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Politics, economics and a pandemic: Equity markets under pressure – Investors' Corner BNP Paribas

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Early trading in September saw heavy profit-taking, the US S&P 500 index having just set a record high when it closed on 2 September, the same day it had marked a rise of nearly 11% since the start of the year.

Labouring under substantial profit-taking and certain technicalities, US tech stocks were hit particularly hard, with the Nasdaq composite index correcting by 10% between 2 and 8 September.

These swings brought with them a rise in implied volatility: The VIX index, calculated on S&P 500 options, rose in a few days from 22 to 34, its highest since the end of June.

However, there was only limited contagion to other major stock markets and other risky assets and so the ‘risk off’ phase failed to really take hold.

  • Firstly, volatility eased and eurozone indices held up well for most of the month; in Tokyo, the stock market even ended slightly higher.
  • Secondly, US equities rose at the end of the period, driven in particular by hopes of an agreement in Congress on new fiscal measures.

Over the month, global equities fell by 3.4% (MSCI AC World index in US dollar terms). Coming after five consecutive monthly gains, the drop reflected concerns about the resurgence of COVID-19. The rise in the number of infected cases and hospitalisation led many countries to beef up social distancing measures: There was a re-imposed lockdown in Israel, local lockdowns in Spain, restrictions on public gatherings and shorter bar and restaurant opening hours in France, the UK and Germany in particular.

The threat of a second wave and such responses reminded investors of the real uncertainties hanging over the global economy – something they had chosen to ignore mostly during the summer. Disappointing activity indicators, particularly in the eurozone, fuelled investor concerns by highlighting signs that the recovery was running out of steam after the mechanical (and rapid) catch-up since May.

Against this backdrop, the renewed commitments from the main central banks to maintain their highly accommodative monetary policies for a long time, or even to take additional measures if needed, failed to fully reassure equity investors.

Recent economic data has been encouraging. Activity is returning to pre-pandemic levels in many sectors of the Chinese economy and the pick-up in demand on Asian exporters is favourable. Moreover, the epidemic appears to be under better control than in major Western countries and other emerging markets. Emerging Asia’s better resilience helped the MSCI Emerging Markets index (-1.8% in USD terms) outperform developed markets.

US equities underperformed other major markets. The S&P 500 lost 3.9% and the Nasdaq composite 5.2%. This decline, however, still leaves the Nasdaq up by 24.5% year-to-date (+4.1% for the S&P 500).

European stock markets ended down: -2.4% for the EuroSTOXX 50, which has fallen by 14.7% so far in 2020, reflecting in particular by the weakness in financial stocks.

In Tokyo, the Topix ended up slightly (+0.5%), supported by the Bank of Japan’s asset purchases and by the recovery in demand in Asia. The Japanese government’s change of leadership, which was quick and smooth, was seen as ensuring continuity in economic policy.

At the global level, cyclical sectors, including some subsectors of technology, outperformed the rest of the market. Energy and banks saw the biggest monthly declines.

The EUR/USD exchange rate, having peered above 1.20 on 1 September, first stabilised at around 1.18 before heading towards 1.16. Market participants had expected comments from members of the ECB Governing Council to end the rapid appreciation of the euro since late May, when the exchange rate was below 1.10.

Market moves in September were a result of concerns over eurozone growth and the drop in equities that led investors to favour the US dollar.

EUR/USD finished the month at 1.1743, down by 1.7% compared to the end of August. Even so, the euro appreciated over the third quarter.

Exhibit 1: Changes in the EUR/USD exchange rate from January 2018 to September 2020

After the ECB’s policy meeting on 10 September, there were no changes in key rates, asset purchase programmes or forward guidance. While this had largely been expected, observers were disappointed on several points, and were left with the impression that the ECB’s stance was a little less dovish than expected.

This feeling was compounded by various rumours that some council members would have liked the upward revision of the GDP forecast to have been better highlighted. An 8% drop in eurozone GDP is now expected for 2020, while in June the ECB had forecast a drop of 8.7%. This was mainly due to a somewhat smaller decline in Q2.

The ECB’s reaction to the euro’s gains seemed low key. As is customary, the ECB has talked about the effects on inflation of a strong currency. However, its statements have remained muted and suggest the council is not too concerned about the euro hovering at around USD 1.18. Yet only the day after the meeting, several comments on this topic suggested dissensions among council members.

Against this background, expectations remain high for an announcement in December of a further increase in the asset purchase enveloppes, or a reallocation between programmes – and this despite some comments giving the impression that the envelope of the PEPP (Pandemic emergency purchase programme) may not be fully used.

The investor optimism that prevailed in July and August weakened in September. The difficulties encountered at the start of the month by US tech stocks spread to other risk assets, although without markets reaching for the panic button.

As signs of a second wave of COVID-19 mount, investors seem to have suddenly become aware of the fragility of the global economy. After the slump in activity in the spring and the rapid rebound from May onwards, momentum has recently flagged.

In addition, as the US election approaches and Brexit negotiations enter the final straight, political factors will come more to the fore in the coming weeks.

And among these health, economic and political uncertainties, there are likely to be delays in the adoption of new fiscal support measures in the US and Europe. Equity movements could be erratic in the short term even if a still rather cautious investor positioning is likely to limit the downside.

In the medium term, proactive economic policies should ensure a favourable environment. The message from central banks is clear: The monetary policies put in place will allow long-term rates to remain low for a long time.

Such an environment is supportive of equities and risk assets generally. In addition, advances in medical research should become more tangible over coming months and help boost economic agents’ confidence. This remains crucial for a sustainable recovery that can spread across all sectors.

Beyond possible short-term headwinds, we remain cautiously optimistic and, depending on the signals sent by our proprietary market ‘temperature’ indicators, we may look at bearish developments as opportunities to strengthen our equity position.


Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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Review finds no case for formal probe of Beijing’s activities under elections law

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OTTAWA – The federal agency that investigates election infractions found insufficient evidence to support suggestions Beijing wielded undue influence against the Conservatives in the Vancouver area during the 2021 general election.

The Commissioner of Canada Elections’ recently completed review of the lingering issue was tabled Tuesday at a federal inquiry into foreign interference.

The review focused on the unsuccessful campaign of Conservative candidate Kenny Chiu in the riding of Steveston-Richmond East and the party’s larger efforts in the Vancouver area.

It says the evidence uncovered did not trigger the threshold to initiate a formal investigation under the Canada Elections Act.

Investigators therefore recommended that the review be concluded.

A summary of the review results was shared with the Canadian Security Intelligence Service and the RCMP. The review says both agencies indicated the election commissioner’s findings were consistent with their own understanding of the situation.

During the exercise, the commissioner’s investigators met with Chinese Canadian residents of Chiu’s riding and surrounding ones.

They were told of an extensive network of Chinese Canadian associations, businesses and media organizations that offers the diaspora a lifestyle that mirrors that of China in many ways.

“Further, this diaspora has continuing and extensive commercial, social and familial relations with China,” the review says.

Some interviewees reported that this “has created aspects of a parallel society involving many Chinese Canadians in the Lower Mainland area, which includes concerted support, direction and control by individuals from or involved with China’s Vancouver consulate and the United Front Work Department (UFWD) in China.”

Investigators were also made aware of members of three Chinese Canadian associations, as well as others, who were alleged to have used their positions to influence the choice of Chinese Canadian voters during the 2021 election in a direction favourable to the interests of Beijing, the review says.

These efforts were sparked by elements of the Conservative party’s election platform and by actions and statements by Chiu “that were leveraged to bolster claims that both the platform and Chiu were anti-China and were encouraging anti-Chinese discrimination and racism.”

These messages were amplified through repetition in social media, chat groups and posts, as well as in Chinese in online, print and radio media throughout the Vancouver area.

Upon examination, the messages “were found to not be in contravention” of the Canada Elections Act, says the review, citing the Supreme Court of Canada’s position that the concept of uninhibited speech permeates all truly democratic societies and institutions.

The review says the effectiveness of the anti-Conservative, anti-Chiu campaigns was enhanced by circumstances “unique to the Chinese diaspora and the assertive nature of Chinese government interests.”

It notes the election was prefaced by statements from China’s ambassador to Canada and the Vancouver consul general as well as articles published or broadcast in Beijing-controlled Chinese Canadian media entities.

“According to Chinese Canadian interview subjects, this invoked a widespread fear amongst electors, described as a fear of retributive measures from Chinese authorities should a (Conservative) government be elected.”

This included the possibility that Chinese authorities could interfere with travel to and from China, as well as measures being taken against family members or business interests in China, the review says.

“Several Chinese Canadian interview subjects were of the view that Chinese authorities could exercise such retributive measures, and that this fear was most acute with Chinese Canadian electors from mainland China. One said ‘everybody understands’ the need to only say nice things about China.”

However, no interview subject was willing to name electors who were directly affected by the anti-Tory campaign, nor community leaders who claimed to speak on a voter’s behalf.

Several weeks of public inquiry hearings will focus on the capacity of federal agencies to detect, deter and counter foreign meddling.

In other testimony Tuesday, Conservative MP Garnett Genuis told the inquiry that parliamentarians who were targeted by Chinese hackers could have taken immediate protective steps if they had been informed sooner.

It emerged earlier this year that in 2021 some MPs and senators faced cyberattacks from the hackers because of their involvement with the Inter-Parliamentary Alliance on China, which pushes for accountability from Beijing.

In 2022, U.S. authorities apparently informed the Canadian government of the attacks, and it in turn advised parliamentary IT officials — but not individual MPs.

Genuis, a Canadian co-chair of the inter-parliamentary alliance, told the inquiry Tuesday that it remains mysterious to him why he wasn’t informed about the attacks sooner.

Liberal MP John McKay, also a Canadian co-chair of the alliance, said there should be a clear protocol for advising parliamentarians of cyberthreats.

This report by The Canadian Press was first published Sept. 17, 2024.

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NDP beat Conservatives in federal byelection in Winnipeg

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WINNIPEG – The federal New Democrats have kept a longtime stronghold in the Elmwood-Transcona riding in Winnipeg.

The NDP’s Leila Dance won a close battle over Conservative candidate Colin Reynolds, and says the community has spoken in favour of priorities such as health care and the cost of living.

Elmwood-Transcona has elected a New Democrat in every election except one since the riding was formed in 1988.

The seat became open after three-term member of Parliament Daniel Blaikie resigned in March to take a job with the Manitoba government.

A political analyst the NDP is likely relieved to have kept the seat in what has been one of their strongest urban areas.

Christopher Adams, an adjunct professor of political studies at the University of Manitoba, says NDP Leader Jagmeet Singh worked hard to keep the seat in a tight race.

“He made a number of visits to Winnipeg, so if they had lost this riding it would have been disastrous for the NDP,” Adams said.

The strong Conservative showing should put wind in that party’s sails, Adams added, as their percentage of the popular vote in Elmwood-Transcona jumped sharply from the 2021 election.

“Even though the Conservatives lost this (byelection), they should walk away from it feeling pretty good.”

Dance told reporters Monday night she wants to focus on issues such as the cost of living while working in Ottawa.

“We used to be able to buy a cart of groceries for a hundred dollars and now it’s two small bags. That is something that will affect everyone in this riding,” Dance said.

Liberal candidate Ian MacIntyre placed a distant third,

This report by The Canadian Press was first published Sept. 16, 2024

The Canadian Press. All rights reserved.

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Trudeau says ‘all sorts of reflections’ for Liberals after loss of second stronghold

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OTTAWA – Prime Minister Justin Trudeau say the Liberals have “all sorts of reflections” to make after losing a second stronghold in a byelection in Montreal Monday night.

His comments come as the Liberal cabinet gathers for its first regularly scheduled meeting of the fall sitting of Parliament, which began Monday.

Trudeau’s Liberals were hopeful they could retain the Montreal riding of LaSalle—Émard—Verdun, but those hopes were dashed after the Bloc Québécois won it in an extremely tight three-way race with the NDP.

Louis-Philippe Sauvé, an administrator at the Institute for Research in Contemporary Economics, beat Liberal candidate Laura Palestini by less than 250 votes. The NDP finished about 600 votes back of the winner.

It is the second time in three months that Trudeau’s party lost a stronghold in a byelection. In June, the Conservatives defeated the Liberals narrowly in Toronto-St. Paul’s.

The Liberals won every seat in Toronto and almost every seat on the Island of Montreal in the last election, and losing a seat in both places has laid bare just how low the party has fallen in the polls.

“Obviously, it would have been nicer to be able to win and hold (the Montreal riding), but there’s more work to do and we’re going to stay focused on doing it,” Trudeau told reporters ahead of this morning’s cabinet meeting.

When asked what went wrong for his party, Trudeau responded “I think there’s all sorts of reflections to take on that.”

In French, he would not say if this result puts his leadership in question, instead saying his team has lots of work to do.

Bloc leader Yves-François Blanchet will hold a press conference this morning, but has already said the results are significant for his party.

“The victory is historic and all of Quebec will speak with a stronger voice in Ottawa,” Blanchet wrote on X, shortly after the winner was declared.

NDP Leader Jagmeet Singh and his party had hoped to ride to a win in Montreal on the popularity of their candidate, city councillor Craig Sauvé, and use it to further their goal of replacing the Liberals as the chief alternative to the Conservatives.

The NDP did hold on to a seat in Winnipeg in a tight race with the Conservatives, but the results in Elmwood-Transcona Monday were far tighter than in the last several elections. NDP candidate Leila Dance defeated Conservative Colin Reynolds by about 1,200 votes.

Singh called it a “big victory.”

“Our movement is growing — and we’re going to keep working for Canadians and building that movement to stop Conservative cuts before they start,” he said on social media.

“Big corporations have had their governments. It’s the people’s time.”

New Democrats recently pulled out of their political pact with the government in a bid to distance themselves from the Liberals, making the prospects of a snap election far more likely.

Trudeau attempted to calm his caucus at their fall retreat in Nanaimo, B.C, last week, and brought former Bank of Canada governor Mark Carney on as an economic adviser in a bid to shore up some credibility with voters.

The latest byelection loss will put more pressure on him as leader, with many polls suggesting voter anger is more directed at Trudeau himself than at Liberal policies.

This report by The Canadian Press was first published Sept. 17, 2024.

The Canadian Press. All rights reserved.

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