The Week Ahead
The year is winding down now, and I suspect we will see decent trading volumes in the first half of the week but that investors will begin to close shop in the second half. We remain without a US fiscal stimulus plan although reportedly the differences are narrowing quickly, and the same can be said for a post-BREXIT trade agreement between the U.K. and the EU. Aside from these uncertainties, it is almost a sure thing that COVID-19 cases and deaths will worsen in those countries that let down their guard over the holidays and / or continue to do little. Indeed, even with short-term economic pain inevitable, financial markets remain focused on the post-pandemic period, a time when – for example – pent up demand is expected to result in a massive increase in consumption globally that will push economies forward, hopefully enabling them to claw back some of the lost ground due to the pandemic. Exactly how we are going to match the phenomenal returns in equities and credit we have had the last two years is beyond me, but it might be that value plays continue to receive more attention at the expense of more fully-valued stocks and bonds. Perhaps 2021 will also be the year that alternative assets, ideally ones that are loosely correlated with public market instruments, flourish as investors seek better opportunities in select pockets.
Summary, What Happened Last Week (details below this blurb)
This past week, three of the world’s four major central banks released policy statements or minutes from recent meetings, following on the heels of the ECB the week before. The Fed, BoE and BoJ all announced that they would hold over-night bank borrowing rates at record lows, whilst at the minimum maintaining their quantitative easing programmes. In other words, the central banks of the US, the UK, the Eurozone and Japan all recognise the need to prolong their historically accommodative policies as the pandemic worsens in the short term, even though the hope is that the combination of vaccinations and countries emerging from the winter will eventually relegate the pandemic to distant memory. Economic data in general was reasonably good last week aside from first-time jobless claims in the US. True to form as we have witnessed in recent weeks, assets generally rallied across the board, with perhaps the one ongoing casualty continuing to be the US Dollar as investors flock to risk.
Global Equity Markets
There’s not really a lot to say about the global indices that I track except that they were mainly better on the week - again. Clearly investors are looking out to the future, post-pandemic, even though equities arguably remain so richly priced that the major concern is that some event causes investors to come to their senses. Who could have imagined in March, during the depths on the onset of COVID-19, that we would be looking at sharp recoveries in most equity markets during the remainder of the year, even as the pandemic continues to rage? The S&P 500 has now returned 14.8% YtD, following a return of 28.9% in 2019 (both ignoring dividend yields of say 1.60%-1.70%/annum or so). Yet, here we are as the year nears its end, with markets in the US reaching new highs day after day (or so it seems). Below is the table that shows how the indices I track performed this past week, with the STOXX 600 (+1.5% w-o-w) leading the way followed by the S&P 500 (+1.3% w-o-w), which staged a strong rally into the close on Friday afternoon, trimming its losses for the day.
As far as news on individual companies, TSLA will officially join the S&P 500 on Monday, capping a year in which the company’s stock has increased (so far) more than eightfold based on Friday’s close, a remarkable increase in price. Most investors by now have learned not to play TSLA from the short side, as it is one of the most volatile stocks in the universe and generally goes up, always finding support on dips. On Friday alone, the shares opened at $668.90/sh, traded as low as $629.54/sh before rallying into the close to end at its daily high of $695.00/sh. I watched the journey from daily low to high unfold in the last 30 minutes or so of trading on Friday afternoon as index funds piled into TSLA shares to prepare for the stock’s inclusion in the index on Monday. As a member of the S&P 500 index, the volatile swings in TSLA’s stock price will undoubtedly have an effect on the index of which it will (as of Monday) account for 1.5%, being the 7th largest constituent component based on Friday’s closing price by market capitalisation.
Both DASH and ABNB have come off of their post-IPO highs although both look to be firmly bid even at levels I consider absurd (and as much as I like ABNB). In their short lives, the swings in prices have been extraordinary too. I wrote about these two stellar IPOs this past week: “IPOs and the story of DoorDash and AirBnB” – check it out if you haven’t already. FDX released solid numbers mid-week which were supportive of its recovery since March. However, the stock was punished on Friday because management refused to provide guidance for 2021. NKE released results after the close on Friday (for its 2Q2021), and the company smashed earnings and revenues versus consensus expectations. The shares rose in the aftermarket. Credit (corporate bonds) The corporate credit markets followed the equity markets this past week as spreads across the ratings spectrum continued to grind tighter and bond prices rose. This spread-tightening is getting slightly boring, so let me instead talk about new issue (or primary) volumes in USD and EUR for 2020 as the year nears a close.
As the graphs above from Moody’s illustrate, USD primary bond market volumes (non-government) have had almost three times the volume of the EUR primary bond market this year, with USD corporate issuance reaching a record amount of new issues (over $2.6 trillion). Roughly 27% of this issuance in USD ($545 bln) has been in non-investment grade – or junk (BB to CCC) – credits, with the balance being investment grade (AAA to BBB). Naturally, the Fed stepping in helped enormously in March as it became (and continues to be, or could always potentially be) a buyer of investment grade corporate bonds, “fallen angels” and high yield ETFs, underpinning the US corporate bond market. Just after, many US companies scrambled to take advantage of this deep pocket of available liquidity and record low underlying interest rates, raising huge amounts of debt in the capital markets even as the outlook worsened. Slowly but surely, ready access to the debt capital markets provided comfort for equity investors, who eventually – as we moved into the autumn – acknowledged this by piling into shares of the most pandemic-damaged industries like airlines, cruise ships, restaurant chains, travel companies and so on, perhaps fuelling the rotation into cyclicals and value stocks. Safe havens assets and oil Gold rallied strongly last week, which I can’t help but wonder - as with crypto currencies - if this was caused by bullish sentiment, risk concerns, the Fed pumping the market with liquidity, or a weaker (and weakening) US Dollar…..or perhaps some combination of these. Gold closed Friday at $1,880.96/oz, +2.2% w-o-w. Other safe have assets fell in price as risk appetite continues to grow. The yield on the 10-year UST increased 5bps w-o-w, closing to yield 0.95%. The UST yield curve steepened, typically a bullish indicator for the US economy. The Yen weakened, but it is the ever-weakening US Dollar that is perhaps the biggest reflection of the solid return of risk appetite, as investors gobble up riskier assets like stocks and bonds in places near and far, fuelling a strong rally – for example – in emerging markets equities. Crypto-currencies are rallying like mad, too, as is nearly anything not nailed down! WTI oil also continued its ascent now that OPEC+ has sorted its production targets for early 2021, and similar to the equity markets, is looking past the dark days that lay ahead and into the post-pandemic period perhaps as soon as early 3Q2021. WTI oil closed at $49.06/bbl, up 5.3% on the week, its highest daily close since late February. Like the steepening UST yield curve, this is signalling a robust economic recovery ahead. Of course, as a dollar-based commodity, oil prices are also being boosted by the weaker US Dollar. Oil has seen a spectacular recovery since April, although it is only one of several asset classes taking off like rockets as we near the end of the year.
Economics & Politics
There was plenty of economic data this past week but much of the focus was on the release of minutes and press conferences with the central banks of the US, the UK and Japan.
The Federal Reserve released its most recent FOMC minutes on Wednesday, and you can find them here. There were really no substantive changes in approach or policy, including no changes in the overnight bank borrowing rate or in the magnitude of the quantitative easing programme (other than reiterating that it remains open-ended). In the press conference following the release, Fed chairman Powell expressed concerns about the near-term (negative) effects of CV19 on the US economy and, accordingly, urged Congress to act quickly on an additional fiscal stimulus plan. The FOMC also released revised economic projections (here), which indicate a less significant decline in 2020 GDP growth (-2.4% revised vs -3.7% in Sept projections) and slightly better 2021 GDP growth (4.2% revised vs 4.0% in Sept), as well as a lower expected unemployment rate by year end (6.7% revised vs 7.6% in Sept). You need to remember that the Fed is the only central bank that has an open-ended commitment for QE, whereas other central banks have fixed the amounts and / or duration of their programmes. The upward revisions in the Fed’s outlook fit with economic data reported this week including higher-than-consensus industrial production, capacity utilisation, Markit Manufacturing PMI, and housing data. However, first-time jobless claims released Thursday morning were worse than consensus expectations, although this seemed to matter little to investors.
The Bank of England released its Monetary Policy Summary and minutes of its most recent Monetary Policy Committee (MPC) meeting on Thursday, which you can find here. Similar to the Federal Reserve, the BoE held its interbank overnight borrowing rate at 0.1% and is continuing with its quantitative easing programme that is in place (which was last increased in November FYI). The BoE did extend its lending programme to SMEs for six additional months, as the near-term outlook for the UK remains more challenging than in the US. The outlook for the UK economy has worsened due to additional COVID-19 restrictions in many parts of the country, but the vaccination is raising hopes that the recovery might be sharper in 2021, assuming the economy can get through the next few months. The UK has to also deal with the transition to life outside of the EU starting January 1, trade agreement or not, and this will take time and will undoubtedly be a drag on the economy. The UK government announced that it would further assist UK businesses by extending the furlough and emergency loan schemes (see FT article here) to get them through the pending dark period of the pandemic. UK retail sales were released late in the week and were stronger than expected before lockdown 2.0 began in early November, and then again coming out of it, a bit of good news for the UK economy.
The Bank of Japan released its Statement of Monetary Policy on Friday, and you can find it here. The BoJ announced that it would: keep its overnight bank borrowing rate at the same level (-0.1%); continue its yield curve control (targeting 0% for the 10-year JGB); extend its purchase of corporate bonds and commercial paper for six months and would continue to purchase these assets at the same monthly level but with flexible allocation between the two asset classes; and extend its pandemic loan schemes to SMEs for an additional six months (to Sept 2021). As the Japanese economy remains anaemic and inflation remains well below the 2%/annum target, the bank announced that it would engage in a monetary policy review in early 2021, suggesting an outcome that might very well be a tilt towards an even more accommodative stance.
In the EU/Eurozone, the ECB released its minutes and held a press conference the week before – see late week’s update. Both preliminary Markit Manufacturing PMI and Market Services PMI data for December in the Eurozone were better than expected in spite of lockdowns of varying degrees throughout the currency bloc.
The US began distributing the Pfizer-BioNTech vaccine last week, following in the steps of the UK. The EU is expected to follow shortly. The FDA also provided emergency use authorisation for the Moderna vaccine on Friday (see FDA press release here), adding a second approved vaccine to the US arsenal as it moves towards eradicating COVID-19. Much of Europe has tightened standards or imposed lockdowns of varying degrees in response to swelling cases, and a handful of countries have imposed lockdowns just as severe as the initial lockdowns (in 2Q2020). The US remains very much piecemeal as the Trump Administration remains silent on nationwide steps, leaving it to states and localities. However, the trend amongst states and localities, although disjointed, is clearly towards partial shutdowns and more severe restrictions as cases continue to increase. I fear the post-Christmas / New Years period in the northern hemisphere (aside from China), as cases will almost certainly hit record levels in January.
Here is the updated table showing the progression of CV19 as far as monthly new cases and deaths, which have now passed 75 million and 1.67 million, respectively.
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