Overview
1. COVID-19 cases reach new highs in the US and Europe
2. Joe Biden wins US presidential election
3. US central bank lending programs set to expire
4. Global equities rally on vaccine hopes
5. US dollar and gold weaken while Bitcoin surges
6. Market sentiment turns bullish
Policy & Geopolitics
Fed lending programs set to expire as COVID-19 cases surge
In a statement released on November 5, the Federal Reserve (the “Fed”) expressed its continued commitment to support the US economy through the pandemic. Economic activity and employment continue to recover but remain well below pre-pandemic levels. As expected, the Fed voted to maintain interest rates in the range 0.00%-0.25% and aims to achieve inflation moderately above 2.0%. Fed Chair Jerome Powell said that the Fed is most focused on the “near-term risk” of the continued spread of COVID-19. As the central bank emphasized the need for more fiscal and monetary support throughout the month, the US Treasury declined to extend several Fed lending programs past December, which Fed officials said will impede the ability of the Fed to support the economy. In a letter to Chairman Powell released on November 19, Treasury Secretary Steven Mnuchin said he will allow some of the emergency lending programs of the Fed to expire on December 31, stating that these programs “have clearly achieved their objectives.” The programs expiring in December include facilities that supported corporate credit and provided loans to small and midsize businesses throughout the pandemic. Mnuchin also requested the Fed to return $455 billion in unused funds to the Treasury.
With record COVID-19 cases and emergency aid programs set to expire in December, a decision on another stimulus package is anticipated. The Democratic and Republican parties remain divided over the size of the next relief package. House Speaker Nancy Pelosi and Treasury Secretary Mnuchin have been discussing a $2 trillion bill, but Senate Republicans recently drafted a $650 billion package. President-elect Joe Biden could affect decisions concerning fiscal and monetary policy through his personnel appointments. On November 23, President-elect Biden nominated former Federal Reserve Chair Janet Yellen as the next Treasury secretary. Yellen, along with the Biden administration, may revive the expiring lending programs.
Last month, the European Central Bank (the “ECB”) hinted at another stimulus package in December. On November 11, ECB President Christine Lagarde suggested that the central bank may cut borrowing costs further for banks and expand asset purchases in response to COVID-19. The ECB will announce its new stimulus package in December.
Joe Biden Elected President of the United States
Joe Biden was declared the 46th President of the United States. President Trump has not conceded the race, and his campaign has filed numerous lawsuits, including ones contesting the election results of six battleground states. Meanwhile, various cabinet appointments to the Biden administration have been reported, several states have certified their election results, and President Trump has stated that he would leave the White House if Biden is declared the winner of the Electoral College.
In the Congressional elections, Democrats maintained control of the House of Representatives but lost several seats. Republicans appear to have maintained control of the Senate subject to the run-off vote in Georgia on January 5.
November 3: The 59th US Presidential Election was held, with incumbent President Donald Trump as the Republican candidate and former Vice President Joe Biden as the Democratic candidate. With record voter turnout and record mail-in ballots, which represented most of the votes due to COVID-19, Joe Biden surpassed President Barack Obama’s 2008 record for the highest number of votes received by a presidential candidate.
November 7: Major news networks announced that Biden won in Pennsylvania, giving him 279 electoral votes, well above the 270 votes needed to win the Electoral College. Senator Kamala Harris will serve as Biden’s Vice President.
November 11: Georgia announced a hand recount of its presidential votes, which certified Biden as the winner.
November 23: Emily Murphy, head of the General Services Administration, declared Joe Biden the winner of the election, starting the presidential transition process. Biden appointed former Deputy Secretary of State Antony Blinken as Secretary of State.
November 27: A federal appeals court denied the appeal of the Trump campaign over the election results in Pennsylvania.
November 30: Arizona and Wisconsin certified that Joe Biden won by a narrow margin, marking the last of the contested battleground states to certify election results. Biden appointed former Fed Chair Janet Yellen as Treasury Secretary.
Macro Indicators
Unemployment continues to fall but claims start rising
The US labor market continued to recover in October as unemployment dropped for a sixth consecutive month to 6.9% from 7.9% in September. Non-farm payroll rose by 638,000 in October with significant job gains in leisure and hospitality as COVID-19 restrictions eased, with a decline in government jobs. In the week ending November 21, weekly initial unemployment benefit claims rose by 30,000 from the previous week to 778,000, marking a second week of increase as restrictions were reinstated on business activity following a surge in COVID-19 daily cases. In Europe, strict measures following the resurgence of COVID-19 cases disrupted the economic recovery after the first wave of the virus. The European Commission forecasts unemployment in the euro area to be 8.3% by year end, the same figure reported in September, and 9.4% by the end of 2021.
Global economic activity slows amid second wave
The US economy continued to recover in November after annualized Q3 GDP grew at an unrevised 33.1% quarter on quarter (QoQ), the fastest pace in more than a year and a half, following a 31.7% annualized QoQ drop in Q2, the largest since 1947. Despite the positive vaccine news, annualized Q4 growth estimates are below 5% as COVID-19 cases soar. US retail sales rose 0.3% in October below the 1.6% increase in September and the estimates of 0.5%, marking the slowest monthly rise in retail sales since May and a slowing economic recovery.
Annualized Q3 Eurozone GDP surged a record 61.3% QoQ, well above economists’ forecasts of 44.3%, with double-digit growth in major economies such as France, Italy and Spain. However, following the reinstatement of restrictions with the resurgence of COVID-19, the European Commission projects that the eurozone economy will contract 7.8% in 2020 and grow 4.2% in 2021
Existing home sales in the US rose 4.3% in October to a seasonally adjusted annual rate of 6.85 million, the highest in 14 years, while the median existing home price increased 15.5% YoY to a record $313,000, supported by record-low interest rates.
The Core Consumer Price Index (CPI) was unchanged in October, after four consecutive months of gains. Economists expect inflation to remain subdued as short-term demand falls following the resurgence of COVID-19 cases in the US. Core eurozone CPI increased for a third consecutive month by a record low 0.2%.
The IHS Markit US Manufacturing Purchasing Managers’ Index (“PMI”) rose to 56.7 in November from 53.4 in October, marking the strongest expansion in factory activity since September 2014, beating consensus estimates of 53.0.
The IHS Markit Euro Area Manufacturing PMI fell to 53.8 in November from 54.8 in October.
Sovereign bond prices remain high
The 10-year US Treasury yield was largely unchanged in November, closing at about 0.84% after reaching about 0.98% earlier this month, its highest level since March. Investors briefly moved away from safer assets amid positive news on the COVID-19 vaccine and more political certainty after the US elections. 10-year inflation expectations, measured by Treasury Inflation Protected Securities (“TIPS”), hovered at 1.77%, below the Fed target but above the 1.06% in May (March and April figures distorted due to dislocation). This put significant pressure on real yields which have been at their lowest negative territory on record.
Germany’s 10-year bund yields rose to -0.57% this month from a three-week low of -0.59% and -0.63% in October, but below the two-month high of -0.46% in early November after the positive COVID-19 vaccine news.
Financial Markets
Equity markets rally on vaccine hopes
US equity markets rallied in November following three consecutive monthly declines, as major indices were driven by investor optimism of the distribution of COVID-19 vaccines in the near-future. The S&P 500 rose 10.8%, mostly in the first half of the month, as uncertainty around the US presidential election subsided and Pfizer and Moderna reported favorable early results of their respective vaccines, while the tech-heavy Nasdaq rose 11.8%, reaping the benefits of the strong earnings season suggested in October.
Most major global equity indices had similar rallies amid optimism for global coordination in combatting the virus under the Joe Biden administration. European markets rebounded from last month’s lockdown-induced declines, with the STOXX Europe 600 and the UK FTSE100 rising 13.7% and 12.4%, respectively. In Asia, the Hong Kong Hang Seng index, the Chinese SSE Composite Index rose, and the Japanese Nikkei 225 Index rose 9.3%, 5.2% and 15.0%, respectively.
The planned $34.4 billion IPO of Ant Group, the Alibaba-affiliated fintech company, was halted by the Chinese government at the beginning of the month, citing the need to adhere to financial regulations just days after founder and controlling shareholder Jack Ma criticized Chinese regulatory policies. The IPO, which would have been the largest in history, topping the $29.0 billion raised by Saudi Aramco in late 2019, seems unlikely before 2022.
Credit spreads continue tightening
Investment grade (IG) spreads tightened to 1.12% from 1.34% this month while high-yield (HY) spreads continued to tighten to 4.33% from 5.32% after peaking at 10.87% in March. First lien spreads to maturity contracted to LIBOR + 4.32% from LIBOR + 4.66% while second lien spreads contracted to LIBOR + 8.16% from LIBOR + 8.72%. The yield-to-maturity of first lien and second lien debt remain below year end 2019 levels due to near-zero interest rates and unprecedented Fed support for the fixed income market.
Oil rallies on vaccine hopes, but remains in bear market
Spot WTI and Brent crude oil prices rose 26.0% and 25.6%, respectively, to $45.08 and $47.64 per barrel at the end of November, the highest since March, as vaccine results improved demand expectations. The rally followed the largest monthly drop since March in October, when Europe and the US imposed new lockdown measures to combat spikes in COVID-19 cases. The month-to-month change in sentiment suggests widespread uncertainty about short-term demand for oil. OPEC officials warned on November 30 during discussions of production cuts that “immense challenges” from the pandemic are likely to continue into 2021.
US dollar weakens, gold falls further, and Bitcoin skyrockets
The US dollar dropped to its weakest level since 2018 in late November, with the ICE US Dollar Index down 11.6% since its March peak to 91.81 at month-end against a basket of currencies. Gold prices dropped 5.3% to $1,780 per ounce for the month, driven partly by promising vaccine results and a subsequent lull in demand for risk assets. Meanwhile, the price of Bitcoin rose over 40.0% to all-time highs. A weakened US dollar, bloated central bank balance sheets, and the collapse of real bond yields have led to increased demand for assets that are insulated from government manipulation. Bitcoin bulls maintain that the cryptocurrency is one such asset due to its decentralization and digitally limited quantity, which imply a natural hedge against inflation.
Sentiment
Consumer sentiment drops as market sentiment improves
The Consumer Sentiment Index of the University of Michigan dropped to 76.9 in November from 81.8 in October, following the US presidential election amid a resurgence in COVID-19 cases.
The VIX briefly fell below 20 in November, its lowest level since February, then rebounded slightly. Decreasing political uncertainty and positive vaccine news gave rise to optimism despite the surge in COVID-19 cases.
The month-end Fear and Greed Index (which uses seven factors including market momentum, safe-haven demand, and junk bond demand) showed “extreme greed” at 88. During the last 20 trading days, stocks have outperformed bonds by 10.2% as investors returned to stocks from the safety of bonds. The S&P 500 is 8.38% above its 125-day average, indicating extreme greed.
COVID-19
November set several COVID-19 records across the globe following a second wave of the virus in many countries. For the first time since the pandemic started, the US surpassed 100,000 daily cases on November 4, and 200,000 daily cases on November 28. November 24 was the “deadliest” day of the pandemic since May with more than 2,100 deaths across the US and more than 90,000 COVID-19 hospitalizations on November 25. With more than 4 million cases in November, the US had the highest number of COVID-19 cases worldwide after India and Brazil. But the 13.4 million cases reported in the US since the onset of the pandemic (with some 267,000 deaths) are well above India’s 9.4 million cases and Brazil’s 6.3 million cases. The Centers for Disease Control and Prevention predict the US death toll to reach 321,000 by mid-December as cases surge, even as more states are imposing restrictions. Los Angeles County announced a stay-at-home order and banned public and private gatherings until at least December 20, San Francisco and Santa Clara County followed.
Despite the strict COVID-19 restrictions in Europe, led by France and Germany, the continent remained the biggest contributor to global COVID-19 new cases and deaths in the week ending November 21. The number of cases in the region is declining by the week but the number of deaths is still rising. France, the hardest hit country in Europe, will ease restrictions gradually through December and January.
November also brought positive news about COVID-19 vaccines. On November 9, Pfizer Inc., and BioNTech announced that their COVID-19 vaccine was more than 90% effective in protecting people from COVID-19. Moderna concluded that their vaccine was 94% effective. One or both vaccines may be available by year end, but it may take months to supply enough for the general population.
The Month Ahead
1. US Presidential Transition. States have until December 8 to resolve controversies over the selection of their electors for the Electoral College, before their electors meet in their state capitals to cast their presidential votes on December 14. Throughout December, investors will be watching cabinet appointments by the President-elect, progress on the transition, and any hints of a concession from President Trump.
2. Vaccine news. With the vaccine of Pfizer and BioNTech already under regulatory review, Moderna may supply the second vaccine in the US by year end.
3. Second wave of COVID-19. Despite positive news on the vaccine, COVID-19 cases continue to surge again across the globe, with many countries and cities under lockdowns and more planning to do so. These restrictions could threaten the economic recovery and compound the damage of the previous Spring lockdowns.
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