13.11.2020 - As of noon on Friday, global equities traded close to record territory as optimism over the potential for a highly effective vaccine to protect against the coronavirus raised hopes that economies will be able to open up more fully sooner than anticipated. The yield on the US 10-year Treasury note rose 10 basis points to 0.88%, having reached 0.97% on Monday at the height of the vaccine euphoria. The price of a barrel of West Texas Intermediate crude oil rose to $40.50 from $37.60 a week ago. Volatility declined further, to 24.3 from 28.7.
Vaccine developments shift sentiment Investors had been anticipating a moderately efficacious coronavirus vaccine sometime toward the middle of 2021. However, news on Monday that a stronger candidate could become available in reasonable quantities — and in the first half of 2021 — brought a change of heart, propelling beaten-down value stocks higher while undermining the case for growth stocks, which tend to outperform during times of sluggish economic growth. Dr. Anthony Fauci, a member of the White House Coronavirus Task Force, said on Thursday, “Certainly it’s not going to be a pandemic for a lot longer because I believe the vaccines are going to turn that around.” Amid the rotation, the broad market has continued to rally, taking the S&P 500 Index into record territory intraday on Monday before easing. The move to new highs comes despite a dramatic uptick in COVID-19 cases in the United States, with positive test results hitting 150,000 on Thursday. Hospitalization and death rates are trending higher as well. Some European countries are starting to see an easing in the rate of new infections after mobility restrictions were renewed in recent weeks.
Optimism brings inflows Data from Bank of America shows that global equity funds received record inflows of $44.5 billion in the week ending 11 November. The US received $32.5 billion, the second highest amount on record, though Japan and Europe experienced outflows. Two battered sectors, energy and financials, saw substantial inflows of around $1.4 billion each. High yield attracted $3.3 billion on the week.
Biden begins building team Despite ongoing legal challenges mounted by the campaign of US President Donald Trump in several states, President-elect Joe Biden began the process of building out his administration this week, beginning with the appointment of Ronald Klain as White House chief of staff. Klain is well known in Washington policy circles and is a longtime Biden aide. Investors are keenly interested in the makeup of Biden's cabinet, particularly because some progressive Democratic senators have publicly indicated that they would like to lead government departments. The outcome of a pair of 5 January runoff elections for Georgia's two senate seats will determine control of the upper chamber. If the Republicans retain control, progressive appointments could struggle to gain Senate confirmation and Biden would likely have to aggressively deploy executive action to achieve his policy goals rather than going through Congress.
Trump ups pressure on China The Trump administration announced an executive order on Thursday that will bar US citizens from investing in companies that the administration says are controlled by China's military. Thirty-one firms, including some high profile companies in the telecommunications sector, are included. Under the order, US investors will be prohibited from purchasing securities issued by the firms starting on 11 January 2021 and transactions to divest ownership will be permitted until 11 November 2021. White House trade advisor Peter Navarro estimated the companies' combined market capitalization is at least a half-trillion dollars.
Unfinished business in Washington Little movement has been seen on Capitol Hill this week toward resolving a standoff over the size and scope of additional pandemic relief. Speaker of the House of Representatives Nancy Pelosi (D-CA) said on Thursday that any package needs to reach at least $2.2 trillion in new spending while Senate Majority Leader Mitch McConnell (R-KY) continues to advocate for a more targeted package worth around $500 billion. Unless the two sides come to an agreement before the end of the year, a number of pandemic-related programs will lapse on 31 December, including funding for some of the US Federal Reserve's programs to backstop business and municipalities, as well as extended jobless benefits.
The German ZEW economic sentiment index plunged from 56.1 in October to 39 in November as a second wave of COVID-19 infections swept Europe.
The European Parliament and European national governments reached a budget agreement this week that clears the way for the funding of the €1.8 trillion recovery package which will offer a lifeline to heavily indebted European countries hit hard by the pandemic.
European Central Bank President Christine Lagarde said this week that all policy options are on the table. Continued monetary support is needed to achieve the ECB's inflation aims and to support economic growth, she said, adding that that the eurozone economy faces headwinds from the spread of the coronavirus and the resulting social distancing restrictions.
Chinese regulatory action undermined technology shares this week as the country sought to root out monopolistic practices in the sector. Authorities are worried about a K-shaped corporate recovery, led by Internet stocks and technology companies while the traditional manufacturing and services industries lag.
Nikkei News reported this week that over 30% of Japanese-listed companies have revised up net profit forecasts for this fiscal year.
With around 92% of the constituents of the S&P 500 Index having reported for Q3 2020, blended earnings per share (which combines reported data with estimates for those that have yet to report) shows that earnings growth is running at -7.1% while sales fell 1.6% compared with the same quarter a year ago, according to data from FactSet Research. So far this quarter, about 89% of the companies reporting have exceeded expectations.
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Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.
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