Weekly Market Recap

Getting ahead of things

26/10/2020

Week in review

Australian preliminary retail sales -1.5% m/m for September
Chinese economy expands 4.9% y/y in 3Q
RBA minutes solidify market view of November rate cut

Week ahead

U.S. durable goods
Australia CPI inflation for 3Q
U.S. 3Q real GDP

Thought of the week

Spiraling COVID cases in the U.S. and Western Europe have done little to dampen investor appetite in recent weeks. The promise of further fiscal spending in the U.S. has been too great a pull in an environment where the alternative, government bonds, have little appeal. However, there are those that are still concerned that the equity market has run ahead of economic fundamentals. This week’s chart illustrates the gap between the market view and consumer confidence, historically a rather close relationship. The stock bond ratio compares the total return of global equities to that of global government bonds. Given the very low yields, and the supportive nature of central banks and governments, it could be argued that the gap to economic data such as consumer confidence is warranted. The alternative view is that the market has already priced in the good news to come, and it would really take a big shift in earnings expectations to drive equities higher, while the stalling economic backdrop presents a material risk of a correction.

Markets already reflect some big improvements
Stock bond ratio and consumer confidence

Source: Bloomberg Barclays, FactSet, J.P. Morgan Securities, MSCI, J.P. Morgan Asset Management, all returns in local currency unless otherwise stated.
Equity price levels and returns: Levels are prices and returns represent total returns for stated period.
Bond yields and returns: Yields are yield to maturity for government bonds and yield to worst for corporate bonds. All returns represent total returns. AusBond Comp is the AusBond Composite 0+ Yr, AusBond IG is the AusBond Credit 0+ Yr both provided by Bloomberg.
Currencies: All cross rates are against the Australian dollar. An appreciation of the foreign currency against the Australian dollar would be positive and a depreciation of the foreign currency against the Australian dollar would be negative.

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