20.11.2020 - As of noon on Friday, global equities were higher on the week, having set records on Wednesday on news that more than one highly efficacious coronavirus vaccine candidate may come to market sooner than anticipated. However, worsening near-term COVID-19 trends tempered the medium-term optimism as increasingly strict restrictions could be a near-term drag on economic growth and corporate profitability. The yield on the US 10-year Treasury note fell 4 basis points from a week ago to 0.84% while the price of a barrel of West Texas Intermediate crude oil rose to $41.75 from $40.50. Volatility, as measured by the Cboe Volatility Index (VIX), fell to 22.8 from 24.3 last Friday.
MACRO NEWS
US Treasury to allow Fed backstops to expire On Thursday, the US Department of the Treasury informed the US Federal Reserve Board that the department will not renew a number of programs put in place early in the coronavirus pandemic to backstop specific fixed income asset classes. While the programs have been little used, their existence has provided investors with a safety net, one that will expire at the end of 2020. Secretary of the Treasury Steven Mnuchin has asked the central bank to return $455 billion of unused funds and for Congress to reallocate those monies to fund additional Paycheck Protection Program loans. The Fed has asked Treasury to reconsider the decision. The incoming Biden administration could revive the backstop, but such an action would need congressional approval.
Hungary and Poland block EU budget Hungary and Poland have vetoed the European Union budget and the critical coronavirus rescue package contained within it. The budget contains provisions requiring member states to uphold the rule of law and to abide by European values. The two Central European countries counter that those conditions limit their sovereignty. Unanimity among the EU member states is needed to pass the €1.8 trillion seven-year budget.
US home sales hit 14-year high In October, ultra-low mortgage rates and shifting housing patterns spurred by the pandemic caused US existing home sales to expand for a fifth consecutive month, to an annual rate of 6.85 million, the highest annualized rate since February 2006. Prices jumped 15.5% over the previous year, the National Association of Realtors reported, while the median home price rose to $313,000, a record on both a nominal and inflation-adjusted basis. Retail sales were less robust in October, rising a less-than-expected 0.3%, the slowest pace in six months.
Global equities attract flows The upbeat news on the potential for the near-term rollout of several coronavirus vaccines has helped prompt significant inflows into global equities in recent weeks. Bank of America estimates that $74.4 billion has flowed into global equity markets over the past two weeks, with the US, Europe and emerging markets attracting investment. At the same time, Investors Intelligence reported this week that its survey of newsletter writers found that nearly 60% of them were bullish, which is often a contrarian indicator.
Global indebtedness soars An Institute of International Finance (IIF) study finds that the total level of global indebtedness rose by $15 trillion in the first three quarters if 2020 to $227 trillion or about 365% of global GDP, up from 320% at the end of 2019. The IIF warned that the pace of debt accumulation will make it difficult for the global economy to reduce borrowing in the future without "significant adverse implications for economic activity."
EU Brexit negotiator quarantined Time is running out for the United Kingdom and the EU to reach a trade and security agreement by the end of 2020. Complicating matters is the news that Michel Barnier, the EU's chief negotiator, has been quarantined due to a COVID-19 exposure. While hopes are rising that a deal can still be struck, talks are now seen as potentially dragging on into December, leaving parliaments little time to ratify any agreement before the transition period ends on 31 December. As a result, European governments have begun preparations for a no-deal Brexit.
QUICK HITS
Japan's core consumer price index fell 0.7% compared with a year ago in October, the measure's weakest reading since March 2012. On a brighter note, Japan's GDP bounced back at a 21% annual rate in Q3.
A wave of corporate defaults in China is roiling the country's credit markets. The defaults include at least one AAA-rated name.
The International Monetary Fund warned that elevated asset prices point to a disconnect between markets and the real economy and are a potential threat to financial stability. However, the IMF urged governments and central banks not to prematurely withdraw policy support.
The Trump administration is expected to introduce today a rule tying some US prescription drug prices to the prices of those drugs in other countries.
Despite rapidly rising debt levels, Canada's AAA sovereign debt rating was affirmed this week by Moody's.
European Central Bank President Christine Lagarde told the European Parliament this week that the bank will forcefully act to help the economy. She told members that the Pandemic Emergency Purchase Program and targeted long-term repurchase agreements will likely remain the main tools in the central bank's kit.
The nomination of Judy Shelton to the Federal Reserve Board by US President Donald Trump failed to advance this week, and it is unclear if her nomination will be brought up for another vote. Three Republican senators failed to back the appointment due to Shelton's unorthodox views on monetary policy.
Industrial production in China held steady at 6.9% year over year in October while retail sales grew 4.3% and fixed asset investment rose 1.8%.
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Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.
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