My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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  • tim@emorningcoffee.com

Week Ended Nov 13th 2020 and the Week Ahead

The Week Ahead

This week is likely to see the ongoing tussle between the two camps currently driving sentiment in the markets – those that are feeling the nearness of a CV19 vaccine (or several) and an eventual return to normalcy within a matter of months, and those that are so distracted by the spread of the virus at the moment that they cannot visualise a future without it. In spite of the recent run-up, I believe that these sentiment swings in the financial markets are far from over. Governments increasingly seem to be coming down of the side of shuddering parts of their economies to slow the spread of the virus, a move that can jeopardise the economic recovery. This will be the narrative that grabs headlines in the coming weeks. As far as other matters, the US election looks to be settled, and Americans seem ready to move on as the election fades into the background. Every week seems critical for BREIXT trade discussions with the EU, and every week yields the same result – nothing. As we have been for so long, we again find ourselves at a critical juncture in these trade talks, and time is running out. There is a smattering of economic data this week, perhaps the most interesting being Japanese 3Q20 GDP (+4.4% QoQ consensus) to start the week. There is a slew of other data coming out, too, and a G20 summit to end the week on Friday.

Summary, What Happened Last Week (details below)

The progress on a vaccine (or several vaccines) to eventually end the pandemic and the reality that the US election is more or less decided cheered markets globally most of the week. As investors adjusted their outlooks, they also began a shift away from tech and WFH companies, towards cyclical and mid-cap companies that have been left behind (relatively speaking) in the post-CV19 recovery but stand to gain the most from the pandemic winding down. The rally in global equities seeped into the riskiest part of the high yield market, too, as CCC spreads narrowed. Gold and US Treasuries sold off, and WTI crude oil was stronger. The growth in COVID-19 cases has hit new highs in the US and many parts of Europe, again causing concerns around adequate hospital beds to treat patients. In fact, the heads of three of the world’s most important central banks reiterated their concerns about the path of the pandemic, pushing strongly for fiscal support to continue from their respective governments to battle the economic scars from COVID-19.

 

Global Equity Markets

Global equity markets continued to rally last week. It seemed much of the focus was on the US equity indices, although the European and Japanese equity markets significantly outperformed the US markets as you can see in the table below.

3Q20 earnings season is drawing to a close. As we have seen throughout, earnings remain solid with more companies than usual beating analysts’ consensus expectations as far as revenues and bottom-line earnings. Last week, several more S&P 500 companies – McDonald’s, Disney and Cisco to name three – handily beat analysts’ expectations, strengthening the foundation which is serving as a base for equities to rally in spite of the resurgence of COVID-19 in the US and Europe. I suppose I have come to accept that the forward (4Q) S&P 500 P/E ratio is toppy albeit not ridiculous at 22.1x, mainly because stronger-than-expected earnings seem to be providing support. The weekly report on S&P 500 earnings from Refinitiv can be found here, should you wish to dig deeper.

As was well covered this week by both Bloomberg and CNBC, there are divergent views on whether or not the equity markets are looking too far forward, meaning towards the end of 2021 when the worst of the pandemic should be behind us. By doing so, investors are choosing to ignore the current surge in coronavirus cases in the US and Europe. Based on the post-March recovery when stocks rallied into the worst quarter ever (i.e. 2Q20) in global GDP, it seems clear to me that investors are again playing the forward game. There’s nothing wrong per se with this philosophy, although there is certainly an abundance of noise – whether it be the US election outcome, the pandemic, BREXIT discussions, sluggish growth in Europe, etc. – that would seem to dampen enthusiasm. Nevertheless, equity bulls continue to carry the day with their unbridled optimistic that these issues, and especially COVID-19, will all be behind us before we know. But is it really this simple?

Last Monday before the US markets opened, Pfizer announced that it and German biotech company BioNTech were in the late stages of a vaccine that was showing greater than 90% effectiveness against the virus – see the Pfizer press release here. Then, as we heard at the end of the week on Friday from President Trump and his medical team, the Pfizer-BioNTech vaccine is only one of several reaching the later stages of requisite approvals. Monday’s announcement caused the equity markets to shoot up like a rocket, with the S&P 500 up 136.55 points (4%) at one point (intraday) on Monday morning, reaching its highest level ever of 3,645.99. However, equity markets faded a bit into the close that day although the index still closed at 3,550.5 (+1.2%). The US indices bounced around most of the rest of the week until Friday afternoon, when late-day rumours of President Trump’s speech regarding more positive news on COVID-19 cheered markets into the close. This news was helped perhaps by the announcement of the final tally of the US presidential election, resulting in President-elect Joe Biden padding his electoral college lead and handily winning both the electoral college and popular vote in the US by good margins.

Digging one layer deeper into the US equity markets, there was also a lot of discussion last week regarding rotation in the equity markets away from big tech and “work-from-home” (WFH) companies (many mid-tech), and into cyclicals. Value stocks also outperformed momentum stocks. These trends were very pronounced during the big rally Monday which

was led by cyclicals and value, whilst tech names and WFH companies were actually down that day. Not only did large-cap tech names like AAPL (-2.0%), MSFT (-2.4%), and AMZN (-5.1%) underperform, but WFH names like PTON (-20.3%), ZM (-17.4%) and NFLX (-8.6%) got absolutely hammered, and never really recovered the rest of the week. More broadly, the table above shows the relative performance of four major US indices last week, indicating clearly the rotation that is occurring towards both small/mid cap value stocks and cyclicals, more representative in the DJIA and Russell 2000 than in the S&P 500 and the tech-heavy NASDAQ.

Credit Markets

Credit migration was modest week-over-week, with spreads tightening in the USD investment grade market slightly, whilst widening ever-so-slightly in high yield. CCC-rated credits were by far the outperformer for the week in the high yield universe, tightening 38bps as this riskiest end of the corporate credit market took its cues from the rally in equities and the recovery (somewhat) in oil prices. This makes sense because many of the most severely-affected and more cyclical credits are found in this tier, whether they be travel companies, entertainment companies, casinos/hotels or energy companies.

Safe Haven Assets & Oil

US Treasuries (10-year price down 0.5%, yield +6bps) and gold (-3.4%) both sold off last week, perhaps finally reflecting the rotation from these safe haven assets into equities. The increasing trajectory of COVID-19 is largely being swept under the rug for the time being, with hopes pinned on several promising vaccines as we look forward. This is shifting risk sentiment more towards the optimistic end of the spectrum.

With the outlook improving for the global economy, WTI crude oil rallied 7.2% during the week to close at $40.12/bbl, even though the EIA reported larger-than-expected growth in US oil inventories. It appears however that OPEC+ might delay its supply increases until the pandemic’s effect on the global economy starts to fade, providing a counterbalance to concerns regarding demand as Europe and the US face growing cases of CV-19.

Economics & Politics

The major event of the past week was the ECB Forum on Central Banking – “Central banks in a shifting world” – which occurred on Wednesday and Thursday (virtually). The heads of three central banks facing the most severe effects of COVID-19 – Christine Lagarde (ECB), Jerome Powell (Fed) and Andrew Bailey (BoE) – all reiterated their ongoing accommodative monetary approach in support of their economies, but at the same time, warned that we are far from out of the woods. All three prominent central bankers continued to stress the concurrent need for aggressive fiscal stimulus. In this respect, the US is still stuck in the starting blocks and likely will remain so until the new administration is in place. Similarly, the revolutionary EU level fiscal plan remains mired in discussions regarding the details, also not able to get out of the starting blocks. To be fair, it seems that the UK is the country that is doing the best as far as supportive fiscal policies, burdened neither by typical European beurocracy or the quagmire of politics in the US. The Bank of England and UK government are well coordinated and are seeing very much eye-to-eye. Of course, there is a big “but” here which reflects why the FTSE 100 is the perineal underperformer, which is the simple fact that – in spite of well-orchestrated and coordinated stimulus ­– the UK economy remains extraordinarily weak, worse than any of its G7 peers by a decent margin as you can see in

this table to the left from Bloomberg. Moreover, the UK government continues to flounder around on other topics. It was a volatile week as far as the leadership of the Conservative government, with two of Prime Minister Boris Johnson’s right-hand men leaving the government. Moreover, a post-BREXIT trade deal with the EU remains a much-discussed topic with no clear end in sight, constraining optimism about the future.

COVID-19

The resurgence of COVI19 in a second (or third) wave in the US and Europe is well covered in the media. The deteriorating US situation is getting plenty of press at the moment for reasons that should be clear in the graph below showing the daily count of new infections, which have more than doubled since the beginning of November.

Even in the face of more and more mandated lockdowns in some countries and states, there is a great deal of optimism about several vaccines that are in the late stages of clinical testing or early stages of final regulatory approvals.  The week started and ended on this theme in fact with the Pfizer-BioNTech announcement on Monday cheering investors, as did the optimistic speech by President Trump regarding other vaccines just after the markets closed in the US on Friday.  As dire as it seems in the moment, the optimists amongst us can more clearly visualise the end of the pandemic.  As always, the devil is in the details as far as timing involving final regulatory hurdles, the mass manufacturing, and the distribution (and sequencing) of a vaccine to the population.  


It is clear we’re not there yet, and the table below summarises where we stand globally, with over 53 million cases and 1.3 million deaths to date. This can’t be over fast enough!


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