Weekly View - Circuit breakers
As Europe struggles with a rapidly rising second wave of coronavirus infections, the economic rebound in China is lifting the mood. The 4.9% year-on-year rise in GDP in Q3 was below consensus expectations but sufficiently impressive for us to raise our 2020 GDP growth forecast for China to 2.1% from 1.8%. Would that were the case in Europe, where just about every country is being forced to contemplate a return to some form of lockdown. With the European recovery losing steam, all eyes will be focused on October purchasing manager index (PMI) numbers this week. In short, the European economy still needs a ‘circuit breaker’ of the kind being talked about to deal with the resurgence in covid-19 cases. Until we see one, we remain upbeat on China and less so on Europe. Could we see a circuit breaker in the US this week? This weekend, US House speaker Nancy Pelosi set a 48-hour deadline for a fiscal stimulus to be passed before the 3 November elections. Hopes of a relief package potentially worth up to USD2 trn even before a new administration assumes power next January could whet the appetite for risk in the short term: but if there is no agreement, renewed focus on the elections may well increase volatility again—especially if the elections are contested.
There is no circuit breaker in sight in the endless shadow boxing of Brexit negotiations. Illusory deadlines to conclude talks come and go, with an apparent hardening of the European stance in turn prompting tougher talk from London. We remain extremely cautious on sterling, but as negotiations look to resume later this week, we are sticking to our position that the balance of probabilities is that some kind of skinny deal will eventually be fashioned.
Large US banks beat expectations in Q3 but earnings quality was suspect, with heavy reliance on investment banking and sharply lowered provisions. With net interest income seriously supressed by low interest rates and little visibility, banks are still unable to command any kind of premium. However, by pushing up bond yields, an emphatic victory for the Democrats in November could improve interest-margin prospects for US banks. Meanwhile, in Europe, results from a major French luxury conglomerate and German car manufacturer furnished proof that the stronger will emerge from the current crisis even stronger.