MARC JONES
Sept. 28, 2020
Financial markets roared into the second half of the year in full-throttle comeback mode. The only problem was that the coronavirus came back, too.
The pandemic never really went away, of course, but up until a few weeks ago, investors seemed happy to ride the rebound without too much worry about second waves of infection.
Fueled by more than US$20-trillion of global stimulus and supercharged tech stocks, MSCI’s world stocks index piled on 14 per cent over July and August to reclaim the record highs it surrendered in February when COVID first spiralled.
Oil gained a further 10 per cent, August saw sustained moves out of government bond and gold bolt holes, video app Zoom kept zooming and even the world’s poorest countries were on a tear in debt markets.
Then September came!
Renewed lockdowns from Melbourne to Madrid compounded concerns that the marauding rally had overshot, as rallies often do. World stocks shuddered, giving back more than 8 per cent in three weeks, and led down for once by the big tech titans.
“People just got a bit complacent in August watching all the tech stocks march higher without too much of a thought,” said IG’s chief market analyst, Chris Beauchamp. “It just needed a decent correction, and that is exactly what we got.”
Tech stocks took double-digit dunkings that wobbled the rest of the “risk” complex from corporate debt to EM currencies.
Europe’s bank stocks slumped back to a record low, while Argentina’s freshly restructured government bonds lost a quarter of their value to score the worst relaunch into markets since Greece in 2012.
$1.5-BILLION AN HOUR
The quarter as a whole still looks broadly positive, though. World stocks are up roughly 6 per cent, the FAANGS 28 per cent, oil 2 per cent, Italy’s bonds nearly 8 per cent despite 160-per-cent debt-to-GDP and stocks in the least-developed “frontier” countries have jumped 9 per cent.
A seesawing of major currencies has also happened. The safe-haven dollar was down 10 per cent from March up until the September wobble. It is still down more than 3 per cent for the third quarter, which will be its worst since mid-2017, but this month it is up 3 per cent.
“You had such a big fall in the dollar, 5 per cent [in July] in just a few weeks. So this rebound is people stepping back a bit,” said François Savary, chief investment officer of Prime Partners. “But I think it is purely a short-term phenomenon.”
For now, though, it has meant more pain in emerging markets.
Brazil’s real is down nearly 30 per cent for the year. Russia’s ruble – one of last year’s top performers – is down 16 per cent and 9 per cent in the third quarter despite a near bulletproof balance sheet. Turkey’s record-low lira has fallen a further 12 per cent this quarter while Mexico’s peso and South Africa’s rand are down 14 per cent and 20 per cent for the year despite calmer third quarters.
With global central banks hoovering up bonds at a rate of US$1.5-billion an hour according to BofA analysts, life has remained good in debt markets.
Italy’s 10-per-cent bond returns have been helped by a supersized COVID rescue plan, Suriname’s bonds have made 33.5 per cent as its fears of default have eased, while even hyperinflation-hit Venezuela has jumped 19 per cent, albeit still only to 12 U.S. cents on the dollar.
WHEN SEPTEMBER ENDS
And there is still the fourth quarter to navigate with its race for a COVID-19 vaccine, the race for the White House and the race to avoid a no-deal Brexit that would end a 3½-year-long Britain-Brussels standoff with an explosive bang.
Ashmore’s Jan Dehn is bracing for another wild few months.
"Data are not getting any stronger and are beginning to roll over, and you have all the political noise ahead of the U.S. elections, which is starting to get a little frayed.
“On top of that, we have markets which are very expensive because they have rallied like mad since March,” he said.
