Markets last week
Following on from the announcement by Moderna that their Phase 3 COVID-19 vaccine trials were 94.5% efficacious, Pfizer said a final analysis of its clinical-trial data showed its vaccine with BioNTech was 95% effective, which may pave the way for the company to obtain regulatory authorisations.
The Oxford University-Astra Zeneca vaccine trials showed that it stopped an average of 70% of participants from falling ill. That’s below the high bar set by Pfizer and Moderna, but effectiveness rose to 90% for one of two dosing regimes, using half a dose followed by a full one later.
The vaccine news flow continued to prop up risk markets, even though some cracks were starting to show in the bullishness.
The political backdrop was not helpful, with President Trump acting as though he has won the election and his legal team putting pressure on certain states not to certify the result. This is creating a void in the traditional transition work between the outgoing and incoming administrations. It has also arguably delayed an additional stimulus package being approved by the existing session of Congress before the new session arrives in early January. In addition, a rare spat between the US Treasury and the Federal Reserve (Fed) is threatening the extension of the lending facilities provided by the Fed with Treasury backing.
Despite such political tension, markets were positive, with equities rising again, oil prices surging and the US dollar weakening to signal a risk-on mode. Government bond yields and gold fell however, this was due to concerns about the stimulus ahead.
Within equities, Japanese and UK small-caps performed best whereas US shares lagged. The sector rotation away from technology and other growth stocks was slightly unwound towards the end of the week.
The week ahead
Tuesday: US Conference Board consumer confidence index
The Conference Board consumer confidence survey is a vital gauge of consumer health in the US. In fact, it was the failure of that survey to rise in the few months before the election that could have been a factor costing President Trump his re-election. At this stage, the survey should be a pointer as to whether low-income consumers are willing to dip into their savings to keep spending whilst the US Congress is still procrastinating on the additional stimulus package. Many payments to individuals under various government programmes have either expired or are due to, so any continuation of consumer confidence would be a sign of using savings to keep the economy going.
Thursday: Chinese industrial profits
Government policy in China has strongly supported the economy which, together with an effective pandemic management, has enabled the China to resurface faster than other countries in the world. It is not clear whether businesses have recovered as well as the general economy. Industrial profits have lagged the overall improvement after a sharp rebound in April to July. It would be supportive of Chinese equities and the global risk mood to see a rally in industrial profits, at a time when most western countries are under second lockdowns or stricter restrictions than during the summer.
Friday: eurozone economic confidence, industrial confidence, services confidence and consumer confidence
The eurozone has lagged the US and Asia in the current up-cycle. None of the confidence surveys have recovered to the pre-COVID-19 level, with services and consumer confidence suffering the most. Although the European stock market tends to be geared towards exporters, in light of the current rotation of growth sectors to value sectors it would be interesting to see whether services confidence stabilises or whether the trend is still down. Industrial confidence has been more solid and is likely to remain close to the pre-pandemic reading.
The numbers for the week
|Equity indices (price only)|
|In local currency||In sterling|
|Index||Last week||YTD||Last week||YTD|
|Hong Kong equities||1.10%||-6.20%||0.50%||-5.80%|
|Emerging market equities||1.80%||8.50%||1.10%||8.40%|
|Government bond yields (yield change in basis points)|
|Current level||Last week||YTD|
|10-year US Treasury||0.82%||-7||-109|
|10-year German Bund||-0.58%||-4||-40|
|Current level||Last week||YTD|
|Commodities (in USD)|
|Current level||Last week||YTD|
|Brent oil (bbl)||44.96||5.10%||-31.90%|
|WTI oil (bbl)||42.15||5.00%||-31.00%|
|Copper (metric tonne)||7277.5||4.20%||17.90%|
Sources: FTSE, Canaccord Genuity Wealth Management
Central banks/fiscal policy
Rare disagreement between the Treasury and the Fed
Fed Chair Jerome Powell delivered a speech, calling rising virus infection rates a “significant” downside risk. “The concern is that people will lose confidence in efforts to control the pandemic and they will pull back from activities that they think might put them at risk of infection, and there are some signs of that already.” Powell said recent progress on finding a vaccine was good news in the medium term, but the US economy still has a “long way to go” before it fully recovers from the pandemic. He also wanted to keep the Fed’s emergency lending facilities in place for now, which are mostly scheduled to expire at the end of the year. “When the right time comes, and I don’t think that time is yet or very soon, we will put those tools away. The recovery is incomplete.”
Shortly afterwards, there was a spat between Treasury Secretary Steven Mnuchin (normally a conciliatory voice) and the Fed. Mnuchin released a letter to Fed Chair Jerome Powell calling for the return of funding for several Fed lending programmes that rely on Treasury backing, basically refusing to extend five facilities after year-end. Minutes later, the Fed issued its own statement urging that ’the full suite’ of facilities should be kept in place. Underscoring the success of the programmes the Fed established, Mnuchin argued that some can be allowed to stop buying new assets at the end of next month.
“The Next Generation EU package must become operational without delay. This is critically important.” Christine Lagarde, the European Central Bank president, said at a committee hearing in the European Parliament. The EU agreed in July on its seven-year budget and a stimulus program funded by joint borrowing. But Hungary and Poland raised objections when the bloc came to nail down the specifics of the rule of law conditions and the requirement for unanimity on debt issuance allows them to block the entire package.
Continued dichotomy between soaring housing and falling employment
Production and Sales: US industrial production rose 1.1% in October, up from 0.4% the previous month, pulling capacity utilisation up to 72.8%. Manufacturing has been powering ahead despite renewed COVID-19 concerns. US retail sales, however, lost some steam in October rising only 0.3% vs. 1.6% the previous month with the retail control group up 0.1%, down from 0.9%.
Housing: the NAHB housing market index surged again to 90 in November (a record reading). US housing starts rose 4.9% in October, with single unit starts up 6.4%. Single-unit building permits (a leading indicator) also rose 0.6%, although overall building permits were flat for the month. Existing home sales rose in October to a 15-year high of 6.85 million, up 4.3% from the previous month, extending the housing market boom. Housing, together with manufacturing, continues to be a driver of growth, whereas retail sales are losing momentum.
Employment: initial jobless claims in regular state programmes totalled 742,000, up 31,000 from the prior week, and compared with expectations for a decline. It’s also the first move up in five weeks. The week included Veterans Day and claims data tend to be more volatile around holidays. Continuing claims fell 429,000 to 6.37 million. The number of Americans claiming extended assistance continued to rise as many unemployed exhausted regular state benefits. Continuing claims for Pandemic Unemployment Assistance (PUA) decreased nationally by 751,000 to 8.68 million. More people have been rolling onto extended programmes like Pandemic Emergency Unemployment Compensation (PEUC), but these programmes will expire by year-end and leave many without government aid. PEUC claims increased about 233,000 to 4.38 million.
Surveys: the Philadelphia Fed Business Outlook survey fell from 32.3 to 26.3, although this was above estimates. New orders were relatively steady but future capital expenditures collapsed. The Kansas City Fed manufacturing survey fell from 13 to 11, in line with expectations.
Retail sales and surveys very soft
Rightmove said that asking house prices fell 0.5% from October, although they are still up 6.3% year-on-year.
Inflation was slightly higher: the CPI (consumer price index) was flat in October, bringing the year-on-year inflation to 0.7%, with the RPI (retail price index) at 1.3%, both up 0.2% from the previous month.
Retail sales rose for the sixth straight month in October, up 1.2% (including auto fuel) against an estimated drop of 0.3%, or 5.8% year-on-year, just as the GfK consumer confidence index fell to near the pandemic low, down from -31 to -33. The CBI trends total orders also fell from -34 to -40 and the CBI selling prices went negative from +4 to -8.
The EU 27 car registrations fell 7.8% in October from a +3.1% number previously.
The CPI (consumer price index) in the eurozone was unchanged at -0.3% year-on-year.
Chinese economy still strong
China: the monthly data dump was quite buoyant. Industrial production was unchanged at 6.9% year-on-year, retail sales rose from 3.3% to 4.3%, fixed assets ex rural (i.e. investment) rose from 0.8% to 1.8% and property investment rose from 5.6% to 6.3%, with the surveyed jobless rate ticking down a notch from 5.4% to 5.3%.
The US SEC (Securities and Exchange Commission) is going ahead with a plan to bar Chinese stocks from US stock exchanges, which doesn’t seem to have affected Chinese markets yet.
Japan: the Japanese trade surplus unexpectedly improved from ¥688bn (£5bn) to ¥873bn (£6.3bn) as imports fell. The PMIs eased somewhat in Japan, with the Jibun Bank manufacturing PMI down from 48.7 to 48.3 and the services PMI from 47.7. to 46.7.
Oil recovered with the Brent gauge above US$45/bbl. Gold continued to stabilise between US$1,850 and US$1,900.