Financial Markets Monthly - October 2020

A second wave of COVID-19 infections that health officials feared is underway in many countries. Case growth in some areas has surpassed (or looks set to) rates seen in the spring, though increased testing capacity makes comparisons challenging. For now, hospitalization rates and ICU usage suggest a less acute health crisis than early in the pandemic, though trends are starting to move in the wrong direction. Governments are responding by tightening containment measures though we don’t anticipate a return to the lockdown conditions put in place earlier this year. Still, for an economic recovery that in many countries was already displaying less momentum—incremental GDP and job gains shrinking over the summer—more business closures and restrictions on activity won’t help.

Coronavirus is the most significant risk, but political uncertainty is also elevated. In the US, lawmakers have failed to agree on another stimulus package, despite Fed Chair Powell’s repeated calls for additional fiscal help. While piecemeal support is still on the table, President Trump says a more comprehensive deal will have to wait until after the election. Polls show a growing lead for Biden but potential delays in determining results and questions around a smooth transition of power could see uncertainty persist beyond November 3. In the UK, Brexit concerns are once again returning to the fore as the end of a year-long transition period comes into view without a trade deal between the UK and EU. In Canada, though, extension of government support for households was enough for the minority Liberals to avoid a fall election.

Financial markets have been in a holding pattern with investors trying to suss out virus trends and policy impacts. The S&P 500 fell by nearly 10% from its record high in early-September but has since retraced about half those losses (currently hovering just above its pre-pandemic peak). Government bond yields have crept slightly higher but are within well-worn ranges, pinned down by accommodative monetary policy. The US dollar is up slightly from its late-summer lows and WTI oil prices aren’t straying far from US$40 per barrel.


  • The US economy likely saw impressive GDP growth in Q3, but slowing job gains suggest more muted growth in Q4. Stimulus negotiations have stalled and additional fiscal support could have to wait until after the November 3 election.
  • Canada saw a surprising acceleration in job growth in September, but other indicators suggest less momentum heading into the fall. Rising case counts are concerning but government support for households remains steady.
  • Forward guidance from the Fed and BoC suggest policy rates will remain at current levels for years to come. The BoC still isn’t ruling out negative rates (“never say never”) but we think any policy changes are more likely to be made through its QE program.
  • UK GDP disappointed in July, and headwinds from rising COVID-19 cases, additional containment measures, fading fiscal support, and Brexit suggest activity will remain soft in the coming months. We expect the BoE will respond with additional QE, and eventually a negative bank rate.
  • The latest survey data suggest euro area growth is stalling, particularly in countries like France and Spain where COVID-19 cases have risen sharply. Still, we don’t see the ECB pushing interest rates further into negative territory.


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Josh Nye is a senior economist at RBC. His focus is on macroeconomic outlook and monetary policy in Canada and the United States. His comments on economic data and policy developments provide valuable insights to clients and colleagues, and are often featured in the media.

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