It has been an eventful four weeks, to say the least. Equities were the big beneficiary despite elevated volatility seeing a significant move lower before mounting a bigger rally, with a much stronger than expected reporting season, helped on by a favourable U.S. election and much better than expected vaccine effectiveness from Pfizer.
The S&P/ASX 200 delivered a 3.4% return, outpacing the S&P 500’s 2.9% return as tech lost leadership to cyclicals such as financials, primarily driven by the vaccine news. The Euro Stoxx 50 outperformed with a 5.8% return as investors looked past renewed lockdown measures and to a post-vaccine world.
Commodities were largely flat again with iron ore at U.S. $120, gold just under U.S. $1,900 and WTI crude at U.S. $40.
Bonds were sold off as yields rose sharply, with the Australian 10-year bond yield back at 0.88% despite the Reserve Bank of Australia (RBA) cutting rates and announcing a new quantitative easing program, whilst the U.S. 10-year government bond yield rose to 0.9%.
The USD resumed its downward trend, with the AUD now sitting at 72.7 cents to the dollar.
Whilst the headlines were focussed on the U.S. election and vaccine news out of Pfizer/BioNTech, economic data and earnings season pointed to an underlying economic recovery that remains intact despite renewed lockdown measures.
The U.S. election continues with almost everyone but Trump acknowledging Biden’s victory for the Presidency. Fears of a contested election have faded as Biden looks to have won by a decent margin and there seems to be little support for Trump’s challenges from other Republican representatives. The focus now turns to the Senate as Democrats maintain a slim chance for a unified government. With 48 seats, the Democrats require the two run-off election seats in Georgia which they could win on 5 January 2021. If this happens, we can expect policies to be very different than under the split government that everyone is expecting.
Locally, the recovery momentum looks promising as COVID-19 cases seem well under control and restrictions ease further with state borders opening. The RBA followed up the encouraging Federal Budget by cutting the overnight interest rate, term funding facility and three-year yield target to 0.1% as expected, and also launching a $100 billion quantitative easing program to buy Australian government and semi-government bonds with five to ten-year maturities over the next six months. At this rate, the pace of bond-buying by the RBA is expected to outpace the rate of new bond issuance by the Australian government over the period.
Vaccine hopes trump surging cases?
Despite the surge in both bond yields and equity markets post the vaccine news, the current situation in the U.S. and Europe is deteriorating significantly. Record daily new cases are providing a headwind to the recovery as countries are forced to renew restrictions as hospital capacity is strained. Whilst U.S. data indicates that the economic recovery remains resilient and continues to accelerate, European data has shown signs of stalling as services and spending slow as mobility falls again.
The risk is that we see a double-dip recession in these economies as we are still many months away from having enough vaccines to return to the pre-COVID normal. The situation remains fluid and in the U.S., Biden, unlike Trump, has shown a willingness to impose strict lockdown measures for a period as they look to control the spread of the virus before a vaccine becomes available. This has already been suggested by his advisor and could be implemented once Biden takes office in late January.
However, the renewed lockdown measures are likely to remain less strict than those imposed earlier this year, and policymakers are continuing to provide support. This means that the recovery is likely to slow but may not necessarily lead to another significant contraction.
Markets have already shown their willingness to look past the valley to the other side, so it is likely that markets remain well supported despite further restrictions. For markets, fiscal or monetary policies may continue to be more important drivers, with another U.S. fiscal stimulus package still expected whilst ongoing quantitative easing programs from central banks continue to be tweaked as the European Central Bank is expected to announce further supportive measures at their next meeting.
Furthermore, other late-stage vaccine study results are also expected in the next month and could result in more than one vaccine type being approved for use, allowing for faster production and distribution to inoculate the population. The Pfizer/BioNTech news saw a sharp spike in the probability for about 8% of the U.S. population to be vaccinated within the first quarter of 2021.
If other vaccine candidates show strong study results, we could be looking at much higher rates of vaccination by the end of March 2021.
The Australian population is much smaller at around 25 million people, so there is a strong possibility for herd immunity by the end of the first half if the AstraZeneca/Oxford University, or the Novavax vaccines prove effective in the next few months. Unlike the Pfizer/BioNTech vaccine, the two aforementioned late-stage candidates can be manufactured locally, with CSL already manufacturing the AstraZeneca/Oxford University candidate at its Broadmeadows, Victoria facility.
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