Markets last week
The week was extremely momentous for markets due to the Monday announcement by Pfizer and BioNTech of vaccine trials showing an extraordinary 90% efficacy, a success rate which was easily extrapolated to other vaccine manufacturers using the same mRNA technology and whose results are being awaited.
Despite the positive vaccine news, on the ground the COVID-19 situation was looking dire, with the US recording more than 150,000 new infections on Wednesday. Deaths are trending upwards with 2,000 on Wednesday alone. The CDC (Centre for Disease Control) said the virus is rising almost everywhere in the US.
The markets were moved sharply by the vaccine development, causing a massive reversal of year-to-date trends. Companies benefitting from the virus and lockdowns (work-from-home, online shopping and entertainment) fell massively whereas the laggards (travel and leisure, oil, banks) surged. Although the rotation exhausted itself later in the week it was not reversed.
Movements in other markets included a sharp rise in government bond yields everywhere, a further weakening of the US dollar, a strong rally in oil and correction in the gold price.
On Friday, sterling recovered on the news of the departure of Dominic Cummings from the UK Cabinet.
Equities had a great week, in particular in the UK and Europe, oil prices rose 8%, whilst benchmark government bond yields rose by 6-8 bps. Gold fell 3% and the US dollar weakened in light of the pro-risk backdrop.
The week ahead
Wednesday: US building permits and housing starts for October
Our thoughts: the housing market in the US has been described as almost single-handedly supporting the US economy during the pandemic. Although other sectors in the US have also done well, it is true that housing has experienced an exceptional revival post-lockdown. Consumer spending has been restrained during the pandemic, but housing purchases have soared due to record-low mortgage rates and a desire to right-size families for the work-from-home environment. The strong housing market pulls many other sectors, such as home improvement and adds to GDP growth above its expected size. At 1,415K, housing starts are close to an all-time high after a strong bounce from a below 900K COVID-19 bottom. At 1,553K building permits are at an all-time high. Of the two, housing starts are more meaningful for the sector, but taken together (and also with existing home sales on Thursday) they should give a good picture of whether the housing rally is still on course.
Thursday: President of European Central Bank in European Parliament hearing
Our thoughts: Christine Lagarde, President of the ECB, will be speaking at the European Parliament. Although the speech details haven’t been leaked, there is a chance that she will announce the ECB policy for the coming year. Indeed, this could be the equivalent of The Fed’s Jackson Hole webinar in August, where Chair Jay Powell outlined the new Average Inflation Targeting policy. The ECB is under pressure to deliver more stimulus and dovetail it to the fiscal spending promises made by the EU. There is already speculation that the ECB will deliver a large boost at its December meeting. With most European countries in the midst of a second COVID-19 wave now, the ECB’s policy is likely to move to a more active phase.
Friday: UK retail sales for October
Our thoughts: UK retail sales have been quite erratic this year due to the virus and the lockdowns and have also been heavily influenced by government schemes like Eat-Out-to-Help-Out and the cut in VAT. September was a reasonably good month but the expectation for October is flat-to-negative: 0.1% for retail sales ex auto fuel and -0.5% including auto fuel. The new lockdown was a November affair and the October retail sales should therefore not be swayed by government announcements. Since the consumer dominates the UK economy, the October reading will be crucial to determining what kind of Christmas retailers might be expecting.
The numbers for the week
|Equity indices (price only)|
|In local currency||In sterling|
|Index||Last week||YTD||Last week||YTD|
|Hong Kong equities||1.70%||-7.20%||1.50%||-6.30%|
|Emerging market equities||1.00%||6.60%||0.80%||7.20%|
|Government bond yields (yield change in basis points)|
|Current level||Last week||YTD|
|10-year US Treasury||0.90%||8||-102|
|10-year German Bund||-0.55%||7||-36|
|Current level||Last week||YTD|
|Commodities (in USD)|
|Current level||Last week||YTD|
|Brent oil (bbl)||42.78||8.40%||-35.20%|
|WTI oil (bbl)||40.13||8.10%||-34.30%|
|Copper (metric tonne)||6982.5||0.50%||13.10%|
Sources: FTSE, Canaccord Genuity Wealth Management
Central banks/fiscal policy
COVID-19 warning from central bankers
Central bankers Jerome Powell of the US Federal Reserve, Andrew Bailey of the Bank of England and Christine Lagarde of the European Central Bank warned that the prospect of a COVID-19 vaccine isn’t enough to put an end to the economic challenges created by the pandemic. Powell said “we do see the economy continuing on a solid path of recovery, but the main risk we see to that is clearly the further spread of the disease here in the United States. With the virus now spreading, the next few months could be challenging.”
Drop in sentiment survey amid slow improvement in unemployment
Prices: inflation was lower. Prices grew by 0% in October, leaving the CPI (consumer price index) at 1.2%, down from 1.4% the previous month. The core CPI (ex energy and food) fell from 1.7% to 1.6%. Real average hourly earnings were unchanged at 3.2% year-on-year whereas real average weekly earnings were higher at 4.4% year-on-year. The PPI (producer price index) edged up from 0.4% to 0.5% for the Core PPI but eased from 1.2% to 1.1% for the core reading ex food and energy.
Employment: initial jobless claims once again fell from 757K to 709K and continuing claims also fell from 7222K to 6786K. The number of Americans receiving Pandemic Emergency Unemployment Compensation, the 13-week programme for those who have exhausted state benefits, increased about 160,000 to 4.14 million in the week ended 24 October. Continuing claims for Pandemic Unemployment Assistance, which provides benefits to the self-employed, increased about 101,000 to 9.43 million. In total, 21.2 million Americans were claiming some kind of unemployment benefit.
Surveys: the University of Michigan sentiment index unexpectedly fell from 81.8 to 77.0, driven by a large drop in expectations with current conditions unchanged.
UK economy still under pressure
Jobs: unemployment numbers disappointed. Job seekers rose by 243,000 in the 3-months to September, taking unemployment to 4.8%, the highest rate in 4 years. The claimant count rate was 7.3% in October.
Growth: the UK economy grew 1.1% in September vs. an estimate of 1.5%, the lowest number since April. The 15.5% in Q3 after a near 20% drop in Q2, is not a meaningful number, though; UK GDP is still almost 10% below its pre-COVID-19 level, among the worst outcomes in the world.
Nothing meaningful this week
In the eurozone, the Sentix investor confidence was worse at -10 vs. -8.3, but better than estimates.
China keeps exporting falling industrial prices and Japanese machine tools are on a tear: good news on both counts.
China: Inflation numbers continued to surprise on the downside. The PPI (producer price index) was unchanged at -2.1% whereas the CPI (consumer price index) fell to 0.5%, from 1.7%. China continues to export deflation to the world.
Japan: There has been a significant improvement in Japanese machine tool orders, down only 5.5% year-on-year in October vs. -15% the previous month. We’re now back to where we were 2 years ago and the peak was 3 years ago. This is a crucial bellwether for global industrial activity and it is surging.