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Stock indices recover some lost ground

Stock indices recover some lost ground

This week we wave goodbye to the troublesome month of September and push into the fourth quarter of 2020. Global stock markets struggled throughout the month despite a last-minute bounce. After a strong start which saw the S&P 500 achieve a fresh all-time record close, the index went into reverse gear. By the end of last week, it had retracted over 8% from its 2nd September top.

Tech issues

Things have been even worse for the NASDAQ 100. The tech-heavy index lost over 10% from its own record close at the beginning of the month. Hardly surprising as the market sell-off was led by those top tech darlings. Going into the new week, Facebook, Alphabet (Google’s parent company) and Apple had all lost 16%, with Amazon off 13% and Microsoft down a mere 10%. Bear in mind that these five tech giants had dramatically outperformed the broader market since the beginning of this year. But for all the recent talk of a rotation, a situation where investors take profits on their best performing stocks (in this instance, big tech) and use the proceeds to buy undervalued ones, there’s little evidence for this phenomenon. As an example, the broad-based Russell 2000 index (which comprises around 2,000 mid-sized US companies) lost around 8% in September, same as the S&P. If rotation is going on, it hasn’t yet happened to a significant degree.

Other noteworthy moves

There have been some other noteworthy moves this month. Following a seemingly relentless decline since late March which saw the US Dollar Index lose nearly 12%, the dollar has rallied sharply, gaining around 2.5% against the Euro.  Meanwhile precious metals took a nasty tumble. Gold has lost 6% over the month so far, taking it down to $1,850 last week. Bear in mind, it hit an all-time high of $2,070 in early August. But the decline in silver was on a different scale. While notorious for its volatility, this month’s drop took many experienced players by surprise. Silver lost 23% from the beginning of the month to last Thursday’s low when it broke back below $22 per ounce to levels last seen two months ago.

This week’s key releases

With the third quarter nearly behind us, this week we have a small clutch of second quarter corporate earnings to round things off. In our weekly ‘Highlights’ feed we feature Wolseley, Bed Bath and Beyond, Constellation Brands and PepsiCo. Then we can look forward to the third quarter earnings season which gets underway the week commencing 12th October. As far as economic data is concerned, Chinese Manufacturing and Non-Manufacturing PMIs are released on Wednesday with US Manufacturing PMI following on Thursday. But the most important data release is Friday’s US Non-Farm Payrolls, the last update before the Presidential Election on 3rd November. We’ll take an in-depth look at Payrolls and analysts’ expectations later this week. We will also dig into the data thrown up by our Smart News social media widget to look for anything unusual there.

The economy matters

But before then, it’s worth repeating that US economic data releases are gaining in importance the closer we get to the election. Usually this wouldn’t be the case as it’s not something that most voters pay much attention to but Donald Trump has spent the last four years emphasising how well he has done in boosting the US economy. Not only this, but he has done something that previous presidents have shied away from in that he has tied his success as President to the stock market’s performance. This would appear to be a high-risk strategy. Markets go down as well as up, but perhaps Mr Trump isn’t being completely daft – investors know that he has their interests at heart. After all, they are the same interests as his own. As far as headline measures of the US economy are concerned, everything was going quite well until the coronavirus pandemic took hold. US unemployment hit its lowest level in over fifty years this March.

In addition, President Trump interfered in monetary policy by repeatedly berating Federal Reserve Chairman Jerome Powell for raising interest rates and reducing the central bank’s bond buying programme. The bullying seemed to work, even though it could be argued that Mr Powell changed his mind on raising rates after the stock market plunged 20% in the last three months of 2018. Now it’s clear that the economy and the stock market are two totally separate things. As we are currently seeing, stock markets can hit record highs even when most of the world is technically in a recession. But Mr Trump is going to find it much more difficult to take credit for a strong economy given the current situation. What’s more, anytime he blames Covid-19, he’ll be blasted for what many people say was his poor response to the pandemic.

First Presidential debate

This Tuesday sees the first of three presidential debates between President Trump and Joe Biden. The subjects were announced last week with the coronavirus and the economy being major topics, along with the Supreme Court nomination, social unrest, election integrity and the candidates’ records. It could be that the President gets quizzed about his tax returns after an unflattering story broke over the weekend. Meanwhile, the bar has been set low for Joe Biden in this debate. If he can avoid getting in too much of a muddle, his performance will probably be viewed positively by commentators.

Smart News

You can follow all this and more by clicking on our Smart News widget in the bottom right hand corner of the trading platform. Here you’ll see all the top social media commentary regarding the election and the financial markets, helping you to get ahead of mainstream media.

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