Another positive quarter for international financial markets

As financial markets entered the second half of 2020 in full-throttle-comeback mode, the third quarter brought with it more challenges, as the economy keeps grappling with the pandemic. The recovery in global financial markets held ground during July and August, while it lost some of its momentum in September, as coronavirus cases spiked to over 33 million worldwide.

The quarter was a choppy ride for investors worldwide, as uncertainty remains. However, the power of central banks and governments has helped the economic structure to hold. Financial aids were injected into the economy to combat the damage already caused, and to cope with the challenges that came along with it. House Democrats released a new $2.2 trillion relief proposal, including a second round of $1,200 stimulus checks.  In July, the European Union agreed on a stimulus agreement worth €750 billion, with hopes of pulling the economy out of the worst recession in history.

Global Equity Markets

Investors remained broadly cautious as fears of a second wave of coronavirus increased, hampering business activity, which would delay the nascent European recovery. The World Health Organisation showed its concern about the rising cases in Europe, considering that the influenza season is yet to begin. Meanwhile, authorities strived to find a balance between stabilizing the health situation and avoiding lockdowns.

In the European market, investor’s risk appetite was mixed, as the US presidential debate between Donald Trump and Democratic rival Joe Biden weighed on sentiment. However, China’s economic recovery offset the potential negative impact caused, as well as September’s purchasing managers index, which was better than expected, rose to 51.5. The banking sector bounced back, despite borrowing costs declining globally, non-performing loans increasing and a money-laundering scandal resurfacing.

The Euro STOXX 600 ended the third quarter marginally positive. The German DAX topped the list of best performers in Europe, as it advanced by a further 3%, following a 24% rally in Q2. On the other hand, Spain’s IBEX returned to negative territory with a 7% change. Similarly, equity markets in Italy and France lost over 1% and 2%, respectively.

In the US, equities remained positive as the major indices closed higher, with gains ranging between high single digits and low double digit returns. US political uncertainty and rising trade disputes with China, did put pressure on investors’ sentiment. Yet, during the quarter, investors preferred to focus on the positive data out of China and the US. China reported strong economic data, and the US jobs report for August showed that the unemployment rate was the lowest since March, as it decreased to 8.4%, against an expected rate of 9.8%.

The energy sector remained among the hardest hit sector, as demand declined substantially. Meanwhile, the US gross domestic product for Q3 is expected to jump, as businesses have re-opened. The results will be released only five days before the presidential election, to be held on November 3, 2020.

In terms of equity markets, the US market performed strongly during the quarter under review. The Dow Jones, S&P 500 and the NASDAQ registered their second straight quarterly gain on renewed hope of stimulus measures and optimism of a quicker economic recovery.

Sovereign Bonds and Credit

The income yield on the 10-year US treasury closed the quarter at 70 basis points, slightly higher than where it closed quarter two. In Europe, the 10-year German Bund, also closed more or less yielding the same return it closed at the end of June. In Germany, the 10-year yield is a negative 0.5%.

On the other hand, yields on riskier European peripheral debt declined, as investors’ optimism pushed demand higher for higher risk bonds. The Spanish 10-year yield closed September at 0.2%, while in Italy the yield on its 10-year benchmark stood at nearly 0.9%. In the UK, the yield on the 10-year sovereign bond closed the quarter at 0.2%, up from 0.17% at the end of the second quarter.

In terms of credit, both investment grade and high yield bonds gained during the quarter. The high yield bond continued to recover ground despite a slight pullback during the month of September, as investors’ sentiment declined across risky assets. Across investment grade, the quarterly gains were generally lower than what we witnessed in high yield, however when volatility increased during September, higher quality bonds performed better.

Local Market

During the third quarter, the MSE Equity Total Return Index lost 13%, with nearly all active equities losing ground too. The declines witnessed across the large caps weighed heavily on sentiment. Even though the airport re-opened, Malta International Airport plc drifted 19% lower as travel demand remained weak and awash with restrictions. Likewise, International Hotel Investments plc posted a 16% decline. The share prices of the two major banks recorded double-digit declines, while from the telecommunications sector, GO plc shed nearly 9%.


In terms of currencies, the EUR gained further ground against the USD. The currency pair closed the third quarter at $1.17, up from $1.12 at the end of June, and down from a high of $1.19 reached in mid-August. During the first nine months of the year, the EUR has gained nearly 5% against the USD.

Meanwhile, despite fluctuations between the EUR and the Pound, the currency pair closed the quarter relatively unchanged.

Despite the virus plunging the world into a deep recession, optimism is a key factor for a strong comeback. Investors’ hope for a vaccine, further stimulus aid, and optimism for a quicker economic recovery are some of the factors which wrapped up this volatile quarter. In the coming weeks, investors will turn their attention to the upcoming US presidential election and will be following closely the policy promises which each of the contenders will make.

Lianne Zahra, BCom (Hons) Banking & Finance is a Trader at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected]