Economic Data Watch and Market Outlook
As a movie “aficionado”, the recent market price action reminded me of the battle between the “force” and the “dark side” from the Star Wars sagas. Financial markets were pulled lower by the sharp rise in new COVID-19 cases around the globe, with new daily US cases averaging 150,000 over a seven-day period, and reaching a daily record high of 187,000 last Thursday. This prompted states to implement new restriction curfews in Ohio, Rhode Island, New Hampshire, Minnesota, and California, while New York City schools went to 100% virtual teaching. Overseas, rising coronavirus cases in Tokyo, Japan and South Korea prompted similar governmental action. On the positive side, the race to get a COVID-19 vaccine to market seems to be heading down the back stretch. Moderna announced their vaccine in Phase Three trials had a 94% efficacy rate in preventing COVID-19 infections. Astra-Zeneca reported their vaccine in mid-stage trials showed a strong immune response from older adults. Pfizer BioNTech announced late Phase Three trials had a 95% versus the originally reported 90% efficacy rate. The European Medicines Agency announced they are working with the US FDA to assess the Pfizer BioNTech vaccine, and the agencies could approve usage as early as mid-December. Such an approval could provide a strong lift to risk assets, helping the typical annual holiday rally take place in 2020.
As we enter next week’s trading sessions, we should continue to see the “tug of war” between the “reflation” and “lock-down” investment opponents continue. The “reflation” trade supporters are betting the approval of an efficacious COVID-19 vaccine will re-open the global economy, and push the economically sensitive sectors and their stock prices higher. We have already seen the vestiges of such a push over the past several weeks, as positive COVID-19 vaccine news has propelled financial, energy and industrial stocks higher. On the “lock-down” side, these proponents believe the coronavirus lock-downs will last longer than expected, and they still favor the US, large caps, and technology. We believe a balanced view is best at this point, as there should be a broadening of stocks participating in a rally, and there will be both winners and losers from the growth and value sides. There are sizable tail winds for risk assets in supportive monetary policy, expectations for further fiscal stimulus, improvements in global trade and “globalization” with a Biden administration, a lower USD, and an eventual steepening of the yield curve.
In turning to the coming week’s economic calendar, the Thanksgiving holiday shortened week will be jammed packed with US PMI, consumer confidence and PCE data. We start off on Monday with the November flash reports for the Markit Manufacturing PMI which is expected to drop by 0.4 points to 53.0. The softer data is most likely caused by the recent increase in COVID-19 cases. The projected decline of 1.9 points to 55.0 for the Markit Services PMI index for November, could also be tied to the recent surge in coronavirus cases.
On Wednesday, Durable Goods orders for October is estimated to have increased by 0.2%. Core capital goods which exclude defense and aircraft, have seen recent strength, with orders projected to rise by 0.8% in October.
The report for real Consumer Spending for October, out on Wednesday, is expected to rise by 0.3%. Growth in spending in the services sector should be positive, driven by increased spending on utilities, while auto sales are projected to see a moderate decline. The rate of growth in services sector spending is wanning, and this is being reflected in the slowdown in retail sales. The PCE headline and core readings are estimated to be flat for October. On an annual basis, the headline PCE price index is projected to rise 1.2% and the core a 1.4% rate.
The Week In Review
U.S. Equities
US equity markets were mixed, as stock prices rose and fell on COVID-19 news regarding the sharp increase in new cases, and hopes for the approval of an effective vaccine as early as mid-December
- Dow Jones -0.65% MTD +10.64% YTD +4.69%
- S&P 500 -0.73% MTD +8.94% YTD +11.95%
- Russell 2000 +2.38% MTD +16.15% YTD +8.28%
Drivers: I) Pfizer and BioNTech stated last Friday that they had submitted an emergency use application with the US FDA. The two companies which jointly developed the ENT162b2 vaccine, reported it ad an efficacy rate of 95% in Phase Three clinical trails The FDA reported on Friday, that its advisory committee will meet to discuss the companies’ vaccine candidate on December 10.
II) The October report for Retail Sales rose of 0.3%, the weakest showing during the new economic recovery. An important segment of the report showed spending at restaurants and bars slipped lower by 0.1%. On the flip side, online merchants saw a rise of 3.1% in sales, most likely helped by the Amazon Prime Day sales. The home improvement area remained strong, with building materials sales up 0.9% last month and 19.5% over a year ago.
III) Industrial Production for October showed an increase of 1.1%, which was on par with consensus estimates. Industrial production has been improving in recent months, but still remains about 5.6% below the pre-COVID-19 levels seen in January and February. Apart from manufacturing, there was an increase in the output from utilities which jumped by 3.9% in October, making up for drops seen in August and September.
IV) The housing market supported by record low mortgage records, continued to show strength, as October Existing Home sales beat Street estimates by climbing 4.3% to 6.85 million units on a seasonally adjusted annual rate. Home sales have soared since hitting a low point in May, and is running nicely above the trend seen before the onset of the coronavirus pandemic. Solid housing activity is putting upside pressure on home prices.
V) Equities Month to Date are higher with Small-Cap, Value, Energy, and Industrials leading equity price performance. The laggards for the period are Large-Cap, Growth, Utilities and Consumer Discretionary.
Capitalization: Large Caps +9.47% (YTD +13.67%), Mid-Caps +11.64% (YTD +9.71%) and Small Caps +16.15% (YTD +8.28%). Style: Value +15.85% (YTD -4.57%) and Growth +12.65% (YTD +12.61%). Sector Groups: Technology +8.41% (YTD +32.26%), Information Technology +8.73% (YTD +31.40%), Consumer Discretionary +7.49% (YTD +23.66%), Communication Services +10.07% (YTD +20.98%), Materials +10.40% (YTD +15.44%), Healthcare +6.99% (YTD +8.16%), Industrials +14.24% (YTD +8.09%), Consumer Staples +6.86% (YTD +7.67%), Utilities +1.88% (YTD +1.88%), REITs +8.25% (YTD -2.46%), Financials +13.88% (YTD -9.83%) and Energy +24.76% (YTD -37.17%)
European Equities
The MSCI Europe Index were higher on the week, as EC President von der Leyen announced COVID-19 vaccines from Pfizer and BioNTech and Moderna could receive conditional marketing authorization by mid-December.
Drivers: I) The Euro-zone report on inflation in October showed a drop of -.03% on an annual basis relative to September, while the core inflation rate was unchanged at 0.2%. The overall core inflation rate is about 1.0% below the level seen in January and February. The primary drivers of the decline have been reduced economic activity due to COVID-19, and the decline in Germany’s VAT rate from 19.0% to 16.0% in July.
II) In November, Euro-zone household confidence declined by 2.1 points to -17.6. The drop in confidence was expected due to the invoking of new COVID-19 restrictions in the UK, Germany, Italy, and France after new virus cases spiked. The overall impact of the restrictions is expected to be less austere than seen during the spring, and consumer confidence has improved from its low level of -22.0 in April.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +1.44% for the week (MTD +15.96% YTD -0.26%).
Asian Equities
Asian equity markets were mixed as the investors dealt with the conflict between the rise in coronavirus cases versus hope that an effective vaccine will revive global economic growth. The DJ Asia Index advanced by +1.76% for the week, (MTD +10.56% YTD +3.67%).
Drivers: I) In China, economic data releases for October showed steady growth, led by a strong 6.9% increase in Industrial Production on an annual basis. Domestic fixed investment increased by a solid 1.8% last month, and grew at a strong 12.2% rate for the first ten months of 2020. The fixed investment growth was fueled by strong growth in real estate, and moderate recoveries in infrastructure and real estate.
II) In Japan, Q3 2020 GDP growth jumped by 21.4% quarter to quarter on a seasonally adjusted annual rate. This was the first quarterly increase in GDP since Q3 2019, and exceeded the Street consensus forecast of 19.0%. The rebound in growth was supported by the recovery in global demand, fiscal and monetary support from Japan’s government and central bank, which was all aided the recovery in net trade (+12.1% points of growth).
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +0.56% (MTD +11.11% YTD +9.86%), the Hang Seng Index was higher by +1.14% (MTD +9.73% YTD -5.75%) and the Shanghai Composite advanced by +2.04% (MTD +4.75% YTD +10.74%).
Fixed Income
Treasury yields fell last week as the spike in new coronavirus cases globally, and weak US retail sales data sent rates lower, which flattened the yield curve and pushed US mortgage rates to record lows.
Performance: I) The 10-year Treasury yield was lower last week ending at 0.829% down from 0.894%. The 30-year yield fell last week finishing at 1.522% dropping from 1.648%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose by +0.59% last week, MTD +0.94% and YTD +7.31%. The Bloomberg Barclays US MBS TR was higher at +0.14% last week, MTD +0.13% and YTD +3.71%. The Bloomberg Barclay’s US Corporate HY Index rallied higher by +0.61% for the week, MTD +3.23% and YTD +4.40%.
Commodities
The DJ Commodity Index advanced last week by +2.22% and is up month to date +7.68% (YTD +5.60%). The commodity sector was led by the rally in industrial metals such as copper due to increased demand from China.
Performance: I) The price of oil rose last week by +5.10% to close at $42.17 and is higher month to date by +18.05% (YTD -30.94%). Oil prices rose on hopes that an effective COVID-19 vaccine will soon be approved for distribution, and OPEC and its allies will hold the line on agreed upon production cuts.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was lower by -0.34% ending at 92.40 for the week (MTD -1.57% YTD -4.13%). The USD fell last week, due to rising optimism that an efficacious COVID-19 vaccine could be released as soon as mid-December.
III) Gold was lower last week, as investors sold the precious metal on the hope that a COVID-19 vaccine would soon be released. Gold fell in price by -0.98% last week, declining to $1869.6 (MTD -0.49% YTD +22.75%).
Hedge Funde
Hedge fund returns in November are higher with all of the core strategies Equity Hedge, Event Driven, Macro/CTA, Relative Value and Multi-Strategy positive for the month.
Performance:
- The HFRX Global Hedge Fund Index is higher at +2.21% MTD (+3.64% YTD).
- Equity Hedge has advanced by +3.61% MTD (+0.01% YTD).
- Event Driven is up MTD +1.82% (YTD +6.25%).
- Macro/CTA has risen by +1.04% MTD (+0.63% YTD).
- Relative Value Arbitrage is higher by +1.85% (+6.47% YTD).
- Multi-Strategy is up MTD by +1.74% (+5.95% YTD)
Data Source: Haver Economics, HFR, Bloomberg, Morningstar and FactSet
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