Pictet North America Advisors

2020 Weekly Views — October 12

Pictet North America Advisors 2020 Weekly Views — October 12
Pictet North America Advisors

2020 Weekly Views — October 12

Pictet North America Advisors 2020 Weekly Views — October 12

Market update

Risk-on week

The S&P 500 closed the week at 3,477.13, +3.84% higher. The Dow Jones closed at 28,586.90, +3.27%, with the Nasdaq up by +4.56%. The volatility index VIX closed the week at 25.00 down from 27.36. The Euro Stoxx 600 gained +2.11%.

The 10-year UST closed at 0.77% up from 0.70% from a week before. The yield curve steepened with the yield spread between the 3-month and 10-year UST at +67bps. Corporate Bond spreads: Investment Grade tightened 10bps at 164bps and High Yield tightened 44bps to 559bps. German 10-year Bunds yield closed at -0.52% up from -0.53% a week ago. In Europe, Corporate Investment Grade spreads tightened 7bps to 128bps and High Yield tightened 19bps to 455bps.

The US Dollar Index (DXY) depreciated -0.84% during the week and closed at 93.06. The Euro closed at 1.1826 (+0.94% weekly); the Yen depreciated -0.31%, closing at 105.62 and the Swiss Franc appreciated +1.08%, closing at 0.9107. Gold closed at $1,930.40 appreciating +1.61%. Oil was up with Brent closing at $42.85 (+9.1%) and WTI at $40.60 (+9.6%).

Macroeconomy

Covid-19 update
New restrictions continue to be implemented across Europe as daily cases continue to rise at the fastest rate of the pandemic. In the UK, more than 100k cases were reported last week versus 68k the week before. France saw a record number of new infections, after new cases had flattened over the last week. Cases in Italy are also on the rise with the country reporting an increase of more than 3k daily cases for the first time since April. In the US, schools in Boston postponed their reopening after the positivity rate rose above 4%, the 7-day rolling sum of new cases in the US has remained over 300k for more than two weeks.

Stimulus
Stimulus talks stalled on Monday after President Trump told Senate Majority Leader Mitch McConnell to stop negotiating and focus on his Supreme Court nomination which followed weeks of inconclusive back-and-forth, with GOP's offer topping out at $1.6tr compared to Democrats $2.2tr expectations. However, on Friday President Trump tweeted about the prospects of a skinny stimulus deal ahead of the election whilst endorsing a $25bn package for airlines and an additional $135bn for the Paycheck Protection Program to support small businesses. In contrast, McConnell said earlier that it was unlikely an agreement could be reached in Congress before election. At the same time, September FOMC minutes said real activity, the labor market, and inflation were all notably stronger at that time compared to June projections. There were some notes of caution in the debate that the pace of recovery could be slower if stimulus was smaller or arrived later than expected.

China Golden week
The National Day holidays in early October have provided further evidence of China’s solid recovery. The holidays start with the Chinese National Day celebrated on October 1st every year to commemorate the founding of People’s Republic of China. On that day, lots of large-scaled activities are held nationwide. The 7-day holiday is called 'Golden Week'. Last week, the number of tourist visits amounted to 637m during the holidays, -20% less than last year’s level but up from a drop of -47% during the Labor Day holidays in May. Retail sales grew by +4.9% y-o-y during the week, up from +0.5% y-o-y in August.

Economic data
US jobless claims dropped to 840k in the week ended Oct. 3 coming above analysts’ expectations at 820k and numbers in the previous week were revised higher to 849k. In Europe, German industrial production fell by -0.2% m-o-m in August, below consensus expectations of a +1.5% increase. Industrial output was 9.6% lower than a year earlier. In Asia, the Caixin China PMI composite index fell in September to 54.5 from 55.1 in August. New orders gauge rose to 54.5 from 53.7 in August. The services index rose from 54 in August to 54.8 in September bypassing analysts’ expectations. South Korean exports grew 7.7% year on year in September, the first increase in seven years, while imports rose by 1.1%, leading to the largest trade surplus in two years. Taiwan fared ever better in trade, with a 9.4% jump in exports in September from the year before.

Highlights

On rates
The US 10-year Treasury yield moved up last week by 10bps to 0.77%, driven by both an increase in the real yield and inflation expectations. As short-term rates remain well anchored by the Fed’s forward guidance, the US Treasury yield curve steepened with the 30Y-to-2Y part at 144 bps, almost back to the highs reached early June. Also, the Fed minutes showed ongoing debate about the details of the new “average inflation targeting” strategy. The Fed hinted it would give details of what this strategy meant for the QE program, which is left running at $120bn per month.

Reporting season
The Q3 season is about to start in the US. On a y-o-y basis, earnings growth is expected at -21% in Q3 compared to -32% in Q2. Of the 69 of S&P 500 companies that have issued guidance so far (versus 100 to 110 usually), two-thirds have sent positive guidance, a much higher proportion than is normal. Some companies that have issued upside preannouncements last week included McDonald’s, Novo Nordisk, BASF, Henkel, Pandora, Samsung Electronics, or Zalando. The financial sector will kick off the season as usual with Blackrock, Citigroup, JPMorgan, Bank of America, Goldman Sachs, Wells Fargo or Morgan Stanley reporting this week. Other notable companies reporting will be Johnson & Johnson, Delta Airlines, United Airlines, Unitedhealth, Honeywell or Schlumberger.

Chinese Yuan
On the back of a strong appreciation by roughly +1.9% since the beginning of September, the People’s Bank of China on Monday set its daily reference rate only slightly weaker than analysts expected. The reference rate was fixed at 6.7126 per dollar on Monday, compared with the average estimate of 6.7073 in a Bloomberg survey (the reference rate is decided based a formula that takes into consideration the onshore yuan’s official close at 4:30 p.m. on the previous trading day and major currencies’ moves overnight).

What to watch

​​​​​​​Monday:Q3 earnings season: 32 US companies and 9 EU companies; Chinese M2 money supply and foreign direct investment (Sep.)

Tuesday: US CPI index (Sep.); Online Apple product launch event; Amazon prime day (day 1)

Wednesday: Euro area industrial production (Sept.); Japanese industrial production (Aug.); Amazon prime day (day 2)

Thursday: European Council Meeting; US initial jobless claims; US Philadelphia Fed Manufacturing Survey (Oct.); Chinese CPI and PPI (Sep.)

Friday: European Council Meeting; US retail sales & industrial production (Sept.); US Michigan Consumer Sentiment (Oct.); Euro Area CPI (Sept.)


Investment team ― Pictet North America Advisors