Market Reports

Afternoon Markets Brief 11-30-2020

Summary and Price Action Rundown

US equities retrenched slightly today after a month of powerful gains that were spurred by positive vaccine news and a relatively clear and orderly US election process, followed by pro-growth cabinet nominations by the incoming Biden administration. The S&P 500 backed off from Friday’s record high, declining 0.5% to shave year-to-date upside to 12.1%. The tech-heavy Nasdaq outperformed as economic fundamentals weighed on the Dow Industrials, which still registered its best monthly performance since 1987. For context, the Dow, which tends to be more sensitive to economic fundamentals, has underperformed significantly during the pandemic but was revitalized by the announcements of effective vaccines throughout November. The Euro Stoxx Index and Asian equities also retreated to close the month. A broad dollar index edged above its multi-year low today, while Treasuries have remained steady, with the 10-year yield hovering at 0.86%. Brent crude prices retreated below $48 per barrel as the ongoing OPEC meeting kept traders in suspense (more below).

 

US Economic Data Shows More Hints of Softening   

With US economic figures providing some garbled signals over the past few weeks, and analysts bracing for further deterioration amid the ongoing resurgence in Covid-19, today’s releases added to the evidence of a renewed slowdown. The MNI Chicago Business Barometer fell to 58.2 in November from 61.1 in October. New Orders dropped 5 points to the lowest level since August, while Production fell 1.2 points. Inventories slipped 2 points to a three-month low. However, Supplier Deliveries jumped 4.9 points to the highest level since May as firms saw delivery delays, while Prices at the Factory Gate surged 9.8 points to the highest level in two years. A special question asked: “Does the outcome of the general election have any effect on your forecast? “A majority 73.2% said that the election results do not influence their forecasts, while 12.5% saw their forecasts increase and 14.3% reported a decrease.” Similarly, the Dallas Fed manufacturing gauge undershot expectations, printing 12.0 versus a consensus estimate of 14.3 and the prior month’s 19.8.

Also, the Small Business Confidence index sank to its lowest level on record at a reading of 48, one-point below the previous low reported in the second quarter (Q2) during the worst of the pandemic-driven economic turmoil. Though responses in the current fourth quarter (Q4) survey, conducted in the period between November 10-17, were impacted by the virulent resurgence in Covid-19, the reinstatement of targeted lockdowns, and the Congressional deadlock in providing additional fiscal relief, survey-data suggests that President-Elect Biden’s victory further compounded the decline in relation to the Main Street outlook on taxes and regulation. Of the 2,200 small business owners polled, 53% expect tax policy to have a negative impact on their business during the next 12 months, and 49% said government regulation will have a negative impact over the same period. While the decrease in outlook is notable, responses from small business owners are heavily skewed by their political affiliations, and the index overall leans conservative. Separated by political connection, 75% of Republicans believe tax policy will have a negative effect and 72% said regulations will be negative, while only 15% and 11%, respectively, of Democrats believe tax and regulatory changes will hinder business operations. Overall, the survey indicates 34% of owners believe Joe Biden will be good for small business, while 55% say the opposite. Though by political affiliation, 89% of Republicans are pessimistic of the Biden administration on small business and 86% of Democrats are optimistic. The stark contrast in business sentiment following the election “reveals how deeply politics has become embedded in the public’s assessment of the economy, and in particular how divided the country is,” stated Laura Wronski, research science manager at SurveyMonkey. She continued to note over the past several quarters that Republican respondents consistently reported a higher degree of confidence than Democrats did, and post-election, that trend has flipped. At the moment however, the feasibility of the Biden team’s tax and regulatory proposals are unclear, and contingent upon Georgia’s runoff Senate races, as a Republican-controlled Senate would surely constrain Biden’s policy agenda.

Lastly, pending home sales in November fell 1.1% month-on-month, well below market expectations of a 1% gain, and following a 2% drop in October. However, this still leaves sales up 20.2% year-over-year following a 20.8% rise in September. Contract activity was mixed among the four major US regions, with the only positive month-over-month growth happening in the South, although each region saw year-over-year gains in pending home sales transactions. Lawrence Yun, NAR’s chief economist said, “The housing market is still hot, but we may be starting to see rising home prices hurting affordability. Both the inventory of homes for sale and mortgage rates are now at historic lows.”

Today’s mixed economic readings follow last week’s pre-holiday data dump that also showed signs of backsliding in weekly jobless claims and October Personal Income.

Vaccine Developments in Focus

With trials showing impressive effectiveness of the various vaccines, investors are now pondering the remaining unknowns of the rollout timeline and public uptake. Moderna’s stock rose 20.2% today on news of its plans to apply for emergency authorization use for its vaccine, a move that could drastically change the course of the pandemic. The results of Moderna’s Covid-19 vaccine trial were released today showing 94.1% efficacy, bolstering hopes of initial vaccine deployment before year’s end. Out of 30,000 participants, only 11 of the 15,000 that received the vaccine developed Covid-19, compared with 185 from the 15,000 who received the placebo. No severe cases emerged in the subset receiving the vaccine compared to 30 in the placebo subset, implying a near 100% efficacy at preventing severe cases. Moderna stated it will file with the FDA on today for emergency authorization of the vaccine following Pfizer’s application on November 20th. The FDA will review both Pfizer and Moderna’s filings on December 10th and 17th respectively, after which, if the panel grants emergency authorization, the process will escalate to the advisory committee from the CDC for recommendations on the first recipients of the vaccine. Once those recommendations are made, vaccines are cleared for distribution and use. Moderna has stated it expects to have 20 million doses by the end of 2020 and as many as 1 billion doses globally in 2021. – MPP view: Investors are still caught in the transition phase between the grim near-term public health reality and its economic consequences, and giddy optimism over the longer term view of widespread distribution of the effective vaccine delivering us from the pandemic.

Additional Themes

Oil Slides with OPEC+ Lacking Consensus – The conclusory cartel meeting was rescheduled from tomorrow to December 3rd as reports suggest continued disagreement over the potential extension of price-supporting output restrictions beyond their scheduled expiry in January. Oil prices reversed a portion of their recent upside today, but remain close to multi-month highs, as caution sets in over the possibility of a less ambitious extension or even a deadlock. For context, prices of international benchmark Brent crude and US benchmark WTI both reattained levels from early March last week amid a confluence of bullish factors, including the brightening demand outlook stemming from the encouraging Covid-19 vaccine developments, a weakening dollar, and indications that Saudi and Russia were set to push their fractious OPEC+ allies to hold to their supply curbs well into 2021, with a three-month extension the consensus expectation. Reports now suggest that the timeframe could be limited to two months or feature a gradual tapering of the curbs over three to four months. The UAE is said to be one of the key holdouts and had reportedly threatened to withdraw from OPEC earlier this month over dissatisfaction with other members’ uneven compliance with the cartel supply cuts. Nigeria and Iraq are the two OPEC members that have struggled to implement the curbs and have been pushed for compensatory cuts. – MPP view: Like stocks, oil prices are in a transition phase as traders try to look past the dire near-term outlook to the post-vaccine demand surge. This will make cartel discipline harder to maintain into 2021, but Russia/Saudi should succeed in securing one last supply curb extension at their meeting this week. As we have expected, anticipation of this last OPEC boost will provide some short-term support to prices, and post-election US stimulus dynamics (when they materialize) should provide some additional lift, but we expect the dismal demand dynamics of the coming quarters to keep prices capped, though this short-term rally has exceeded our expectations. This burst of optimism in oil markets has increased the risk that OPEC fails to deliver meaningful additional support to the market in this week’s pivotal meeting, as member discipline will be questionable.

Reserve Bank of Australia Meeting – This evening the Reserve Bank of Australia (RBA) will hold an interest rate meeting. At the November meeting the RBA lowered its cash rate to an all-time low of 0.1% from 0.25%. Policymakers said they would buy A$100 billion of government bonds with maturities of around five to 10 years over the next six months. The RBA also cut its target for three-year bond yields to 0.1%, from 0.25%, to align with the cash rate, which, it pledged will remain unchanged until inflation is sustainably within its 2-3% target band. GDP growth is expected to be around 6% over the year to June 2021 and 4% in 2022 while the unemployment rate is expected to remain high, but to peak at a little below 8%, rather than the 10% expected previously. This meeting is not expected to see any significant change in policy or statement as the November saw significant loosening in policy. – MPP view: We shall see if the RBA mentions its currency during the meeting, which is at its highest level against its US counterpart since 2018, but even if so, there should be scant impact. We expect the Biden administration, when it takes over, to quietly make the case to US allies that now is a particularly inauspicious time for currency controversies as the US attempts to course-correct on pandemic containment and patch up its raw internal political and socioeconomic divisions.

Morning Markets Brief 12-1-2020

Summary and Price Action Rundown

Global risk assets are mixed this morning after stellar month-to-date performance, with US equities registering record highs last Friday, as investors assess the latest China-related developments and await a key OPEC decision tomorrow. S&P 500 futures indicate a 0.2% lower open after the index edged to a new record high in Friday’s holiday-shortened session, gaining 0.2% to up its year-to-date gain to 12.4%, while the Dow Industrials has slipped a bit after crossing 30,000 for the first time last week. Equities in the EU are consolidating their recent gains as well, while Asian stocks were mostly lower overnight. A broad dollar index is descending to a new multi-year low, at a level last seen in April 2018, while longer-dated Treasuries are generally steady, with the 10-year yield ticking up to 0.85%. Brent crude is paring its recent upside, dipping below $48 per barrel, ahead of a pivotal OPEC meeting (more below).

 

China Headlines in Focus

Solid purchasing managers’ index (PMI) figures overnight reflected the robustness of China’s recovery but more potential additions to the US trade blacklist highlight ongoing US-China tensions. China’s official PMI figures for November topped estimates across the board overnight, with the composite reading registering a solid 55.7 versus October’s 55.3. For context, PMI readings over 50 denote expansion. The manufacturing reading accelerated to 52.1, outpacing the consensus forecast of 51.5 and the prior month’s 51.4. Services were even more impressive at 56.4, topping estimates of 56.0 and October’s 56.2. Nevertheless, the People’s Bank of China added liquidity to the financial sector as analysts cited proactive management of year-end cash needs. This positive data has helped support the renminbi near its strongest level versus the dollar since June 2018, which takes pressure off the incoming Biden administration on the currency front, but other key US-China sources of tension persist, with the outgoing Trump administration obviously intent on keeping up the pressure in its final weeks. Reports overnight indicated that the White House is preparing to add more Chinese companies to its trade blacklist due to ties with China’s military, including chip giant SMIC and oil major CNOOC, shares of which fell 2.7% and 14.0%, respectively, on the Hong Kong exchange overnight. Analysts have been pondering the extent to which the Biden administration will continue President Trump’s hardline policy direction against China. – MPP view: We believe the Biden administration will take a more multi-lateral approach to confronting China, focusing more on using its human rights transgressions to marshal international pressure on officials and businesses, while still maintaining the segments of the Trump China policy that cover national security, IP, property rights, and investments. We expect trade and currency to be de-emphasized, or perhaps more accurately, dealt with in a more subtle fashion.

OPEC+ Members Lack Consensus Ahead of Pivotal Meeting

With the cartel and its allies meeting today and tomorrow, traders are highly attuned to signs of disagreement over the key issue of whether or not to extend supply caps into 2021. The full cartel meeting will commence later today following headlines indicating that informal interactions among members revealed rifts over the potential extension of price-supporting output restrictions beyond their scheduled expiry in January. Oil prices are retracing a portion of their recent upside this morning, but remain close to multi-month highs, as caution sets in over the possibility of a less ambitious extension or even a deadlock. For context, prices of international benchmark Brent crude and US benchmark WTI both reattained levels from early March last week amid a confluence of bullish factors, including the brightening demand outlook stemming from the encouraging Covid-19 vaccine developments, a weakening dollar, and indications that Saudi and Russia were set to push their fractious OPEC+ allies to hold to their supply curbs well into 2021, with a three-month extension the consensus expectation. Reports now suggest that the timeframe could be limited to two months or feature a gradual tapering of the curbs over three to four months. The UAE is said to be one of the key holdouts and had reportedly threatened to withdraw from OPEC earlier this month over dissatisfaction with other members’ uneven compliance with the cartel supply cuts. Nigeria and Iraq are the two OPEC members that have struggled to implement the curbs and have been pushed for compensatory cuts. – MPP view: Like stocks, oil prices are in a transition phase as traders try to look past the dire near-term outlook to the post-vaccine demand surge. This will make cartel discipline harder to maintain into 2021, but Russia/Saudi should succeed in securing one last supply curb extension at their meeting this week. As we have expected, anticipation of this last OPEC boost will provide some short-term support to prices, and post-election US stimulus dynamics (when they materialize) should provide some additional lift, but we expect the dismal demand dynamics of the coming quarters to keep prices capped, though this short-term rally has exceeded our expectations. This burst of optimism in oil markets increases the risk that OPEC fails to deliver meaningful additional support to the market in this week’s pivotal meeting, as member discipline will be questionable.   

Additional Themes

Black Friday Spending Shows a Resilient US Consumer – US consumers spent $9 billion online on Black Friday, up 21.6% on a year ago. Adobe had originally forecast sales of between $8.9 billion and $9.6 billion. The figure makes Black Friday the second-largest online spending day in US history, after 2019’s Cyber Monday. The National Retail Federation (NRF) has predicted that holiday sales during November and December will increase between 3.6% and 5.2% this year from 2019 to a total of between $755.3 billion and $766.7 billion, up from last year’s 4% gain that totaled $729.1 billion. Of that amount, NRF expects that online and other non-store sales will increase between 20% and 30% to between $202.5 billion and $218.4 billion, up from $168.7 billion last year. Nevertheless, holiday sales metrics can often contrast with overall consumption figures, and the disappointing October retail sales reading suggested a degree of deterioration in demand as the pandemic intensifies into its second winter season.

Signs of Progress Keep Brexit Deal Hopes High – The pound is turning higher again this morning, though remains below recent multi-month highs versus the dollar and euro, amid upbeat assessments of the prospects for an agreement this week between the UK and EU to avoid a disorderly year-end Brexit. The thorny matter of fishing rights apparently remains the key sticking point, though UK Foreign Secretary Raab expressed optimism that a compromise could be found, and indicated greater clarity on possible resolution of UK state aid and “level playing field” issues. – MPP view: Our base case remains a hard and/or disorderly Brexit at year-end, though the renewed pressure from the pandemic is adding further impetus for PM Johnson to compromise and secure a deal, while the sidelining of arch Brexiteer Cummings also suggests a possible softening of the UK position. We do not expect the EU to give much ground from here.

Five Minute Macro 11-30-2020

In this week’s Five Minute Macro, global markets remain positive on a Yellen Treasury and continued positive vaccine news. New entrants at 3 and 4 are this week’s OPEC meeting and oil prices along with the Pound and Brexit deal, while US political uncertainty continues to easy.

Morning Markets Brief 11-3-2020

Summary and Price Action Rundown

Global risk assets are subdued this morning after yesterday’s losses as investors continue to weigh the grim near-term outlook for the pandemic and the global economy against upbeat medium-term prospects for stimulus measures and eventual vaccine rollout. S&P 500 futures indicate a 0.1% lower open after the index retreated further from Tuesday’s record high yesterday, dropping 1.2% to reduce its year-to-date upside to 10.4%. Equities in the EU are lagging as regional leaders ponder further coronavirus containment measures, while Asian stocks were mixed overnight. A broad dollar index is up slightly from its recent multi-year low, while longer-dated Treasuries are firm, with the 10-year yield dipping to 0.86%. Brent crude is hovering around $44 per barrel despite some bearish signs of OPEC disunity ahead of its pivotal month-end meeting.

 

Investor Focus Shifts Back to Dire Near-Term Pandemic Dynamics Despite Vaccine Optimism

The announcement of school closures in New York City yesterday due to the accelerating coronavirus outbreak highlighted the downside risks to the economy over the coming quarters before widespread vaccine availability. US stock futures are still in the red this morning after equity losses accelerated yesterday afternoon following the announced closure of schools in New York City due to rising infection rates across the metropolis. The specific trigger was the weekly average rate of positive tests rising over 3%, which some analysts had thought might occur as early as last weekend. Mayor de Blasio characterized the closure as temporary but gave no indication of the timeline for reopening and cautioned a decline in the positivity rate alone may not be sufficient to send city students back to the classrooms. Although President-Elect Biden’s public health advisors have declined to support a strict lockdowns like the one imposed in South Australia this week, or even partial shutdowns like those instituted in Germany and France late last month, more state and municipal leaders are tightening restrictions and calling for families to stay home for the Thanksgiving holiday. Most recently, Kentucky announced statewide school closures this morning as well as a ban on indoor dining. Near-term concerns over the pandemic and its economic fallout are overbalancing more upbeat vaccine news, this time from AstraZeneca and Oxford University. Specifically, this vaccine is said to be highly effective in older adults, who are more vulnerable to this coronavirus and would be a higher priority for immunizations. – MPP view: We expect renewed US fiscal stimulus negotiations in December to be challenging and result in only a mini-deal before year-end (if that) and disabuse more optimistic investors of the notion that a GOP-controlled Senate will go higher than $500 billion for the post-transition pandemic relief deal (minus any amounts agreed next month). This puts the spotlight on the Fed, and we think they will not shy away from signaling augmented asset purchases at their December meeting.   

US Jobs Data in Focus Amid Rising Concerns of Double-Dip Recession

Analysts will be attuned to this morning’s jobless claims data for any signs of backsliding after weeks of improvement. After US retail sales for October signaled a warning about consumer fortitude ahead of what is increasingly likely to be a challenging winter from both a public health and economic standpoint, with large swathes of the US beset by the ongoing seasonal Covid-19 surge, labor market dynamics will be a key focus for market participants and policymakers alike. Initial jobless claims for the week ending November 14th are expected to improve slightly to 700K after the prior week’s tally showed that 709K Americans filed for unemployment benefits, down from the previous week’s revised level of 757K and below market expectations of 735K. This is the lowest number since late March but still well above pre-pandemic levels. Also, there were more than 298K new applicants to the Pandemic Unemployment Assistance (PUP) scheme, which covers workers that do not qualify for initial claims, compared with 362K in the previous period. So combined, 1.007 million claims were filed in the last two weeks. Furthermore, 6.79 million Americans filed continuing jobless claims in the week ended October 31st, comparing favorably with market expectations of 6.90 million and marking the lowest level since the pandemic began. All told, as of October 24th, 21.157 million Americans are receiving some fort of Federal assistance, down from 21.531 million in the previous week.

Additional Themes

Fed Nominee Shelton Faces Tough Odds – With the Senate now on recess until November 30th, and the potential for the balance of the Senate to shift with Democrat Mark Kelly being sworn in that day to replace Martha McSally after winning the race in Arizona, Judy Shelton’s nomination to the Fed Board is in jeopardy. For context, the process to confirm her was stalled in the Senate on Tuesday after Vice President-elect Kamala Harris returned to the chamber to cast a key vote today as two key Republicans were absent because of exposure to Covid-19. The other nominee under consideration, Christopher Waller, has broad support and is expected to be confirmed. Analysts have begun to speculate about which candidates the incoming Biden administration might consider if Shelton’s nomination falters and they have the chance to fill the vacancy. – MPP view: This would be a windfall for the Biden White House, particularly given the importance of Fed-Treasury coordination going forward. Even if her nomination fails, the Shelton precedent remains a signal to future administrations to get “your people” onto the FOMC to have your back.   

Turkish Lira Spikes on Rate Hikes – Turkey’s volatile currency is up 1.8% versus the dollar this morning, extending its recovery from late September’s all-time low, as the newly installed central bank governor implemented a 475 basis point interest rate hike to 15% at his inaugural meeting. President Erdogan has sent mixed messages regarding his support for the program of the newly installed economic team, and has a track record of interfering with central bank independence and advocating unorthodox economic theories. – MPP view: Emerging market assets have generally received a positive impetus from the Biden win, as he is assumedly more constructively engaged in international cooperation and development goals, along with the boost from a weaker dollar (please see our Market Viewpoints piece on EM from November 8th).    

Looking Ahead – Is It Over Yet? 11-6-2020

Looking Ahead – Is It Over Yet?

The concept of Election Day was already antiquated when this year’s enormous preponderance of early and mail-in voting elongated the process into an election month, while the tightness of the presidential race, as well as other key contests, has dragged the nation through an excruciating ordeal of piecemeal and halting ballot tabulation this week (though this is in no way the fault of the great people who are doing the hard work of ballot monitoring and counting). And even though a win looks highly likely for Joe Biden at this point, the Trump campaign is insisting that the race is not over, and recounts and legal challenges are sure to drag on, alongside a litany of unsubstantiated charges of fraud from the President and some of his ardent supporters.  

Our base case had long been for narrow and disputed results in the presidential race and key Senate contests, with uncertainty dragging on beyond election day. And though this is how events played out this week, it is a great relief to us, and to financial markets, that the worst case scenario of a breakdown of our obviously creaky electoral system accompanied by major civic unrest has been avoided (thus far, at least). Whether or not the final state tallies will leave any feasible room for doubt, the Trump campaign will surely continue with an array of seemingly desperate legal challenges. The next few weeks will reveal the extent to which the process will remain orderly and legitimate amid massive partisan pressures.

Even if cooler heads continue to prevail in the political arena, as we hope and expect, salient policy questions remain. Most importantly, how does this charged political environment impact the prospects for a pandemic relief bill before year-end? In this bizarre interregnum, Senate Majority Leader McConnell has indicated that passing a stimulus bill is his number one post-election priority, but he is unlikely to take a magnanimous position given the continued uncertainty over control of the Senate. Meanwhile, House Speaker Pelosi has shifting incentives as she prepares to stave off internal challenges to her leadership and eyes the possibility of a better post-transition deal. Last but not least, an obviously distracted President Trump must sign off on the agreement at a time when chief dealmaker Secretary Mnuchin is likely focused on his post-Treasury trajectory.      

The other key uncertainty involves control of the Senate. The twin Georgia runoffs in January could be the deciding factor for control of the chamber, and in that case there will obviously be a flood of money and resources into those contests. Both GOP candidates will go in as favorites but with Georgia looking like it may tip for Biden, investors should prepare for uncertainty. So while a Blue Wave certainly did not materialize, the Democrats’ tide still might go high enough to secure control of both houses of Congress and the White House.

In short, this fraught election cycle is far from over, but at least we have made it to the weekend. Cheers!

Looking ahead, next week’s calendar is mercifully light and non-market moving most likely, with third quarter earnings season pretty much a wrap. 

 

  • US Price Data, Consumer Confidence & Initial Jobless Claims
  • German and Australian Economic Sentiment Gauges      
  • UK Q3 GDP
  • EU Industrial Production

 

Global Economic Calendar: Nada Mucho

 

Monday

The week begins with German Balance of Trade for September. In August, Germany’s trade surplus declined to €12.8 bill, from €16.4 bil last year, as the coronavirus pandemic hit global demand. Exports dropped 10.2% due to lower sales to the European Union and to third countries, in particular the UK, the US and China. Imports fell at a softer 7.9%, as purchases from the EU dropped 5.4% and those from third countries tumbled 10.5%. Among these, imports fell from the UK and the US, while imports from China were unchanged. On a seasonally adjusted basis, exports rose 2.4% from a month earlier, beating expectations of 1.4%, while imports were up 5.8%, compared to forecasts of a 1.4% gain.

 

The evening brings National Australia Bank’s Index of Business Confidence. September rose to -4 from -8 in August, pointing to the highest reading since June, amid improving business activity as the economy opens up. Confidence rose in all industries except finance, business & property services which was flat. Business conditions also strengthened to levels not seen since the COVID-19 pandemic brought a nationwide lockdown. All three sub-components rose, with trading and profitability in positive territory while the employment index remaining negative as businesses were not yet ready to add new positions. Alan Oster NAB Group chief economist added, “Meanwhile, forward orders improved while capacity utilization ticked higher to 76.9%. “While the improvement in conditions and confidence in the last few months has been promising, it is important to remember that in a levels sense, things are still weak.”

 

The day closes with China’s Annual Inflation Rate. September eased to 1.7% from 2.4% in August and slightly below market expectations of 1.8%. This was the lowest reading since February 2019, amid a marked slowdown in prices of food. Furthermore, cost of non-food products was flat, after a 0.1% gain in August. There were declines in cost of transport, rent, fuel, and utilities, household goods and services, and clothing. At the same time, prices increased for health, other goods and services, and education, culture & recreation. On a monthly basis, consumer prices edged up 0.2% in September, the lowest in three months, following a 0.4% gain in August.

 

Tuesday

The day begins with UK Claimant Count Change. In August, the number of people claiming for unemployment benefits in the UK rose by 28K to 2.7 mil, following a downwardly revised 39.5K increase in July and below market expectations of a 78.8K gain. This added to a rise of 120.3% since March, or 1.5 mil, as the coronavirus pandemic hit the labor market.

 

The ZEW Indicator of Economic Sentiment for Germany for November follows. October dropped by 21.3 to 56.1, from the previous month’s 20-year high and well below market expectations of 73. Investors voiced concerns about the recent sharp rise in the number of COVID-19 cases and the prospect of the UK leaving the EU without a trade deal. The current situation in the run-up to the presidential election in the US further fuels uncertainty. By contrast, the assessment of the economic situation in Germany improved again, and currently stands at -59.5 points, 6.7 points higher than in September.

 

The day closes with the Melbourne Institute and Westpac Bank Consumer Sentiment Index for Australia. October increased 11.9% m/m to 105 points, following an 18% jump in September. This was the highest reading since July of 2018, amid the ongoing success across the nation in containing the COVID-19 outbreak and the response to the October Federal Budget. All components of the Index were higher in October, the most striking improvements were around the outlook for the economy, with the surge in the five-year outlook taken this sub-index to its highest level since August 2010. In addition, there was a stunning lift in confidence around job security, with the Index improving by 14.2% to be back around the levels of early 2019. Also, confidence in the housing market boomed, the ‘time to buy a dwelling’ index increased 10.6% to its highest level since September 2019.

 

Thursday

Thursday begins with the UK Balance of Trade for September. In August, the UK trade surplus shrank to £1.36 bil from an upwardly revised £1.69 bil in July and was the smallest monthly trade surplus in five months. Exports rose 1.5% to £51.83 bil, boosted by a 2.7% rise in services exports and a 0.4% increase in goods shipments. On the flip side, imports surged 2.2% to £50.46 bil driven by a 3.7% increase in purchases of goods, while services declined 1%.

 

At the same time, the Preliminary Third Quarter GDP Growth Rate will be released. In the second quarter the British economy shrank 19.8% q/q, slightly less than a preliminary estimate of a 20.4% drop. This remains the largest contraction ever and the second consecutive quarterly decline in GDP, officially entering a recession, due to the COVID-19 pandemic and the government measures taken to reduce transmission of the virus. Gross fixed capital formation fell, while both household consumption and government spending shrunk precipitously. Private consumption accounted for more than three-quarters of the fall in GDP, reflecting the implementation of public health restrictions, the mandated closures of non-essential shops and forms of social distancing. Net external demand contributed positively as imports fell more than exports.

 

Later in the morning Eurozone Industrial Production (IP) will be released. In August, IP rose by 0.7% m/m, following an upwardly revised 5.0% growth in July. An increase in production of durable consumer goods, intermediate goods and energy was partially offset by declines in output for capital goods and non-durable consumer goods. On a yearly basis, IP shrank by 7.2%, compared to a 7.1% contraction in July.

 

In the US, the Consumer Price Index (CPI) for October will be released. In September, Headline CPI increased 0.2% m/m, easing from a 0.4% advance in August and was the lowest reading in four months. Used cars and trucks cost jumped 6.7%, its largest monthly increase since February 1969, as people avoid public transportation. Energy prices went up 0.8%, boosted by a 4.2% climb in natural gas prices. At the same time, food cost was flat. Additional upward pressure came from shelter, new vehicles, and recreation, while declines were seen in prices for motor vehicle insurance, airline fares, and apparel. This put Headline CPI up 1.4% from 1.3% in August. Meanwhile, Core CPI, which excludes the more volatile items such as food and energy, rose 0.2% m/m after larger increases in July and August, pushing up the yearly rate from 1.3% to 1.4%.

 

Friday

Friday begins with the Second Estimate of Third Quarter Eurozone GDP. The preliminary estimate showed the Eurozone economy grew by 12.7% in third quarter, recovering from a record slump of 11.8% seen during the second quarter and easily beating market expectations of 9.4 percent. It was the steepest pace of expansion since comparable data started to being collected in 1995, boosted by a rebound in activity and global demand after European countries lifted lockdowns imposed to contain the spread of the coronavirus pandemic. All major economies in the region posted record increases in GDP.

 

At the same time Eurozone Balance of Trade will be released. In August, the Eurozone’s trade surplus widened to €14.7 bil from 14.4 bil in July. Imports fell 13.5% to €141.6 bil, due to lower purchases of mineral fuels, lubricants & related materials, machinery & transport equipment, miscellaneous manufactured articles, chemicals & related products, manufactured goods classified chiefly by material, crude materials, inedible, except fuels and food, drinks and tobacco. Export fell 12.2% to €156.3 billion, as sales went down for mineral fuels, lubricants & related materials, manufactured goods classified chiefly by material, machinery & transport equipment, miscellaneous manufactured articles and crude materials, inedible, except fuels.

 

In the US we will get the Producer Prices Index (PPI) for October. In September, Headline PPI increased 0.4% m/m, following a 0.3% rise in August. Cost of goods advanced 0.4%, after increasing 0.1% in August, led by a 14.7% rise in cost for iron and steel. Prices of services went up 0.4%, lower than 0.5% in August, led by a 3.9% advance in the index for traveler accommodation services. Year-on-year, Headline PPI went up 0.4%, after falling 0.2% in the prior month. Core PPI, which excludes food and energy, went up 0.4% m/m, the same as in August, while the annual rate increased to 1.2% from 0.6%.

 

At the same time Initial and Continuing Jobless Claims will be released. Last week 751K Americans filed for unemployment benefits, above consensus expectations of 732K but down from the previous week’s revised level of 758K. Initial claims are now at their lowest level since the pandemic began but part of the decline is due to expiration of eligibility. However, those people are still able to apply for help from the Pandemic Unemployment Assistance scheme, which runs out of funds in December if Congress does not pass another relief bill. Close to 363K workers applied for PUP assistance, compared with 359K in the previous period. Furthermore, the number of continuing jobless claims fell to 7.29 mil in the week ended October 24th, compared with market expectations of 7.20 mil, also the lowest level since the pandemic began but also due to the same expiration issue. In total, there are 21.508 mil Americans on some sort of Federal assistance, down from 22.661 mil in the previous week.

 

The week closes with the University of Michigan’s Consumer Sentiment for November. In October, sentiment was revised slightly higher to 81.8, reaching the highest since March. Still, the sentiment remains much below 101 reported in February. Improvements were seen in both expectations and current conditions. On the price front, one-year inflation expectations were revised lower to 2.6% from 2.7% and five-year expectations were unchanged at 2.4%. Surveys of Consumers chief economist, Richard Curtin added, “Consumer sentiment remained virtually unchanged from the first half of October (+0.6 points) and was insignificantly different from last month’s figure (+1.4 points). Fear and loathing produced this false sense of stability. Fears were generated by rising Covid infection and death rates, and loathing was generated by the hyper-partisanship that has driven the election to ideological extremes.”

Afternoon Market Brief 11-16-2020

Summary and Price Action Rundown

US equities climbed higher again today as more positive vaccine news kept investors focused on the encouraging medium-term outlook despite grim near-term pandemic developments. The S&P 500 posted a fresh record high today, gaining 1.2% today with growth-sensitive stocks remaining in the lead, to hoist its year-to-date upside to 12.3%. The Euro Stoxx Index and Asian stocks also registered robust gains. A broad dollar index slid back toward recent lows while Treasuries were little changed, with the 10-year yield hovering below multi-month highs of 0.89%. Brent crude slid back below $43 per barrel.

 

Vaccine Hopes Continue to Drive Markets Despite Dire Coronavirus Developments 

Pandemic outperformers lagged traditional economy stocks again today even as daily infections remained grimly elevated and containment measures in various areas were tightened further. US stock indices soared to record heights today after Moderna announced that its experimental coronavirus vaccine is 94.5% effective at preventing infection, according to recent results from its large-scale Phase 3 trial. Moderna is the second company to announce preliminary data on an apparently successful product, following Pfizer and BioNTech’s announcement last Monday that its experimental dose is 90% effective. Moderna’s trial, including more than 30,000 volunteers, appeared to prevent virtually all symptomatic cases of the virus. The vaccine’s effectiveness was tested by inoculating one study group and giving another placebos. Of the 95 participants who contracted coronavirus, only five received the vaccination beforehand. Statistically, the virus showed no difference in effectiveness in key subgroups, though the test results will still undergo independent analysis before the product is considered for release to the general public. Earlier this morning, Dr. Fauci, director of the National Institute of Allergy and Infectious Disease, stated “these are very impressive and very encouraging and exciting results,” though reasserted the need to continue wearing masks, social distancing, and maintaining Covid-cautiousness.

The virus has now affected more than 11 million Americans directly, with the latest million cases occurring in the last six days alone. Moncef Slaoui, chief scientist for Operation Warp Speed, suggested that should any early vaccine candidates receive permission for emergency use, doses could be distributed as early as this December. However, health officials specified that front-line health workers and those most at risk would receive the initial vaccine, while the general public would likely see expanded access by April 2021. After the announcement, “stay-at-home stocks” slipped, with shares of Zoom, Netflix, Logitech, and Teladoc down 1.1%, 0.8%, 0.3%, and 3.4%, respectively, with these price responses considerably milder than after Pfizer’s announcement last Monday. In contrast, those stocks that have struggled during the pandemic rose, with AMC, Norwegian Cruise Lines, and Royal Caribbean climbing 4.7%, 6.3%, and 6.9%, respectively, and all major airline carriers posted robust gains as well. – MPP view: With these exciting developments bolstering investors’ conviction that a vaccine will be effective and widely available at this time next year but near-term pandemic developments suggesting a virulent short-term economic impact, markets will be in transition mode for the coming quarters as investors attempt to navigate these complex public health and economic cross-currents. It had seemed premature to get really excited about cyclicals and the post-Covid growth story, but today’s estimates of widespread availability were earlier than Pfizer’s projections last week. Meanwhile, we continue to expect the ardor to cool for pandemic winner stocks, but for the moment, the positive tide seems to be lifting almost all boats. Re-upped QE by the Fed early next year, which we expect, will lend support to liquidity/momentum-driven upside in the short run.

Wall Street Ponders Candidates for SEC Head

Investors are speculating over future potential regulations under a Biden administration as Securities Exchange Commission (SEC) Chief Jay Clayton announced he will retire from his post before the end of 2020. An appointee of the Trump administration, Clayton pursued changes to regulations considered by some as burdensome and hindering corporate growth, often in the face Democratic opposition. Clayton’s SEC clipped off rules under the Dodd-Frank law meant to tighten control over Wall Street banks and eased rules for small cap companies to raise capital on the market. The SEC cited rules Clayton ushered in to simplify how information is presented to individual investors and his initiatives towards strengthening the agency’s inspection and enforcement programs.

Several names are currently being discussed as to who Biden will appoint as Clayton’s replacement. The two most concerning to banks and investment firms are Gary Gensler, the head of Biden’s transition team examining federal regulators, and former Manhattan federal prosecutor Preet Bharara. Gensler, former head of the Commodity Futures Trading Commission, has a history of clashing with Wall Street over issues including the manipulation of LIBOR, leaving investors concerned over the regulatory environment under his potential leadership. However, his consideration for other prominent cabinet posts keeps his appointment as SEC chairman far from certain. Bharara is also considered by investors as a worrisome option due to his contributions in the shutdown of SAC Capital Advisors in the wake of the 2008 crisis, though he is also being considered for top positions at the Justice Department. Other names progressives have pushed for include former SEC Commissioner Kara Stein, current SEC Commissioner Allison Lee, and Dodd-Frank contributor Michael Barr. Moderates have advocated for Robert Jackson Jr. who opposed many of the Trump-era rule cuts at the SEC and pushed, along with Preet Bharara, for clearer insider-trading rules to better protect investors.

Additional Themes

Regional Bank Mega-Deal – Regional banking giant PNC announced that it is purchasing Spanish financial group BBVA’s US business for $11.6 billion. The US division has $104 billion in assets under management, with banking subsidiary BBVA USA operating 637 branches in Texas, Alabama, Arizona, California, Florida, Colorado, and New Mexico. The combined bank will have a coast-to-coast presence in 29 of the 30 largest markets in the US. PNC’s all-cash deal is the second-largest US banking acquisition since the 2008 financial crisis, behind only the combination of SunTrust and BBT in December of 2019. The purchase price represents almost 50% of BBVA’s current market cap and is expected to close in mid-2021 and will create the fifth-largest US retail bank with more than $550 billion in assets. The deal is attractive to PNC because it accelerates PNC’s presence in the Southeast and West. Shares of PNC gained 2.2% while US-listed shares of BBVA vaulted 11.4% higher.

Empire State Manufacturing Slackens – The New York Fed’s regional factory gauge for November showed a slower-than-anticipated pace, printing 6.3 versus a consensus forecast of 13.5 and the previous month’s reading of 10.5. This is the slowest rate of expansion since August as the Empire State survey continues to lag other Fed regions in the manufacturing recovery. Although official data remains relatively resilient, tomorrow’s retail sales and industrial production data for October will be scrutinized for signs of backsliding. High-frequency indicators such as restaurant and travel bookings are showing incipient signs of rolling over in recent weeks, corresponding with the nationwide surge in coronavirus cases. – MPP view: Vaccine news this good has also inoculated markets against growth concerns, even if tomorrow’s retail sales data undershoots.   

Five Minute Macro 11-17-2020

This week positive vaccine news continues to drive market optimism, while political uncertainty falls as a normal transition looks likely. The White House turning up pressure on China moves up a spot and uncertainty about further stimulus moves down. Finally, Brexit negotiations enter the homestretch.

Morning Markets Brief 11-17-2020

Summary and Price Action Rundown

Global risk assets are pausing their recent rally this morning as investors continue to grapple with questions over the timeline and dynamics of a vaccine rollout while the near-term picture remains grim as the pandemic’s autumn wave continues to accelerate. S&P 500 futures indicate a 0.6% lower open after the index posted a fresh record high yesterday, gaining 1.2% today with growth-sensitive stocks remaining in the lead, to hoist its year-to-date upside to 12.3%. Equities in the EU are similarly retracing a portion of their recent upside, while Asian stocks were mixed overnight. A broad dollar index is sliding to a new multi-year low, while longer-dated Treasuries are rallying modestly, with the 10-year yield descending to 0.88%. Brent crude is fluctuating below $44 per barrel as traders look ahead to the month-end OPEC+ meeting.

 

Vaccine Optimism Contends with Near-Term Covid-19 Uncertainties

Markets are digesting yesterday’s latest announcement of highly encouraging vaccine data and pondering whether it is too early for the prevailing pandemic market trends to go fully into reverse. US stock indices soared to record highs yesterday after Moderna announced that its experimental coronavirus vaccine is 94.5% effective at preventing infection, according to recent results from its large-scale Phase 3 trial. Moderna is the second company to announce preliminary data on an apparently successful product, following Pfizer and BioNTech’s announcement last Monday that its experimental dose is 90% effective. Analysts also note that Moderna’s vaccine remains stable without the deep freeze required for Pfizer’s doses, easing the logistical burden of rollout. Meanwhile, Pfizer announced a four-state pilot program for distribution of its vaccine in New Mexico, Rhode Island, Tennessee, and Texas,

After yesterday’s announcement, “stay-at-home stocks” slipped, with shares of Zoom, Netflix, Logitech, and Teladoc down 1.1%, 0.8%, 0.3%, and 3.4%, respectively, while those stocks that have struggled during the pandemic rose, with AMC, Norwegian Cruise Lines, and Royal Caribbean climbing 4.7%, 6.3%, and 6.9%, respectively, and all major airline carriers posting robust gains as well. However, these price responses were considerably milder than after Pfizer’s announcement last Monday and there appears to be scant follow-through today, as tech-heavy Nasdaq futures are higher while S&P 500 and Dow Industrials futures are down. This speaks to the dilemma for equity investors, who are seeing the relative appeal of the pandemic winners lessened by the vaccine news but are concerned that it is still premature to aggressively rotate to those sectors more impacted by Covid-19 given the near term resurgence in infections and relatively lengthy timeline for vaccine rollout even under the most optimistic scenarios.

US Economic Data in Focus

Although official data remains relatively resilient, this morning’s retail sales and industrial production data for October will be scrutinized for signs of backsliding. The pace of US retail sales growth in October is expected to decelerate to 0.5% month-on-month (m/m) from 1.9% in September, with the core reading that strips out autos and gasoline similarly forecast to register 0.6% versus 1.5% the prior month. These estimates for a more sober pace of consumer demand comes as high-frequency indicators, such as restaurant and travel bookings, are showing incipient signs of rolling over in recent weeks, corresponding with the nationwide surge in coronavirus cases. Analysts are pondering the degree to which the grim backdrop of the pandemic and lingering economic impact will affect holiday shopping season. Meanwhile, industrial production for October is estimated at 1.0 m/m%, which would be an improvement over September’s -0.6% reading. While manufacturing has generally held up better than service sectors during the pandemic, there have been some regional disparities. Yesterday’s release of the New York Fed’s factory gauge for November showed a slower-than-anticipated pace, printing 6.3 versus a consensus forecast of 13.5 and the previous month’s reading of 10.5. Overall, US economic indicators have evidenced resilience in recent months despite the resurgence of Covid-19 and the dwindling of fiscal support measures enacted by Congress in the spring.

Additional Themes

Pound Advances on Brexit Deal Hopes – The pound is up 0.5% versus the dollar this morning and 0.3% against the euro amid reports that negotiators from the UK and EU may be nearing a deal, with a prospective announcement possible as early as Monday. UK negotiators, however, cautioned that a breakdown in talks remains a risk, as the key points of contention over fishing rights and the “level playing field” businesses have yet to be fully resolved. Friday is seen to be a critical day as EU Chief Negotiator Barnier is set to present his progress report to EU leaders after which Prime Minister Johnson is potentially set to call European Commission President von der Leyen, pending confirmation.

Fed Nominee Shelton Faces Key Vote – After Senate Majority Leader McConnell initiated the process of confirming Judy Shelton to the Federal Reserve Board of Governors last week, she faces a procedural vote today. Shelton was one of President Trump’s nominations to the Fed’s Board, alongside Christopher Waller, though following her nomination 17 months ago, Shelton has not been able to garner enough support in the Senate to win confirmation. Senators on both sides of the aisle had criticized Shelton’s policy views for being well outside the mainstream, including her advocacy of the gold standard and questioning central bank independence. Other critics have pointed to her apparent willingness to abandon long-held views in order to conform to prevailing policy preferences of the Trump administration in an effort to secure her nomination, with Democrats flagging her supposed loyalty to President Trump after her work as an informal advisor to his campaign in 2016. Though upon Joe Biden’s victory, Senate Republicans appear to have reevaluated the nomination and are likely to vote next week. Senators Romney, Collins, and Alexander are the three Republicans in the chamber who have publicly opposed Shelton’s nomination, though with Alaska Senator Lisa Murkowski’s recent affirmation of support, Shelton may finally have enough support to move forward.

Morning Markets Brief 11-9-2020

Summary and Price Action Rundown

Global risk assets are surging this morning as the positive impulse from easing US political uncertainty has been further boosted by exceptionally positive news on the Covid-19 vaccine front. S&P 500 futures indicate a 3.6% jump at the open, which would add to the 7.4% rally last week that upped the index’s year-to-date gain to 8.7%, only 2.0% below early September’s record high. Equities in the EU are also soaring while Asian shares were mixed overnight. With risk appetite in ascendance, a broad dollar index is dipping to a new multi-year low, while longer-dated Treasuries are climbing, with the 10-year yield back at multi-month highs of 0.92%. Brent crude is surging toward $43 per barrel this morning as the demand outlook brightens.

 

US Political Uncertainty Eases as Biden Named President-Elect

Concerns over a breakdown of the rickety US electoral process and civic unrest amid extreme partisan pressures have been allayed as the slow but steady process ultimately resolved into a relatively clear-cut victory for Biden/Harris, although President Trump continues to dispute the result. Major news outlets called the election for Democratic candidate Joe Biden after he was declared the winner in Pennsylvania and Nevada early on Saturday, securing 279 electoral votes versus President Trump’s current tally of 214. Final results in the presidential race are still pending in North Carolina, Georgia, Arizona, and Alaska though with Biden already beyond the 270 electoral votes needed to win, these results are largely academic. Biden and Harris delivered their victory speeches on Saturday night, with the President-Elect calling for national unity and announcing the formation of a coronavirus task force to coordinate a federal-level response to the worsening pandemic. President Trump has declined to concede the race and vowed to continue an array of legal challenges, seeking overturn the result while making unsubstantiated allegations of ballot fraud and unfounded declarations of victory. On the Senate front, the balance currently stands at 48-48 between the two parties. The contests in North Carolina and Alaska are expected to deliver wins to the GOP candidates, though counting is still ongoing. That puts Georgia’s two races firmly in the spotlight, as Republican frontrunner David Perdue’s vote share has slipped below 50%, resulting in two run-off elections in January for the state’s two Senate seats. The outcomes of these elections are therefore set to decide control of the Senate. While Biden may win Georgia, both Perdue and Senator Loeffler will be favored against their Democrat opponents, with a win for either keeping control of the Senate in Republican hands. – MPP view: Our base case had long been for narrow and disputed results in the presidential race and key Senate contests, with uncertainty dragging on beyond election day. And though this is how events played out over the past week, it is a great relief to us, and to financial markets, that the worst case scenario of a breakdown of our obviously creaky electoral system accompanied by major civic unrest has been avoided (thus far, at least). Meanwhile, uncertainty persists over control of the Senate, with significant policy implications, the most immediate of which is the pandemic relief bill. We expect a small lame duck session stimulus and a somewhat larger deal post-election but do not expect a GOP-controlled Senate (our base case) to go above the $500 billion level of their proposed bills, particularly since the vaccine news may be showing us the light at the end of the pandemic tunnel.

Covid-19 Vaccine News Lifts Market Spirits

With the pandemic resurgence accelerating in the US, EU, and UK, this morning’s disclosure from Pfizer and BioNTech that its vaccine trials are yielding highly encouraging results is boosting investor sentiment. The drug giants have announced that their third stage vaccine trial is indicating 90% effectiveness with no serious safety concerns, with analysts expressing surprise and elation at such a positive announcement. For context, a Covid-19 vaccine was generally expected to be 60-70% effective, with the possibility that it would be even lower, like a seasonal flu vaccine, which can be merely 40% effective. The Pfizer/BioNTech trial is continuing and other biotech firms working on vaccines are expected to announce their results in the coming days or weeks as well. Pfizer has estimated that it will have 50 million doses available before the end of the year and 1.3 billion doses distributed in 2021, though each individual vaccination requires two doses. – MPP view: Outstanding news! Pending further details and additional confirmation, this is better than we dared hope. Time of rollout and degree of public uptake are key variables, and it will be a delicate policy balance to deploy sufficient stimulus and rebuild trust in the scientific community in order to facilitate deployment.

Additional Themes

Earnings Season Wraps Up – Third quarter earnings season is winding down after providing scant direction to equities. This week, a smattering of earnings reports remains on the calendar, including McDonald’s, Beyond Meat, Lyft, DR Horton, and Disney. With 448 of the S&P 500 corporates having reported, 83.2% of results have featured a positive earnings-per-share (EPS) surprise and 75.9% have topped revenue estimates, far exceeding typical rates of outpacing consensus. But since the start of reporting season, the S&P 500 had been down 0.7% going into today’s session and price action has been driven primarily by macro factors.

Oil Prices Vault Higher – With the Covid-19 vaccine news lifting growth-sensitive asset prices, crude prices are jumping this morning as the prospect of a widely available and effective vaccine brightens the demand picture. This comes as Saudi’s energy authorities have been gearing up for another contentious OPEC+ meeting later this month at which they were likely to push for a pause in plans to taper the cartel’s supply curbs despite apparent slippage in discipline among some members. The positive prospects for a near-term vaccine, however, may allow OPEC+ to continue on its current supply increase trajectory without sinking oil prices.