The third quarter of the year was characterised by a rally by the main stock exchanges following the containment of the spread of the pandemic, which enabled a resumption of economic activity within the major global economies. In September, the spectre of a second wave of Covid-19 transmission and the absence of a vaccine, which probably will not be forthcoming until next year, triggered a risk-off among investors, while still allowing the main equity indices to end the quarter in positive territory. The US market in particular, driven above all by technology stocks, outperformed the European market by approximately five percentage points.
The Federal Reserve published its estimates for US GDP (-3.7% in 2020, better than expected, and +4.0% in 2021) and lowered its unemployment forecast for 2020 to 7.6% in light of the US economic recovery in recent months. In the Eurozone, the decline in GDP was estimated at 8.1% in 2020, followed by estimated growth of +5.1% in 2021.
During the period, the expansionary fiscal and monetary policies implemented by governments and central banks at the global level continued to sustain stock market performance. The assets on the Federal Reserve’s balance sheet rose by nearly 3,000 billion dollars since the end of February (equivalent to 13.4% of US GDP in 2019), whereas in fiscal terms the US government set aside more aid than provided during the 2008 financial crisis. In addition, in order to provide a further stimulus to the economy recovery, during the annual symposium in Jackson Hole, Federal Reserve Chairman Jerome Powell announced a shift in monetary policy towards “average inflation targeting”. From now on, the 2% inflation target — measured by the change in the personal consumption expenditure price index — will be measured in terms of the average of inflation, accepting periods of inflation above the target (overshooting), offsetting periods in which, as at present, inflation remains low. Finally, the US central bank stated that in order to ensure that the financial markets continue to function properly and maintain expansionary financial conditions, rates will remain at the current level of 0-0.25% until at least the end of 2023, whereas securities purchases will continue at the current pace of 80 billion dollars a month (plus 40 going to mortgage-backed securities).
Europe also mounted a unitary response to the pandemic. On the fiscal policy front, European leaders approved an extraordinary plan (the “Recovery Fund”) amounting to 750 billion euros to save the countries most affected by the economic crisis caused by the coronavirus. Among them, Italy will receive 28% of aid, for a total of 209 billion euros, to be used to reconstruct the country’s social and economic fabric. The European approach calls for most of the aid to be put towards sustainability, with a particular focus on energy resource waste. Europe has set itself the goal of becoming the first carbon-neutral continent by 2050. Accordingly, economic aid will be allocated to promote increasing de-coupling of economic growth from resource use. The adoption of EU Energy System Integration and Hydrogen Strategies paves the way to a fully decarbonised and more efficient energy sector.
In terms of monetary policy, the European Central Bank announced that rates will remain unchanged at least until the economy reaches 2% inflation and is trending above this level. The ECB has much less room to manoeuvre than the Federal Reserve, in part because its mission relates solely to price stability, without an employment level target. Securities purchases will continue through the PEPP (Pandemic Emergency Purchase Programme) at the current level of 120 billion euros a month.
In the third quarter, the Eurostoxx 50 index moved laterally, punctuated by several periods of volatility, driven above all by the development of the pandemic situation, whereas the S&P 500 and emerging market index posted gains in euro of around 3-4 percentage points, buoyed in particular by the performance of technology stocks. Sectors such as technology and cyclical industrial sectors outperformed. The energy and banking sectors instead underperformed.
In view of the ongoing economic slowdown and the significant monetary stimulus implemented by central banks, German ten-year government bond yields remained near -0.50%, whereas US Treasury yields were essentially unchanged from their lows in recent years at 0.68%. Spreads between European Monetary Union countries narrowed. In particular, in September the BTP-Bund spread reached approximately 138 bps in September, due above all to the agreement on the use of the Recovery Fund, which will make Italy the main beneficiary. In the corporate bond market, due to the considerable need for funds by companies, issuance from June to August exceeded the average for the past ten years by 80%. During the period, credit spreads initially continued the gradual normalisation process that had begun in late March, followed by a slowdown in the final weeks of September due to uncertainty relating to the solidity of the economic recovery.
On currency markets, the dollar depreciated against the euro, with the euro-dollar exchange rate passing from 1.12 to 1.17 for the quarter under review. This currency movement may pose a problem for an export-oriented economy such as that of Europe, which exports approximately 46% of its GDP, compared to 12% for the United States. The euro also gained approximately 2% against the yen and 1% against the pound sterling.
During the third quarter of 2020, the general commodities index posted a robust recovery, following the severe downturns witnessed early in the year. The main supporting factor was the gradual recovery of global economic activity, driven by the easing of the lockdown measures that had been adopted to halt the spread of the pandemic. The rally extended across all sub-segments of the general commodities index, from the most cyclical segments such as energy and industrial to those less tied to the performance of the economic cycle, such as the agricultural and precious metals sectors. The precious metals sector was once again driven by gold, purchased as a safehaven asset by investors.
The main global investment firms expect that economic activity will recover gradually in the coming months. Despite the adoption of the Recovery Fund, the Eurozone will grow more slowly than the United States. Governments and central banks will continue to adopt expansionary monetary and fiscal policies in support of the economy. In the coming weeks, there will nonetheless be many sources of uncertainty at the global level. Attention will need to be focused in particular on the development of the pandemic, the possible discovery of a vaccine and the outcome of the US elections, which will mark a major turning point for market performance in the fourth quarter of the year.