Market and Economic review for week ending 20 November 2020
As a reminder, in the portfolios where we apply tactical portfolio tilts, we have been overweight risk assets since mid-October, increasing this twice during November to more moderate levels of overall risk. In the most recent change UK and European equities joined our pre-existing positions in US, China and Asia, diversifying our aggregate factor exposures to include a more cyclical dynamic. A small UK REITs position continues to be held across all the LF Prudential Risk Managed Active and Passive portfolios as long-term valuations continue to look attractive.
Market and Economic review
The week started on a firm footing as markets concentrated on Japan’s 'Zoom Boom', the formation of the world's largest trading bloc, called the Regional Comprehensive Economic Partnership (RCEP), and expectations of further COVID-19 vaccines. A fresh jab was added when Moderna became the second US drug maker to announce a Phase III, highly effective, COVID-19 vaccine (efficacy of 94.5%). A growing coronavirus third wave in the United States and further European warnings and lockdowns began to weigh on investors’ minds over the hump of the week with markets taking a breather. The week finished on a slightly brighter note but kept in check by confirmation that the US Treasury are ending their Emergency Loan Programme at year end.
COVID-19 case numbers appear to be levelling off globally. However, in the United States the 7 day moving average (DMA) of case numbers is on an unrelenting trajectory and the daily confirmed deaths are at highs not seen since the initial outbreak. New York Mayor Bill de Blasio announced schools would close their doors once again but bars and restaurants remain open… for now. Europe appears to be in a brighter spot with evidence the renewed lockdowns are working. Reviewing the 7 DMA in case numbers, France has seen a marked reduction, Spain and Germany seem to have turned the corner whilst the UK and Italy are showing early evidence of a plateauing. Scandinavian countries and parts of Eastern Europe, like Russia, are going in the other direction. Lancet published the Phase II results of the COVID-19 vaccine developed by AstraZeneca and Oxford University. Results are promising (and probably material for markets) given it shows robust effectiveness in the most vulnerable, is 1-fifth cheaper and has 5 times the production capacity of Pfizer’s alternative and uses viral vectors (rather than mRNA) so is easier to administer. Phase III efficacy data should be available in the coming weeks.
As mentioned, Japan’s GDP came roaring back in Q3, coming in above expectations at +21.4% QoQ annualised (exp.+18.9%), going some way to repairing the damage from Q2 which was downwardly revised to -28.8%. The market saw the positives from growth in private consumption, the first time in 12 months, and external demand.
Inflation in Europe remains benign with October’s figure coming in at -0.3% YoY, the same as last month and as expected. The same story does not hold for the UK: headline CPI rose from 0.5% to 0.7% YoY (exp. 0.6%). We saw rebounds in clothing, food and furniture/furnishings. Our very own Jim Leaviss, CIO of Public Fixed Income, has been musing whether in lockdown the ONS inflation basket is at all reflective of our current spending habits. On his ‘Uncle Jim’s World of Bonds’ podcast you can indulge yourself in puppy inflation chat and follow a topic MAPM are keeping an eye on as we get closer to the end of COVID-19 lockdowns.
Last week the number of Americans filing for unemployment benefit rose by 742k which was above market expectations of 707k. Whilst this surprised markets, the first rise in a month should come as little surprise given the aforementioned rising COVID-19 case counts and localised lockdowns. US retail sales stuttered in October as well, registering in at +0.3% MoM (exp. +0.5%) coming down from the +1.6% seen in September. Vehicle sales, gasoline, furniture, food and clothing all saw falls month on month. Philly Fed Business Index was more muted this month falling from 32.3 to 26.3 but beating market polls of 22. Industrial Production (+1.1%) and Manufacturing Output (+1.0%) showed an encouraging improvement MoM. Likewise Housing Starts in jumped 4.9% in October, moving to a level last seen in February 2020. This was bolstered by a big beat in Existing Home Sales which rose 4.3% in the month beating expectations of a 1.2% fall. UK Retail sales for October came in at 7.8%, a rise (and resounding market beat) from the month before and suggesting more optimism for economic growth in Q4.
In other news; Hungarian leader, Viktor Orban, blocked the EU’s first attempt to issue €750bn in collective debt to bail out pandemic battered members. Joined by Poland, both dislike plans to link the pay-outs to having to respect the rule of law. Turkey increased interest rates by 475bps in an attempt to control the Lira.
We continue to be incrementally more constructive of the economic backdrop as uncertainty reduces alongside twinned governmental and central bank support globally; a recovery seems to be bedding in. We reiterate our expectation for some volatility as COVID-19 case numbers cause emotional reactions by the market and President Trump continues to scheme whilst at his seat in White House.
Next week we receive the November updates on UK/European PMIs to get our first glimpse at what impact the renewed lockdowns are having on the economy. A raft of US centric data is released which also includes PMI numbers, October inflation figures and the latest Consumer Confidence. The Personal Income print is a release that we will be watching closely to see if the delays in fresh US fiscal packages are harming households.
T&IO Weekly Market Update Podcast
Mark Riggall, Head of Client Portfolio Management at T&IO talks through this weeks latest market developments and T&IOs current outlook.