Last week was extremely volatile for equity markets, with indices falling between 4% and 7%. Part of the reason was the surge in Covid-related hospitalisations and the return to lockdowns or partial lockdowns in Europe. Other factors quickened the nervous mood, providing easy pretexts for dumping shares. Corporate earnings releases can obviously wrongfoot investors, especially in today’s uncertain conditions. Analysts are struggling to project earnings figures, and stretched multiples leave little room for disappointment. The icing on the cake last week was Brexit, with tense talks entering the eleventh hour, and US government’s failure to reach agreement on the next dose of fiscal stimulus.

The economic data last week tended to be better than expected. US GDP recovered by 33.1% in the third quarter versus the expected 31% while initial jobless claims clocked in at 751,000 versus a forecast of 775,000. In Europe, France’s GDP also bounced strongly, gaining 18.2% in the third quarter amid strong consumer spending. It goes without saying that these impressive figures were helped by easy quarter-on-quarter comparison following the dire second-quarter numbers. All this does not tell us much about the true state of the global economy.

The ECB left its benchmark policy rate unchanged at -0.5% but Christine Lagarde expressed concern about the prospective slowdown in growth during the fourth quarter. An additional support plan could be activated in December to cushion the economic fallout from the renewed lockdowns in Europe.

Even if volatility on equity indices has increased sharply, with the benchmark spiking above 40 points, this state of anxiety is not corroborated by credit markets. Usually, when investors are panicking, credit spreads tend to widen sharply, which is not the case today. Last week, the benchmark index rose by 35bp over the week to 5.75%, whereas in March – at the height of the panic – it exploded to a massive 14%. To some, credit remains the true stress metric in the markets. What was new last week was the return of sharp price swings, which are now spreading to former strongholds such as large caps and, in particular, ‘big tech’ in the US. Some blue chips have now sunk to levels that are good entry points for investors interested in directly held positions. Think SAP, which is 37% off its recent high, as well as Swisscom, Novartis and Apple.

So while the market is nervous, investors are not yet panicking.

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