Equity markets delivered their worst monthly returns since March as the prospect of further lockdowns spooked investors. As has been the case throughout 2020, the disease outlook remains the key variable for markets. Rising infections and increasing hospitalisations led many European countries to tighten lockdown restrictions. Heightened risk aversion due to the Covid situation was exacerbated further by the impending US election.
November’s US Presidential election loomed large in investors’ minds as both candidates made their final appeal to the nation. Despite the drama of President Trump catching Covid, Supreme Court nominations, and the final debate, there was little evidence that much has changed in the race. Challenger Joe Biden’s polling lead held steady and he remains favourite to win the election. Predicting the initial market reaction is trickier than usual. A comprehensive Biden victory would likely lead to fears of higher taxes and increased regulation, but in this case many will welcome the prospect of a more predictable Presidency. In the long-run, though, history tells us that markets are relatively agnostic to the party affiliation of the resident of the White House.
A number of European countries announced the reinstatement of nationwide lockdowns to combat the steady increase in infection. While less restrictive than the lockdowns earlier in the year, they will nonetheless have a significant impact on economic activity. Investors’ initial reactions, however, appear to be to largely look through the short-term economic impact and focus on the prospect of a successful vaccine and economic recovery in 2021. Should there be any material slippage in the timeline for a vaccine markets will respond negatively.
With the mid-November deadline for trade talks between the UK and EU fast approaching, both sides talked positively about the prospects of a deal. The reduced likelihood of a ‘no deal’ outcome initially led to a rebound in sterling although this petered out as risk assets came under pressure later in the month.