Pictet North America Advisors

2020 Weekly Views — September 14

Pictet North America Advisors 2020 Weekly Views — September 14
Pictet North America Advisors

2020 Weekly Views — September 14

Pictet North America Advisors 2020 Weekly Views — September 14

Market update

Corporate activity​​​​​​​

The S&P 500 closed the week at 3,340.97, -2.51% lower. The Dow Jones closed at 27,665.64, -1.66%, with the Nasdaq down -4.06%. The volatility index VIX closed the week at 26.87 down from 30.75. The Euro Stoxx 600 gained +1.67%.

The 10-year UST closed at 0.67% down from 0.72% from a week before. The yield curve flattened with the yield spread between the 3-month and 10-year UST at +55bps. Corporate Bond spreads: Investment Grade tightened 7bps at 168bps and High Yield widened 16bps to 584bps. German 10-year Bunds yield closed at -0.48% down from -0.47% a week ago. In Europe, Corporate Investment Grade spreads were unchanged at 124bps and High Yield tightened 6bps to 445bps.

The US Dollar Index (DXY) appreciated +0.66% during the week and closed at 93.33. The Euro closed at 1.1846 (+0.07% weekly); the Yen appreciated +0.08%, closing at 106.16 and the Swiss Franc appreciated +0.50%, closing at 0.9089. Gold closed at $1,940.55 appreciating +0.34%. Oil was down with Brent closing at $39.83 (-6.6%) and WTI at $37.33 (-6.1%).

Macroeconomy

Covid-19 update
On Friday, Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, said the latest data on the U.S. Covid-19 outbreak was “disturbing,” with a worrying level of new infections even as the number of daily new cases (roughly 33.9k on average per day over the last 5 days) remains far lower than the peak. In Europe, cases continue to raise and the UK government announced new measures limiting gatherings to a maximum of 6, indoors or outdoors. Israel is to impose a new national 3-week lockdown as the country faced a surge with 4,000 new daily infections. In the vaccine front, AstraZeneca confirmed that the trial was stopped after a person developed neurological disorder that causes inflammation of the spinal cord. Over the weekend, the company announced that phase-3 trials will resume in the UK after regulators concluded it was safe to do so while trials in other countries remain paused. Pfizer’s CEO declared yesterday that it’s likely that the US will deploy a vaccine to the public before year-end.

US fiscal stimulus
Last week an updated Republican fiscal stimulus bill failed to reach the 60 GOP Senate votes needed to advance. The Senate Majority Leader Mitch McConnell said Friday "I can't predict we are going to get together here in these last two months before the election," and "I wish I could tell you we were going to get another package, but it doesn't look that good right now".

ECB meeting
On Wednesday, the ECB left policy on hold (deposit facility rate at -0.50%), reiterated that the PEPP purchase package will be fully utilized and GDP/inflation expectations were adjusted. GDP forecasts were announced (2020 at -8% vs. prior -8.7%, 2021 at +5% vs. prior +5.3%, and 2022 at +3.2% vs. the prior +3.3%) while inflation forecasts were also adjusted (2020 at +0.3% unchanged, 2021 at +1% vs. prior +0.8%, and 2022 at +1.3% unchanged). President Lagarde said the ECB has taken “good note” of the Fed’s recent policy shift and the ECB is conducting its own review which is due to be announced by mid-2021. Lastly, Lagarde mentioned that EUR strength would be taken into account when considering policy and the growth/inflation outlook.

Brexit
Last week, the UK government published their Internal Market Bill. The bill would allow the government to override elements of the Withdrawal Agreement reached between the UK and the EU therefore breaching an international treaty. On the European side, Commission President von der Leyen tweeted that she was “very concerned about announcements from the British government on its intentions to breach the Withdrawal Agreement. This would break international law and undermines trust”. US House Speaker Nancy Pelosi said that “if the UK violates that international treaty and Brexit undermines the Good Friday accord, there will be absolutely no chance of a US-UK trade agreement passing the Congress”. The pound depreciated -3.64% last week.

Highlights

Tech sell off continues
The tech-heavy Nasdaq (Apple, Amazon, Microsoft, Facebook and Google make up 40% of the index) fell by -4.06% last week. Investors continued to unwind positions in Tech shares on the back of a very strong performance which accelerated through the summer months, especially in August. Despite a roughly -10% sell off, Nasdaq is still posting a +20.96% return year-to-date, compared to +3.41% for the S&P 500. While some reports suggested the Tech stocks performance was boosted by Japanese investing conglomerate SoftBank loading up on call options, other analysts point out to day traders buying enormous amounts of call options, which have created a virtuous hedging and buying cycle pushing stocks upwards. It could be seen through the recent spike of US equity purchase premiums on call options for trades of 10 contracts or less.

LVMH & Tiffany
LVMH issued a press release stating it is no longer able to complete the Tiffany (TIF) deal within the deadlines agreed. Separately, TIF has announced it is suing LVMH for contractual breach in a Delaware court. LVMH explained that the decision is driven by a combination of factors including advice from the French European and Foreign Affairs Minister to delay the acquisition to Jan 2021 due to threat of US taxes on French exports, TIF's own request for delay as well as legal aspects.

Corporate transactions
Gilead Sciences will acquire biopharmaceutical company Immunomedics for $21bn, a 108% premium to the Sept. 11th close. The deal will provide Gilead with Trodelvy, an antibody drug for advanced triple-negative breast cancer. The drug was given accelerated FDA approval in April. NVIDIA formally announced a deal to buy Arm for $40bn, a chipmaker owned by Softbank. Arm is expected to continue to operate its open-licensing model while maintaining the global customer neutrality that has been foundational to its success. NVIDIA intends to retain the name and strong brand identity of Arm and expand its base in Cambridge. Arm’s intellectual property will remain registered in the U.K.

What to watch

Monday: Japan Industrial Production (July final)

Tuesday: Apple “Time Flies” product launch; China Industrial Production and Retail Sales (Aug.); Germany ZEW Survey (Sept.); US Empire Manufacturing (Sept.); US Industrial Production (Aug.)

Wednesday: FOMC rate decision and Fed Chair Powell News Conference; US MBA Mortgage Applications (Sep. 11); US Retail Sales (Aug.)

Thursday: Bank of Japan monetary policy decision and briefing; Eurozone CPI (Aug. final); UK Bank of England Official Bank Rate; US Housing Starts (Aug.); US Initial Jobless Claims (Sept. 12)

Friday: Japan National CPI (Aug.); Bank of Russia Key rate Announcement;US Leading Index (Aug.); University of Michigan Sentiment (Sept. prel.)


Investment team ― Pictet North America Advisors