LONDON (Reuters) – 1/GO FOURTH
An extraordinary year is shuffling into its final stretch and it’s packed with blockbuster events — the race for a coronavirus cure or vaccine, a seismic U.S. presidential election and a possible no-deal Brexit that would end a 3-1/2 year long UK-Brussels standoff with a bang.
Squaring the books after Q3 will be interesting too.
Markets have lost altitude lately but top tech stocks, while some 20% off peaks, are still up 65% year-to-date. Chinese shares have leapt 13%, while a dollar that spent recent months slumbering could suddenly be heading for its best month since 2016.
(Graphic: Asset price performance since the coronavirus – https://fingfx.thomsonreuters.com/gfx/mkt/dgkvlbjwrvb/themesASSETS2509.PNG)
2/ STIMULUS AND VACCINES
By now we were meant to have resumed shopping, dining, travelling and commuting. Instead, regional lockdowns are returning, the global COVID-19 deathcount is marching toward a million and stocks are swooning.
All that has trained market focus on stimulus and vaccines. Governments from Canada and Britain to Thailand are stepping up on the former. The U.S. Congress is dithering over further relief but the possibility of mass evictions and defaults in an election year may persuade lawmakers to break the deadlock.
As for vaccines, several companies are conducting final-stage clinical trials; any signs of their efficacy would likely boost sentiment.
The COVID resurgence has ended talk of V- or U-shaped bouncebacks. Without more stimulus or vaccines, the trajectory could end up looking like a W or even an L.
(Graphic: World stocks vs confirmed COVID-19 cases – https://fingfx.thomsonreuters.com/gfx/mkt/nmovawyjmva/ThemeCOVID2509.PNG)
September U.S. jobs data, out on Friday, will be watched even more closely than usual over growing concern on lawmakers’ failure to agree on fresh fiscal stimulus to protect the economy. This will also be the final monthly gauge of the U.S. jobs market before Election Day on Nov. 3.
Analysts polled by Reuters expect payrolls rose 875,000, after growing by 1.371 million in August. Recent data, including weekly jobless claims, suggest a nascent economic recovery may be fading as the effects of the last fiscal stimulus wane.
Fed chief Chair Jerome Powell on Thursday told lawmakers that fresh fiscal stimulus could make the difference between a continued recovery and a much slower economic slog.
But a new deal before the presidential election looks unlikely, dimming the prospects for stock markets already hurt by election uncertainty and concern about the economy. A weak payrolls number could add to the angst.
(Graphic: U.S. payrollls data – https://fingfx.thomsonreuters.com/gfx/mkt/jznpnllrkpl/Pasted%20image%201600987032270.png)
4/ OH WOEFUL INFLATION
Preliminary September euro zone inflation data is out Wednesday and, rest assured, the ECB will be watching closely.
August inflation turned negative for the first time since May 2016. With the economy showing signs of weakening amid the coronavirus resurgence, concern is growing. ECB board member Fabio Panetta warned that inflation remains “uncomfortably” below its near-2% target.
Market-based inflation expectations, closely tracked by rate-setters, are also flashing warnings, having fallen to two-month lows. No wonder that speculation about another round of ECB stimulus before year-end is building, as are expectations for a rate cut in 2021.
(Graphic: Inflation headache for the ECB – https://fingfx.thomsonreuters.com/gfx/mkt/ygdvzkkanpw/theme2409.png)
5/ BANKING ON A DEAL?
European policymakers have stopped worrying that the region’s banks are too big to fail and instead fret they are too small to survive.
Average return on equity – a measure of profitability – at European banks is around 7%, half that of their American peers. The STOXX Europe 600 bank index () has fallen back below levels hit during the 2008 crisis and hovers off record lows.
For regulators, deals may be the only way out of the malaise. They are trying to make tie-ups easier — helping drive mergers of domestic retail lenders in Italy and Spain this year.
Now focus is on banking giants, with sources saying UBS examined a tie-up with Credit Suisse (SIX:) earlier this year. Deutsche Bank (DE:) hinted this week it could join the fray once it finishes its latest overhaul.
Muted share price reaction suggest investors have limited confidence mega deals can be pulled off just yet. But with losses caused by COVID-19 set to crystallise in the coming months, some may soon have no other option.
(Graphic: European bank stocks vs the broader market –