October 07, 2020

Q3 market update: The road to global economic recovery

The third quarter of 2020 was a mixed period of hope and uncertainty for investors. Here’s how financial markets have responded to the pandemic recently.

Key Highlights

  • The global economy continued its gradual reopening in the third quarter.* Business activity and the job market improved, but economic challenges remained. 
  • Stocks showed some strength to begin the period. However, pandemic concerns slowed markets down.
  • Central banks around the world kept interest rates low to help boost the economy.

(*A quarter refers to a three-month period. The first quarter covers the months of January to March. The second quarter covers April to June. The third quarter covers July to September. And, the fourth quarter covers October to December.)

How the world continued to deal with the pandemic 

The COVID-19 pandemic shocked the world in the first quarter of 2020. The second quarter was a period of adjustment to life in a pandemic. The third quarter raised even more questions. People wondered what would happen next. The global economy and markets reflected how conditions were different in each quarter.

Here’s what happened: Economies gradually reopened. Business activity increased as a result. China was one of the first to manage the pandemic and also one of the first to reopen. Its economy rebounded after a long period of little activity.

Interest rates remained low in the third quarter. Central banks tried to support the economy during difficult times. 

The U.S. Federal Reserve Board (Fed) said it would allow inflation to rise above its 2% target. The Fed hoped this move would help improve the economy. The Fed also said interest rates may stay “lower for longer.”

The U.K. and the European Union (EU) continued to face challenges about a trade deal. The U.K. is looking to leave the EU. The U.S. and China continued with their trade talks as well.

Financial markets reflected an uncertain economy

Stocks made gains over the period in most major markets. The economic recovery continued and investors became more hopeful. Many people worked from home and shopped online during the pandemic. Companies that helped people do that benefited the most. 

Financial markets were strong in the third quarter. People were more willing to invest when global conditions began to stabilize.

Canadian stocks also gained. Demand increased for oil as well as metals like gold. Travel slowed around the world earlier in the year. Oil prices moved lower as a result. Demand for oil went up once the economy began reopening. Oil prices began to recover. 

The price of gold often rises in times of uncertainty. It also rises when the U.S. dollar weakens compared to other currencies. Bond prices in many countries rose while yields declined. Markets reacted to the level of inflation rising less than expected. 

Market gains stalled near the end of the period. Investors became more concerned about how the world would recover from the pandemic. The markets were also concerned the U.S. government may cut back on economic support. The U.S. had been one of the countries to introduce large spending programs. These programs tried to limit damage to the economy during the pandemic.

Canada’s economy remained steady overall

Canada’s economy faced challenges in the second quarter of 2020. Household spending and business investment declined at their fastest pace ever. Trade activity also slowed around the world. Many economies spent most of the second quarter shut down. 

Canada continued opening more parts of its economy in the third quarter. Economic conditions began improving. The reopening of the economy helped Canada’s manufacturing industry. Retail businesses also showed more strength as the level of sales rose.

Inflation in Canada stayed at low levels during the period. The Bank of Canada (BoC) kept its central interest rate at 0.25% for the second straight quarter. Interest rates in Canada might not move higher until inflation rises. Inflation has been under control so far in Canada.

Increases in the prices of gas and food slowed during the third quarter. The BoC also continued to buy bonds to help the markets run properly. Government support has been important in Canada’s efforts to recover from the pandemic.

The Canadian economy added back many jobs during the quarter. The reopening of the economy helped the labour market to improve. More people went back to work as more businesses opened. Unemployment remained higher than it was before the pandemic.

The latest economic outlook 

The pandemic still poses many risks to the global economy . Cases are rising much higher in some areas of the world. Governments have eased lockdown measures. People have started being less careful about controlling the spread of the virus. A possible second wave of COVID-19  is causing uncertainty in global markets. 

Support continues from governments and central banks around the world. The purpose of this support is to give people more confidence in the economic recovery. Many individuals are concerned this financial support may cause governments to hold too much debt. It’s a challenge for governments to support an economic recovery and be careful with their spending.

What financial challenges can Canadians expect?

The labour market in Canada has improved, but it may not get stronger until the economy improves even more. The personal finances of Canadians may also face challenges in the next few months. 

The government has planned to reduce aid for people who borrow money. This may lead to an increase in financial challenges. The government is also cutting back on programs that support Canadians without jobs. This may also lead to an increase in financial challenges.

The BoC may keep its central interest rate steady over the next quarter. The BoC’s target inflation rate for Canada is 2%. Interest rates are unlikely to rise until Canada reaches this target rate. Uncertainty continues in the economy. It may take some time before inflation levels in Canada reach 2%.

Oil prices may still rise and fall in the next quarter. The strength of the economic recovery will likely have a large impact on the price of oil. Demand for oil could move lower if the recovery does not progress as expected. 

Industries like airlines and hotels may also have problems if the pandemic continues. Industries like these need an improving global economy.

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This commentary contains information in summary form for your convenience. Although this commentary has been prepared from sources believed to be reliable, Sun Life can’t guarantee its accuracy or completeness. Plus, this commentary is intended to provide general information and should not be seen as providing specific individual financial, investment, tax, or legal advice. The views expressed are those of the author and not necessarily the opinions of Sun Life. Please note, any future or forward looking statements contained in this commentary are speculative in nature and cannot be relied upon. There is no guarantee that these events will occur or in the manner speculated.

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