Last week started with positive vaccine news from Pfizer and BioNTech that data showed their vaccine was 90% effective in preventing covid infections driving a euphoric risk-on rally across equity markets. Equity markets rallied strongly in Europe and to a lesser extent in the US. However, there were signs of the initial rally tailing off into the US close on Monday as reality set in i.e. it will still take some time to deploy any vaccine. Speaking at the ECB forum on central banking, Christine Lagarde described the latest news on the vaccine as encouraging but warned that until widespread immunity is achieved cycles of “viral spread and tightening restrictions” remain likely and that “the recovery may not be linear, but rather unsteady, stop-start and contingent on the pace of vaccine roll-out.” As the week progressed rising infections and the potential for restrictions in some US states tempered investor optimism. Jerome Powell warned: “We do see the economy continuing on a solid path of recovery, but the main risk we see to that is the further spread of disease here in the United States”. The news that the Trump administration is leaving Senate majority Leader Mitch McConnell to negotiate with House Speaker Nancy Pelosi on further fiscal stimulus also suggested less scope for a large package to get agreed.
Over the week, the S&P 500 gained 2.2% and the Nasdaq fell 0.6% as technology names, beneficiaries of the lockdown, faced profit taking. USTs sold off on the vaccine news with the yield on the UST 10-year yield reaching 0.98% at Wednesday’s close. However, as the week progressed USTs recovered some ground on renewed concerns about the rising virus cases in the US and October US CPI inflation data coming in below expectations: the UST 10-year yield closed the week out 8 bps higher at 0.90%. The 2-year 30-year spread widened ~2bps to 146bps. Elsewhere, UK Q3 GDP gained 15.5% qoq but there were signs that growth was weakening in September as the economy grew by 1.1% mom. However, disarray in Boris Johnson’s advisory team dominated headlines into the end of the week as the departure of Communications Director Lee Cain and chief adviser Dominic Cummings were announced.
In the week ahead, the global spread of covid infections and developments towards a vaccine roll-out continue to be a market focus while in the US Donald Trump is yet to officially concede the election to Biden tweeting at the weekend: “He only won in the eyes of the FAKE NEWS MEDIA. I concede NOTHING! We have a long way to go. This was a RIGGED ELECTION!.” In Europe, Brexit talks are due to resume in Brussels: making progress is becoming increasingly urgent with limited time left to reach an agreement and allow enough time for both the European and UK Parliaments to ratify it. US-China tensions continue following President Trump signing an executive order last week prohibiting US investors holding shares linked to the Chinese military, although ByteDance, the parent of TikTok, was given an extension to a deadline to restructure its ownership in the US. On a more positive note the Regional Comprehensive Economic Partnership trade deal between 15 nations (ASEAN-10, China, Japan, S.Korea, Australia and New Zealand) was signed over the weekend.
Central bank meetings this week include Turkey and South Africa on Thursday: Turkey will be closely watched to see if Naci Agbal, the newly appointed central bank governor, can restore investor confidence. A large number of Fed speakers speak at various events including Richard Clarida, Raphael Bostic, Mary Daly, Neel Kashkari, Eric Rosengren, John Williams, Robert Kaplan, James Bullard and Ester George. ECB speakers include Christine Lagarde who appears at several events including the WEF’s Pioneer of Change Summit on Monday, the Bloomberg New Economy Forum on Tuesday. Other ECB speakers due to speak include Luis de Guindos, Yves Mersch and Isabel Schnabel. Economic data-wise, Chinese data released today suggests the economic recovery remains on track: October retail sales gained 4.3% yoy versus expectations of 5% yoy while October industrial production and fixed asset investment exceeded expectations. Japanese 3Q GDP grew 21.4% quarterly annualised which was ahead of expectations helped by the fiscal stimulus supporting a recovery in consumption and trade. In the US, key data releases include October retail sales are due on Tuesday with the market looking to gauge if sales slowed in October with a rise in virus infections and as stimulus support wears off: the Bloomberg survey is looking for an increase of 0.5% mom from 1.9% mom in September. Later in the week, the Philadelphia Fed Business Outlook reading for November and Building permits and housing starts data for October are due. In Europe, the final reading of the Euro area CPI for October is due on Wednesday and in the UK October retail sales data is due on Friday.