October’s news flow was dominated by the resurgence of COVID-19 in Europe, and the US elections.  As a result markets spent much of the month without clear direction, before the announcement of widespread restrictions across Europe in the final days of the month tipped the balance of risks to the downside.  A stronger than expected showing by President Trump in the US election meant that confirmation of Joe Biden’s victory was delayed but with the Senate expected to remain in Republican control, concerns over a major shift in the economic direction of the country receded and markets gained.

Europe is unfortunately suffering a second wave of coronavirus infections with all major economies now reporting new highs in infection rates.  The policy response has been much more targeted than that seen in the spring, with governments imposing local restrictions in a bid to avoid national lockdowns. This approach appears to have had only limited success with a number of countries subsequently re-imposing national level restrictions. Against this backdrop data measuring economic activity has started to move lower as containment measures take hold.  Data has also highlighted a split between the manufacturing sector, which has continued to recover and service sectors, which are once again subject to restrictions.

The issue of Brexit also re-emerged last month, with members of the European Council meeting on 15-16 October (which was previously seen as a key deadline) failing to reach agreement on a deal.  After negotiations were briefly paused, talks are now intensifying as both sides seek to agree a trade deal before the year end. Markets seem to believe that a deal will be reached with the re-imposition of the drag on the UK and EU’s economies from pandemic related restrictions adding to the pressure to reach a compromise. Risks do however remain of a breakdown in talks, and any deal is likely to be narrow.

UK equity markets declined sharply at the end of October, ending the month down -3.8%.  The pound fluctuated with Brexit headlines but ended the month at the same level against the US dollar as it started. UK 10-year Gilt yields rose by just over 10 basis points, resulting in negative returns in a month where UK equities also declined compounding their losses for the year.  Returns from government bonds this year have been very robust however as their safe haven qualities have been boosted by the prospect of very low or even negative interest rates, for a prolonged period of time.

In the US, while the virus remains prevalent, attention focused primarily on the presidential election.  Up to the election date the Democratic nominee Joe Biden extended his lead in the national polls and ended October eight points ahead, as well as holding his lead in a number of the key swing states.  Markets responded positively to polls indicating an increased likelihood of a Democratic sweep of the House, Senate and the presidency with concerns over tax hikes seen as less important than a clear-cut outcome that would unlock a wave of fiscal stimulus.  With the actual result much closer than anticipated and the Democrats considered unlikely to win the Senate, higher taxes and tighter regulation of technology companies have become less likely, but some form of fiscal stimulus package before the end of the year still seems probable.

Positive gains in US and European stocks over the first few weeks of October were erased in the last week of the month, as market volatility increased in reaction to new lockdowns.  The S&P 500 ended October down -2.7%, while Europe ex-UK stocks were the biggest laggard, down -5.4%.  Asia was the regional winner, with strong Chinese data helping emerging market stocks to return +2.1% over the month.

China’s success in controlling the virus has allowed its economic recovery to gather pace, with third-quarter GDP growth coming in at +4.9% year on year.  After a strong bounce over the summer, China now looks set to be one of the only major nations that will see positive economic growth in aggregate over 2020 relative to 2019. Chinese imports have also recovered with the latest data for September showing imports +13.2% higher year on year.  A resurgent Chinese consumer may help international exporters, given the potential for weaker demand in their home markets.

In fixed income, US 10-year Treasury yields rose by 18 basis points, while European virus concerns pushed 10-year German government bond yields 10 basis points lower.  UK 10-year Gilt yields rose by just over 10 basis points, resulting in negative returns in a month where equities also declined. Corporate bonds were broadly flat, with returns of -0.1% for global investment grade credit.

More positive news on coronavirus vaccine developments and the early reaction to the US election results have contributed to markets making a stronger start to November, with the US technology sector leading the way as the likelihood of corporate tax increases and/or tighter regulation, receded.

November is set to be another very busy month as the US election results are digested, the progress of several late stage coronavirus vaccine trials are awaited and the outcome of Brexit trade deal negotiations all contribute to giving a clearer picture of the outlook for 2021.  A balance across asset classes, business sectors, and geographical regions in portfolios remains appropriate with the outcome.

Market Performance


2020 Year to Date Total Returns
FTSE All-Share -19.12%
FTSE World ex-UK (GBP) +7.03%
FTSE Actuaries UK Conventional Gilt All Stocks +7.78%
FTSE Actuaries UK Index-Linked All Stocks +11.76%


Performance to 4 November 2020


Key Rates  
Bank of England Base Rate 0.10%
Inflation (Retail Prices Index)* 1.10%


 *September 2020