Economic Data Watch and Market Outlook
Global markets were on a roller coaster ride last week, rising on Monday and Friday while dropping during the middle of the week. Downside pressure was caused by the spike in COVID-19 cases, particularly in Europe, which prompted leaders in Germany, France, UK, Italy, Spain, and the Czech Republic to discuss plans to “combat the resurgence”. Adding on to the negative sentiment was news that Johnson & Johnson was pausing its late stage COVID-19 vaccine trial due to a patient’s unexpected illness, and Eli Lilly also temporarily stopping its treatment trial citing safety concerns. In addition, hopes for a new coronavirus stimulus bill out of Congress and the White House continued to be stalled, as Republicans and Democrats cannot reconcile the $400 billion gap between each parties proposal ($1.8 versus $2.2 trillion) which centers on aid for state and local governments. But markets ended the week on a positive note as US Retail Sales came in for September at +1.9%, more than triple the +0.6% rise seen in August. Equity market technicals beginning on Thursday also improved as a reversal from sharply lower equity prices to down slightly, saw close to 2/3’s upside participation from stocks in the S&P 500 and the Russell 2000. In addition, it was encouraging to see the old Dow Theory come into play, as the Dow Jones Transportation index rallied six out of the last seven sessions, and posted a record high on Friday.
As we enter next week’s trading sessions, we will be in the throes of earnings season, led by the Netflix which will be the first of the famous FAANG’s to report. Other notable names reporting during the week will be consumer staples Coca-Cola and Procter & Gamble, big techs including IBM, Intel and Texas Instruments as well as AT&T, Verizon, Lockheed Market and Haliburton. In addition, we should begin paying attention to the gorilla in the room, as the US presidential election as of Monday will be only 16 days away. Many political polls are either calling for a Vice President Biden to win the presidency, or being even bolder by predicting a “blue sweep” (polls have been wrong before as in 2016 and regarding “Brexit”). If these consensus election outcomes from the polls are correct, investors need to address important issues heading into 2021. In short, can the proposed tax increases for corporations and individuals (drags on economic growth), be offset by hopes that a stimulus package approved by the new administration be large enough (present estimates exceed $3 trillion) to sustain the economic recovery and push risk asset valuations higher ?
In turning to the coming week’s economic calendar, the schedule will be dominated by housing data and the next reporting of Jobless Claims. We begin on Monday with the National Association of Home Builders survey for October, which is expected to drop slightly by one point to 82, after reaching an all time high in September.
September Housing Starts out on Tuesday, is projected to have increased by 3.8% to 1.47 million units, while Housing Permits also jumped by 3.7% to 1.53 million units. The housing surge is being led by single family homes, which are expected to see starts rise by 1.9% and permits by 3.1%.
On Thursday, Initial Jobless Claims are estimated to have declined by 23,000 to 875,000 for the week ending October 17. This drop would offset some of the 53,000 increase reported the previous week. Expectations are for claims filings to drop over time as the labor market recovers from the COVID-19 recession. We finish the week with September Existing Home Sales which are projected to surge by 7.5% to 6.45 million units. Housing indicators have been strong, spurred on by the decline of 30 year and 15-year mortgage rates to record lows of 2.81% and 2.35% respectively.
The Week In Review
U.S. Equities
US equity markets were slightly positive last week on the surge in US retail sales in September and news Eli Lilly and Pfizer were applying for emergency approval for their COVID-19 vaccines at the end of November.
- Dow Jones +0.07% MTD +3.02% YTD +2.09%
- S&P 500 +0.21% MTD +3.67% YTD +9.45%
- Russell 2000 -0.22% MTD +8.40% YTD -1.01%
Drivers: I) On Friday, Pfizer Inc. announced they were expected to know whether its potential COVID-19 vaccine is effective by the end of October, and would apply for Emergency Use Authorization (EUA)m by late November. Working with German biotech company BioNTech S.E., Pfizer stated before it can apply for EUA, they must provide safety data to the FDA covering two months on half of the trial participants after a final vaccine dose.
II) For September, the Consumer Price Index reported headline prices were up 0.20% or 1.4% on an annual basis, while the core reading rose by 0.19% for a 1.7% annual rate. Inflation continues to drift lower since the COVID-19 pandemic took hold. The index rise was boosted by a rise in used vehicle prices (+6.7%) as families move to the suburbs from the inner cities. Inflation declined for rents, airfares, lodging and apparel.
III) Industrial Production in September came in below consensus estimates, as total output declined by 0.6% while manufacturing output fell by 0.3%. After the outbreak of COVID-19, output suffered a sharp drop and rebounded through August before stalling in September. After seeing manufacturing output surge by a 53.5% annual rate in Q3, output in September is still an estimated 6.0% below its pre-coronavirus level.
IV) Retail sales in September soared by a stronger than expected 9%, with gains seen in thirteen major retailing categories. The sharp rise in real sales is prompting Wall Street firms to estimate consumer spending will see an increase of 0.8% after jumping by 0.6% in August. On an annualized basis, real consumption in Q3 is estimated to have risen by a solid 39.3%. Sales in October should be boosted by Amazon Prime and new Apple phone sales.
V) Equities Month to Date are lower with Small-Cap, Value, Utilities, and Industrials leading equity price performance. The laggards for the period are Large-Cap, Growth, Energy and REITs.
Capitalization: Large Caps +4.04% (YTD +10.69%), Mid-Caps +6.15% (YTD +3.66%) and Small Caps +8.40% (YTD -1.01%). Style: Value +8.28% (YTD -13.85%) and Growth +6.98% (YTD +5.58%). Sector Groups: Technology +3.73% (YTD +33.36%), Information Technology +3.98% (YTD +31.94%), Consumer Discretionary +4.20% (YTD +23.24%), Communication Services +2.64% (YTD +11.99%), Materials +4.15% (YTD +9.69%), Healthcare +2.25 (YTD +7.32%), Consumer Staples +3.14% (YTD +7.10%), Industrials +5.98% (YTD +1.74%), Utilities +7.74% (YTD +1.67%), REITs +2.23% (YTD -4.72%), Financials +3.87% (YTD -17.08%) and Energy +0.66% (YTD -47.04%).
European Equities
The MSCI Europe Index fell on the week on an increasing likelihood of a hard “Brexit” and the sharp rise in new COVID-19 cases across the Euro-region.
Drivers: I) The Euro-zone led by the UK, Germany and nine cities in France implemented new COVID-19 restrictions due to the spike in new coronavirus cases. The new restrictions include further controls on social gatherings and nighttime curfews. The UK implemented restrictions in three tiers, with London now at Tier 2 which restricts interactions across households, schools, shops, and pubs.
II) Euro-zone Industrial Production in August jumped by 0.7% month over month, a gain which on average is four times larger than the gains seen during the 2013 to 2017 growth phase. The rise has partially offset the sizable decline in industrial production seen during the spring, but remains about 5.8% below pre-COVID 19 levels. Weakness continues in the transport and textile sectors, while food and electronics have rebounded.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was lower by -1.54% for the week (MTD +1.77% YTD -7.23%).
Asian Equities
Asian equity markets fell last week, as equity prices were weighted down by uncertainty over the US presidential election, a spike in global COVID-19 cases, and declining hopes for a new stimulus package out of the US. The DJ Asia Index declined by -0.58% for the week, (MTD +2.58% YTD -4.60%).
Drivers: I) In Japan, the October Reuters’ Tankan survey of current conditions for large manufacturers rose by 3 points to -26.0. The recovery has been led by autos and machinery, while electronics have lagged. The projection for direct investment advanced by 9 points to 17, driven by gains in autos, materials, and machinery. The rebound been uneven, as autos, machinery and materials are ticking higher while electronics have yet to trend upward.
II) September trade data following sizable gains in July and August, continue to show China’s export activity is stabilizing. Exports of merchandise rose 9.9% on a year over year basis, but gained only 1.1% m/m versus the 1.8% reading in August. While the strong surge in global demand for tech and personal protective equipment have slowed from pandemic levels, China’s export sector remains on track for a solid recovery.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei fell by -0.88% (MTD +0.97% YTD +0.73%), the Hang Seng Index was higher by +1.11% (MTD +3.95% YTD -13.07%) and the Shanghai Composite advanced by +1.96% (MTD +3.68% YTD +9.38%).
Fixed Income
Treasury yields declined last week as hopes for another COVID-19 relief bill in the US waned, and weekly Jobless Claims rose to their highest level since August.
Performance: I) The 10-year Treasury yield was lower last week ending at 0.745% down from 0.777%. The 30-year yield fell last week finishing at 1.532% dropping from 1.576%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose +0.24% last week, MTD +0.01% and YTD +6.81%. The Bloomberg Barclays US MBS TR was flat at +0.00% last week, MTD -0.04% and YTD +3.58%. The Bloomberg Barclay’s US Corporate HY Index climbed higher by +0.06% for the week, MTD +1.41% and YTD +2.04%.
Commodities
The DJ Commodity Index rose last week by +0.36% and is up month to date +4.13% (YTD +1.59%). Commodity prices were firm last week as the rise in soybean prices continued, driven by the increased demand from China to feed its growing population of hogs.
Performance: I) The price of oil rose last week by +0.64% to close at $40.78 and is higher month to date by +1.39% (YTD -33.21%). Oil prices firmed as OPEC and its allies remain committed to production cuts.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was higher by +0.71% ending at 93.72 for the week (MTD -0.18% YTD -2.77%). The USD rose last week as hopes for another US stimulus package waned and volatile global equity markets brought a safe haven bid for the USD.
III) Gold was lower last week as prospects for another US stimulus package before the November 3rd presidential election faded. Gold fell in price by -1.72% last week, declining to $1902.9 (MTD +0.39% YTD +24.93%).
Hedge Funds
Hedge fund returns in October are positive with the core strategies Equity Hedge, Event Driven, Macro/CTA, Relative Value and Multi-Strategy all higher for the month.
Performance:
- The HFRX Global Hedge Fund Index is higher at +1.06% MTD and up +2.70% YTD.
- Equity Hedge has advanced by +1.51% MTD and is lower by -1.48% YTD.
- Event Driven is up MTD +1.09% and is up YTD +5.72%.
- Macro/CTA has risen by +0.88% MTD and is higher by +0.99%
- Relative Value Arbitrage is higher by +0.64% and is up +4.82% YTD.
- Multi-Strategy is up MTD by +0.56% and has risen by +4.32% YTD
Data Source: Haver Economics