Markets last week
In a shorter week where the US Thanksgiving holiday dampened market trading, equities managed some more upside and oil prices were buoyant.
The States of Michigan and Pennsylvania have certified the result of the election, while President Trump is still refusing to concede, although he did admit that he would abide by the decision of the Electoral College on 14 December. President-Elect Biden has named quite a few members of his team already, but they all have to be approved by the Senate, which won’t be a rubber stamp. The market is seeing Janet Yellen at the Treasury as a reason to count on more economic stimulus. In addition to Yellen, the one that matters for the markets is John Kerry as climate envoy. It really puts environmental issues at the top of his agenda.
The UK and EU have resumed negotiations with Michel Barnier in London during the weekend. The last-minute sabre-rattling has not helped sterling and UK equities have lagged on the week. The Chancellor’s dark outlook for the UK economy on Monday did not help the mood either.
The day before Thanksgiving, the US released a slew of economic statistics. In a nutshell, despite the ongoing resilience of manufacturing and the housing sector, the US economy is slowing down. This contributed to halting the rotation from growth and quality stocks to value and cyclical stocks.
During the week, once again Japanese equities were the standout and oil prices continued their strong run. Gold was the loser, falling below US$1,800/oz as a result of doubts on any upcoming economic stimulus. To date, this month has been the best November in the stock market since 1987 after the October crash.
The week ahead
Monday/Wednesday: China Caixin manufacturing PMI and services PMI
The Caixin PMI mainly tracks small private factories, whereas the official index follows large manufacturers. Caixin PMIs are run by IHS Markit and follow international survey procedures. Manufacturing has been on a tear in China since the country came out of lockdown much earlier than the rest of the world. The manufacturing PMI is now not only above pre-COVID-19 levels but at a 4-year high. The services PMI peaked in June above 58 and has been less buoyant since, as consumers have been reluctant to embrace their full shopping freedom. The manufacturing PMI will matter mostly to industrial companies in the west whereas the services PMI will give an indication of the health of the Chinese economy.
Tuesday: US ISM manufacturing survey
The ISM (Institute for Supply Management) produces surveys of purchasing managers rather than financial executives or chief executives. As a result, the ISM PMIs tend to be more volatile and reflect changes in conditions very early on. The ISM manufacturing PMI has been hitting record levels recently, as manufacturing, together with housing, has been driving the US economy. In light of the rising COVID-19 cases in the US and the contested election results, it will be interesting to note whether industrial activity is still as strong. ISM publish details of new orders, inventories, prices paid and employment, which give an excellent picture of the manufacturing sector in the US.
Friday: US employment survey
Employment has been the problem area in the US since the pandemic, as more than 20 million jobs have been lost. The recovery has looked strong, with half of the job losses being clawed back, but the trend seems to be exhausting itself. The job creation last month was hampered by a major drop in the services sector as the census ended. The net gain was 638K jobs but the private payroll gain was over 900K. Current forecasts point to a smaller 500K gain for November. As many Americans have used up their statutory unemployment benefits and rely on pandemic employment insurance top-ups, the new job creation will be a crucial support for the economy. The unemployment rate (U-3) stood at 6.8% last month with the underemployment rate (U-6) at 12.1%. A further drop would be a psychological boost at the very least.
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%||-4.60%||1.40%||-4.50%|
|Emerging market equities||1.80%||10.40%||1.50%||10.00%|
|Government bond yields (yield change in basis points)|
|Current level||Last week||YTD|
|10-year US Treasury||0.84%||1||-108|
|10-year German Bund||-0.59%||-1||-40|
|Current level||Last week||YTD|
|Commodities (in USD)|
|Current level||Last week||YTD|
|Brent oil (bbl)||48.18||7.20%||-27.00%|
|WTI oil (bbl)||45.53||8.00%||-25.40%|
|Copper (metric tonne)||7499.5||3.10%||21.50%|
Sources: FTSE, Canaccord Genuity Wealth Management
Central banks/fiscal policy
Sombre autumn statement from the Chancellor
UK Chancellor Rishi Sunak delivered his autumn statement. The OBR forecast that the economy would contract this year by 11.3%, the largest fall for 300 years, and it is not expected to return to pre-crisis levels until the end of 2022. The UK is forecast to borrow £394bn this year – equivalent to 19% of GDP, the highest recorded level in history. He announced an increase in the national minimum wage, pay rises for one million NHS staff, with a freeze for other public sector workers apart from those earning below the median wage. Capital spending is expected to hit £100bn in 2021. Tax discussions on CGT, IHT, etc, were kicked down the road.
The European Central Bank (ECB) said in its Financial Stability Review that euro-area banks will have to set aside more money for potential losses when government pandemic support ends, as debt will surge and some companies may not be able to meet repayments. Provisions for losses on loans to companies are lower than in previous crises and below those seen in the US. That’s partly because measures by European governments and the central bank have reduced default risks, and partly because of the weak bank profitability.
Housing and manufacturing doing well, but the rest of the economy is weak
Surveys: the Markit PMIs were buoyant, with manufacturing going from 53.4 to 56.7 and services from 56.9 to 57.7, both defying projections of a drop. The Chicago Fed national activity index was also way above expectations, at 0.83 up from 0.32.
The Conference Board consumer confidence highlighted a major discrepancy, with the present situation at 105.9 vs. 106.2 but the expectations down from 98.2 to 89.5. The Richmond Fed manufacturing index also fell from 29 to 15. The University of Michigan sentiment index was almost unchanged at 76.9, but, like the Conference Board, current conditions (87 vs. 86) were better than expectations (70.5 vs. 71.9).
Housing: the Case Shiller index of house prices rose to 6.96% year-on-year from 5.81% and the 20-city index to 6.57%. New home sales looked softer in October, at 999K vs 1002K, but in fact the previous number was revised upwards and this is close to the all-time high.
Employment and income: initial jobless claims rose for a second week, from 748K to 778K. Although continuing claims fell from 6370K to 6071K, the drop is entirely due to people falling off the unemployment register, so the employment situation is getting worse.
Personal income fell 0.7% in October from +0.7% the previous month but personal spending rose 0.5% vs. 1.2%. This highlights that low-income earners have received significant government transfers (PPP, PUA, PEUC) and have saved a considerable percentage, which means they can now deploy those savings and cushion their drop in income. Given that further US stimulus is likely to be delayed because of the transition period, this could help support the weak economy until that point.
Inflation: the PCE (Personal Consumption Expenditures) deflator fell from 1.4% to 1.2% and the PCE core deflator, which is the Fed’s inflation gauge, fell from 1.6% to 1.4%, in line with estimates.
Industry: durable goods orders were better than expected, up 1.3% in October vs. 2.1% the previous month and also up 1.3% ex transportation. Capital goods orders non-defence ex aircraft were up 0.7% vs. 1.9% previously. All prior numbers were revised upwards, so the general picture was good.
Profits: in the GDP numbers, US corporate profits for Q3 are back to the level of Q4 2019 at US$2.3trn, so it’s not just the S&P earnings that have rebounded but also the national accounting profits.
Better data than expected but still weak
The manufacturing PMI surged to 55.2 from 53.7, way above estimates. Shame that manufacturing is such a small part of the British economy! The services PMI also surprised on the upside but fell from 51.4 to 45.8.
The CBI retailing report sales survey fell from -23 to -25, but better than expected.
Negative data but not getting much worse
PMIs: the eurozone manufacturing PMI eased from 54.8 to 53.6, above estimates, but the services PMI slumped from 46.9 to 41.3, below estimates. In Germany, manufacturing was more resilient from 58.2 to 57.9, above estimates, but services less, down from 49.5 to 46.2. In France manufacturing was down from 51.3 to 49.1 and services from 46.5 to 38.0, both below estimates. Services are the challenging area right now.
Other area surveys: the eurozone economic confidence survey fell from 91.1 to 87.6, industrial confidence from -9.2 to -10.1, services confidence from -12.1 to -17.3 and consumer confidence remained at a depressed -17.6.
Country Surveys: in France, various surveys showed a depressed economy. Business confidence fell from 90 to 79, manufacturing confidence from 93 to 92 and the production outlook indicator collapsed from -12 to -39. The IFO survey in Germany was stable for the current situation (90.0 vs. 90.4) but showed a big drop in expectations (91.5 vs. 95.0).
Monetary Policy: money supply in the Eurozone was almost unchanged, up 10.5% year-on-year in October.
Chinese industrial profits soared
China: industrial profits (total profits for industrial enterprises) soared in October, up 28.2% year-on-year, vs. 10.1% the previous month, the highest growth percentage since 2011. Of course, profits collapsed in January, but the recovery has definitely been V-shaped since.
Japan: machine tool orders were down 6% year-on-year in October, a massive bounce-back since the bottom in May, as manufacturing across the world is on a tear. The leading index and coincident index were flat, however.
Copper on a tear
Copper is near the highest price in more than 6 years as concerns mount that supplies of the metal will fall short of demand for years to come. Supply is insufficient for the green policies planned around the world. Copper warehouses in China are emptying at a time when normally inventories normally pile up. Chinese copper consumption is being driven by rebounding demand from the power, auto and home appliance sectors.
Oil prices have also been surging, whereas gold has been hovering around the US$1,800 level only 3 months after surpassing US$2,000.