Cambridge Weekly – 2nd November 2020

Unsettled week ahead – or behind?

In the first article of The Cambridge Weekly we normally discuss the relevance of the weekly news flow for the development of our longer-term picture for our investors. Usually, our conclusion is that the noises of the week need to be put into perspective and not overinterpreted, because the long-term picture only very rarely changes abruptly. This week is different. The period we are in just now is one where the short term does have formidable influence on the longer term, so it is perhaps not surprising that capital markets as a whole were choppy over the past week.

The outcome of the US elections is keeping short-term market participants particularly trigger happy. Unhelpfully, this is exacerbated by the realisation that the severity of the COVID-19 second wave is no longer looking as benign as it did in September. Hospitalisations and fatalities among the old and infirm are rising at such an uncomfortable pace that critical care units could soon be struggling with capacity again. The economic impact of this second round of lockdowns may not be as severe as the first – because activity restrictions appear less blunt and all-encompassing – but nevertheless, the extraordinarily strong rates of economic recovery over the third quarter tell us very little about the next three months. As suggested last week, the recovery will pause and even dip into reverse for a little while, but the long-term picture of a strong 2021 will only fade if governments lose their confidence in bridging the gap once again. Central bankers and economists are still encouraging them to borrow and spend, but inevitably there will be many a politician whose natural instinct is to step on the fiscal brake instead.

Investors bullish on China

As COVID fears rattled global asset markets last week, one country was notably absent from the sell-off. China’s CSI 300 Index rallied in the midweek, while stocks across the US and Europe slid the other way. China’s breakaway from the pack has been noticeable for some time – out of the major global indices only the NASDAQ has produced a higher return over 12 months. Chinese equities have been largely flat since the summer in local currency terms, but this stands in stark contrast to the volatility seen in the S&P 500, Eurostoxx 50 and – particularly – the beleaguered FTSE 100. Perhaps more importantly, the sideways motion in local currency translates into upward momentum when measured in other major global currencies. This is due to the immense recent strength of the Renminbi, which has been gaining value against the US Dollar since May.

Central Banks join the Crypto currency party

We have seen some impressive returns in capital markets since the depths of March. US equities stole the limelight for most of the year, soaring above their pre-crisis highs in the summer, but equally impressive has been the rally in some of the less traditional assets. On a percentage basis, Bitcoin – the much-hyped cryptocurrency – has delivered some of the best returns around over the last seven months. Worth around $5,000 per coin in mid-March, Bitcoin is currently trading around $13,500. The world’s first cryptocurrency last saw such highs in 2019 – and only briefly. Before then, you would have to go back to the heady days of late 2017, just before the Bitcoin bubble burst, to see levels like these. But what makes the current rally more impressive is its stability. Unlike in the past, this looks more like sustained optimism than a sudden spike of exuberance.

Read the full commentary here