bond rally musings

24 May 2019

It is getting warmer

17 May 2019

Market support for Trump or unwarranted equanimity?

10 May 2019

Geopolitics re-enter market stage

3 May 2019

Central banks disappoint expectations

26 April 2019

Waning market stimuli put stock markets on notice

18 April 2019

Spring time from here?

12 April 2019

Brexit in-limbo aside, sentiment is improving

5 April 2019

Happy 10th birthday choppy bull market

29 March 2019

Quarter End

22 March 2019

Brinkmanship and extensions

15 March 2019

Bits & pieces

8 March 2019

ECB stimulus U-turn leaves markets unimpressed

1 March 2019

£-Sterling ‘applauds’ prospect of Brexit delay

25 February 2019

Progress?

15 February 2019

Brexit - an investment perspective

8 February 2019

Is 2019’s market recovery beginning to stutter?

1 February 2019

Turnaround?

25 January 2019

Market absurdities?

18 January 2019

Markets looking ahead

11 January 2019

Substantial but fragile New Year recovery

4 January 2019

Year-end turbulences heralding difficult 2019?

21 December 2018

A Turbulent Start to the Holidays

14 December 2018

The Tatton 2019 Outlook

7 December 2018

Roller-coaster Advent

30 November 2018

Predicaments

23 November 2018

Muted replay of 2015 or end of cycle approaching 2019?

16 November 2018

Brexit drama vs. renewed global slow down fears

9 November 2018

The American people have spoken

2 November 2018

Good-bye cathartic October

26 October 2018

Stock markets suffer liquidity squeeze

19 October 2018

Complicated picture suggests taking a step back

12 October 2018

Autopsy of a stock market sell-off

5 October 2018

A bond market sell off & our Brexit view

28 September 2018

Poor politics containing bond market risks?

21 September 2018

Brexit clamour vs real market news

14 September 2018

Financial Crisis - 10 years on

7 September 2018

Interesting times ahead

31 August 2018

Not the end of the world

24 August 2018

Steady markets vs. noisy politics

17 August 2018

Political strongman tactics come home to roost

10 August 2018

Summer heat wave makes way for return of political heat

3 August 2018

A gentle deceleration?

27 July 2018

Hot air for a hot summer?

20 July 2018

Earnings are growing, why worry?

13 July 2018

Trump's trade wars - Hard Brexit demonstration potential?

6 July 2018

It is getting hot

29 June 2018

Digesting or consolidating?

22 June 2018

Fragile recovery

11 June 2018

No Surprises

8 June 2018

Delicate equilibrium

1 June 2018

Ignore politics at your peril...

25 May 2018

Far more interesting than GDPR!

18 May 2018

What's going on?

14 May 2018

Batten down the hatches?

4 May 2018

Past the peak?

27 April 2018

Confusing signals?

20 April 2018

A mixture of messages

13 April 2018

Peaking, plateauing or dimming - and how about that war?

6 April 2018

Could do better

29 March 2018

End of a stormy first quarter

23 March 2018

Now we know it's risky!

16 March 2018

Back to Normal?

9 March 2018

Tariffs to growth

5 March 2018

Time to take some profits

23 February 2018

Change of direction or gradual normalisation?

16 February 2018

Breathing easier for the moment

9 February 2018

Meteoric stock markets crash back to reality

5 February 2018

Good news turns bad news - again

26 January 2018

Surprises

19 January 2018

US$ weakness versus Bitcoin and Carillion

12 January 2018

Bullish sentiment begins to ring alarm bells

5 January 2018

Encouraging kick-off

22 December 2017

Tatton's 2018 Outlook

15 December 2017

2017 drawing to a close

8 December 2017

Progress

6 December 2017

You Have Reached Your Destination

1 December 2017

Sudden but not entirely unexpected

24 November 2017

Invincible markets?

17 November 2017

Yield-curve flattening: a bad omen?

10 November 2017

Nervous investors herald more volatile markets

3 November 2017

UK rate rise: '˜one and done' or beginning of rate hiking cycle?

27 October 2017

Trick or treat season

20 October 2017

30 years

13 October 2017

All-time highs and Q3 results outlook: Reasons to be fearful or optimistic?

6 October 2017

Bad news - good news

29 September 2017

Movements

22 September 2017

QT to reverse QE and 2-year transition period to soften Brexit

15 September 2017

BoE guides for year-end rate hike - Bluff or real?

11 September 2017

'˜Back to school' amidst hurricanes, earthquakes and nuclear threats

1 September 2017

Bad news, good news

25 August 2017

Summer low or summer lull?

18 August 2017

More sellers than buyers

11 August 2017

Stocks take note of North Korea crisis - or do they?

4 August 2017

Consolidated base but momentum dwindling

28 July 2017

Summer thoughts about the '˜longer term'

21 July 2017

Summer lull - delayed

14 July 2017

Pre summer-holiday investment check

7 July 2017

Global growth ploughs on while markets take a breather

30 June 2017

Return of the Taper Tantrum?

23 June 2017

Quo Vadis Britain?

16 June 2017

Central Banks - None the Wiser

9 June 2017

Strong and Stable?

2 June 2017

Expected and unexpected turns of events

26 May 2017

End of globally synchronised growth upswing

19 May 2017

Trump trade reversal - sign of things to come?

12 May 2017

Political volatility vs. market calm

5 May 2017

Megaphone politics calming the stock markets?

28 April 2017

Pollsters win again / 100 days Trump / economy slows / risk appetite returns

21 April 2017

Snap - political risks return - or do they?

13 April 2017

Rollercoaster of expectation changes

7 April 2017

Constructive tones amongst much noise

31 March 2017

Remarkable market resilience

24 March 2017

Returning themes

17 March 2017

Return of the '˜old normal' or calm before the storm?

3 March 2017

February 2017 asset class returns

24 February 2017

One year on from the last stock market correction

10 February 2017

Market focus returns to Europe

3 February 2017

From '˜Trump Bump' to '˜Trump Slump'?

27 January 2017

Consumers make UK the G7 growth champion

13 January 2017

Living with new realities

6 January 2017

Growth boosting '˜Animal Spirits' finally returning?

16 December 2016

Good-bye 2016 - Hello 2017!

9 December 2016

Santa Rally?

2 December 2016

Exchange rates return to the spot light

18 November 2016

Bond market volatility takes centre stage

11 November 2016

Are financial markets ignoring the Trump risk?

4 November 2016

Are markets bracing for a '˜President Trump'?

28 October 2016

Sobering October

21 October 2016

UK government bonds caught in £-Sterling's downdraft?

14 October 2016

Markets buffeted by political risk and economic realities

7 October 2016

Politics are back - £-Sterling plunges - again!

23 September 2016

Definitely not (yet) Taper Tantrum II

16 September 2016

Taper Tantrum II?

9 September 2016

Back to school - end of Goldie-Locks

5 September 2016

UK business sentiment rebound

26 August 2016

Have markets '˜run out of road'?

19 August 2016

Have markets '˜run out of road'?

12 August 2016

Ultra-low UK yields '˜medicine' brings challenges but drives up returns

5 August 2016

Market rally despite UK's central bank announcing emergency support measures for the economy

29 July 2016

Summer blues on the horizon?

22 July 2016

Market exuberance or dawn of a post fiscal austerity era?

8 July 2016

'It's an ill wind that blows nobody any good''¦

10 June 2016

Oil price and bond yield moves cause stock market roller coaster

3 June 2016

Sell in May and go away?

27 May 2016

Brexit fears wane, but UK economic momentum has suffered

20 May 2016

Rate rise anxiety returns, amidst stronger economic data

6 May 2016

Search for direction after the recovery

29 April 2016

Falling US$ and rising oil prices vs. central banks' cautioning

22 April 2016

Politics, politics and politics but markets grind higher regardless

15 April 2016

Relative calm returns - as does rally scepticism

8 April 2016

The Panama Papers revelations - Morality versus Legality

1 April 2016

April fool or permanent market truce as global economy '˜refuses' to change course?

24 March 2016

Quiet markets as terrorist murders return

18 March 2016

Stock market recovery continues - because or despite US Fed meeting and UK budget?

11 March 2016

ECB's Draghi - '˜Super Mario' once more

4 March 2016

Smell of spring in the air

3 March 2016

Platform DFM Tatton goes through £2.5bn and is awarded Defaqto 5 star rating after completing 3 year track record

26 February 2016

Referendum Déjà Vu

19 February 2016

Markets coming to their senses or just a '˜Bear Squeeze'?

12 February 2016

Can markets cause a recession?

5 February 2016

Good riddance January - but will February bring investors relief?

29 January 2016

Markets close tumultuous January on the up as US Fed keeps its cool

22 January 2016

Crisis of confidence in central banks' omniscience emerging as sell-off driver

15 January 2016

Bear markets without recession tend to be brief

Media Enquiries

Roddi Vaughan-Thomas

Head of Communications and Marketing

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m: 07469 854 011

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