Pictet North America Advisors

2020 Weekly Views — November 16

Pictet North America Advisors 2020 Weekly Views — November 16
Pictet North America Advisors

2020 Weekly Views — November 16

Pictet North America Advisors 2020 Weekly Views — November 16

Market update

Vaccine news​​​​​​

The S&P 500 closed the week at 3,585.15, +2.16% higher. The Dow Jones closed at 29,479.81, +4.08%, with the Nasdaq down by -0.55%. The volatility index VIX closed the week at 23.10 down from 24.86. The Euro Stoxx 600 rallied +5.13%.

The 10-year UST closed at 0.90% up from 0.82% from a week before. The yield curve steepened with the yield spread between the 3-month and 10-year UST at +80bps. Corporate Bond spreads: Investment Grade tightened 7bps at 145bps and High Yield tightened 2bps to 523bps. German 10-year Bunds yield closed at 0.55% down from 0.62% a week ago. In Europe, Corporate Investment Grade spreads tightened 13bps to 108bps and High Yield tightened 40bps to 407bps.

The US Dollar Index (DXY) appreciated +0.57% during the week and closed at 92.75. The Euro closed at 1.1834 (-0.34% weekly); the Yen depreciated -1.24%, closing at 104.63 and the Swiss Franc depreciated -1.47%, closing at 0.9127. Gold closed at $1,889.20 appreciating -3.18%. Oil was up with Brent closing at $42.78 (+8.4%) and WTI at $40.13 (+8.1%).

Macroeconomy

Covid-19 update
As per Johns Hopkins University data, global cases reached 54.4m. With cases reaching new highs in several European countries, restringing measures are expected to be in place at least until the beginning of December. The latest country to toughen up the measures is Austria that will impose a strict, three-week lockdown. In the US, new daily infections rose above 166,000 on Saturday. The situation remains particularly acute in the Midwest and West. Michigan ordered closure of schools and restaurants. In New York City, schools are on the verge of closing as the city’s positivity rate is inching closer to the 3% threshold (used as a yardstick to close schools). At the national level, some grocers have started to put back purchase limits on certain items like paper towels and soap according to the Wall Street Journal.

Vaccine news
On Monday, Pfizer and BioNTech announced preliminary results of their phase 3 trial showing a 90% efficacy with no serious adverse event. While some questions remain such as production and distribution, how long it will protect against infection and how well it will work in the elderly, the results topped the best-case scenarios. Today, Moderna said its vaccine candidate is 94.5% effective based on preliminary phase 3 data and should be stable at temperature of a standard home or medical refrigerator. Lastly, Eli Lilly's antibody therapy was granted an emergency-use authorization by the FDA.

US economic data
Despite pre-election uncertainty, the NFIB Small Business Optimism index came in at 104.0 in October, unchanged from September and above February’s pre-pandemic level. Weekly new jobless claims slipped to 709k in the week to Nov. 7th as layoffs continued to ease. The University of Michigan survey showed a sharp decline in consumer sentiment this month at 77.0 compared to 81.8. Annual US consumer-price inflation came in at 1.2% in October, lower than 1.4% in September.

Global economic data
Euro Area Q3 GDP came slightly below expectations at +12.6% q-o-q compared to +12.7%. However, on a y-o-y basis growth is down -4.4%. UK GDP expanded by +15.5% in Q3 over Q2, but the UK economy was still -9.7% smaller than at the end of 2019. Japan’s Q3 GDP rose by a better-than-expected +5% (up from -7.9% in Q2) and by +21.4% at an annualized rate. In China, October industrial production came up +6.9% y-o-y versus expectations at +6.7%, retail sales came slightly below expectations at +4.3% y-o-y versus consensus at +5.0%. October CPI was +0.5% compared to +1.7% in September.

China increasing regulation
After strengthening regulations on fintech companies the week before, on Tuesday, the State Administration for Market Regulation (SAMR) released a draft on antitrust guidelines against the monopolistic practices in the Internet industry. Among others, the draft guidelines define monopolistic practices like price discrimination based on big data, bundle sales, predatory pricing, and exclusive dealing.

Brexit
Dominic Cummings, one of Johnson’s most senior advisors, resigned last week. Over the weekend, the UK’s chief Brexit negotiator declared: “We are working to get a deal, but the only one that’s possible is one that is compatible with our sovereignty and takes back control of our laws, our trade, and our waters. That has been our consistent position from the start and I will not be changing it”. PM Boris Johnson is self-isolating after meeting a colleague who tested positive.

Highlights

Value rotation
Last week’s announcement of highly positive trial results triggered several stark moves in the markets. Equity markets rose rapidly on the announcement. We saw a strong rotation from growth to value, with value’s outperformance last Monday the strongest in years as the beneficiaries of ‘stay at home’ trades were penalized in favor of potential winners from a cyclical recovery. Europe outperformed the US. Within Europe, the trailing indices staged big recoveries such as the IBEX +13.29%, the CAC 40 +8.45% and the FTSE 100 +6.88%. At sector level, cyclicals as energy companies in Europe rallied +15.5% and Financials rallied +11.6% whilst Healthcare and Technology companies lagged. There were some large moves in rates as US 10y yields moved +7.8bps higher and there was a similar move in Bund yields +7.4bps as economic growth expectations recover. Gold sold off whilst the cyclical commodities such as WTI and Brent rallied.

Q3 earnings season
Nearly 90% of companies reported so far in both the US and Europe. Earnings delivery has been much better than consensus expectations, with EPS surprises at +17% and +13% in the US and Europe, respectively. As activity picked up during the quarter, the proportion of US companies beating EPS estimates remains elevated at 84%. In Europe, EPS beats at 64% are the highest over the past 10 years. In terms of growth, while it has improved compared to Q2, it remains in negative territory across regions, printing at -8% y-o-y in the US and -20% y-o-y in Europe. At a sector level, cyclicals continue to underwhelm relative to defensives, with energy and industrials being a drag on overall growth.

What to watch

Monday: US Empire Manufacturing (Nov.)

Tuesday: US retail sales (Oct.); US industrial production (Oct.)

Wednesday: Euro area final HICP (Oct.); UK CPI (Oct.); US housing starts (Oct.)

Thursday: ECB’s Lagarde in EU parliament; US Initial jobless claims; US existing home sales (Oct.)

Friday: UK retail sales (Oct.)


Investment team ― Pictet North America Advisors