Quarter in Review Q3 2020

Key quarterly themes

Global economy regains its footing

Covid-19 – vaccine hopes temper virus fears

Political risk on the rise (US Presidential election, Brexit

Markets snapshot

The MSCI AC World equity benchmark rose 7.1% (3.7% in euro terms).

The US rose 9.6% (5.0% in euro terms) as the US Federal Reserve (Fed) indicated that interest rates will not be raised until at least the end of 2023. Policymakers also announced a new average inflation target. Economic growth exceeded expectations throughout the period, resulting in upgrades to third-quarter growth forecasts.

Emerging-market equities rose 8.8% (5.1% in euro terms), benefiting from the weaker US dollar – it was positive for flows into emerging-market regions and continued improvement in the Chinese economy.

Pacific Basin equities fell -0.7% (-2.3% in euro terms), with Hong Kong weak on the back of rising Covid-19 cases and tensions stemming from new security measures to limit anti-government opposition.

The UK fell -4.6% (-4.4% in euro terms) as Brexit-related uncertainty remained a challenge. In addition, the UK economic recovery lagged those evident elsewhere in the world and there was a risk of tighter restrictions to combat a renewed rise in Covid-19 case numbers.

The ICE BofA Merrill Lynch Eurozone >5-year sovereign bond benchmark rose 2.5%. German 10-year yields fell to -0.52% as the European Central Bank (ECB) and other central banks maintained accommodative monetary policies and continued to buy large amounts of bonds.

Peripheral spreads narrowed as the EU announced a Recovery Fund of €750bn, including €390bn of grants, which is an effective fiscal transfer from the core to peripheral countries and was seen as strengthening the long-term outlook for the Eurozone. Spreads were also supported by the ECB’s ongoing asset-purchase programme.

European investment-grade corporate bonds rose 2.0% as yields and spreads fell to 0.59% and 117bps, respectively. Concerns over potential defaults eased as the growth backdrop improved.

The euro rose against the US dollar to 1.1722, benefiting from the policy commitment of fiscal transfers to peripheral regions within the EU Recovery Fund. This was seen as reducing risks of a Eurozone breakup. The US dollar was weaker against most currencies after the Fed’s guidance that it would not raise interest rates until at least the end of 2023. The US dollar also tends to be regarded as a ‘safe haven’ currency, so it declined in the more ‘risk on’ environment evident through the quarter.

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