Stock markets generally rose over the last week, but it was the pattern of moves that was interesting. The Dow Jones was up by 1.8% whereas the tech-heavy NASDAQ was flat. Europe outperformed the US with the DAX up by 2%, the Nikkei was up a healthy 3.4% and the Hang Seng up 4%. So, value outperformed for a change. Indeed, there’s a long way to go for value to catch up: year-to-date, European indices are in deep red territory whereas the NASDAQ is up over 20%.
Some of this is rotation; some movement might reflect politics (more on that later). And bond markets also had an impact. Yields on 10-year government bonds in Europe and North America rose by 10 basis points. This hurts growth stocks, whose earnings are by definition weighted more in the future compared to value stocks.
Vaccine success still on the cards but markets have not priced this in
There is still a good chance that we get positive news on a vaccine, likely the Oxford vaccine, where trials and production are at an advanced stage. Of course, the results of the trials need to be a success, but early indications are very positive. Rolling out the vaccine for the global population would obviously be a massive logistical challenge, but it seems that the Oxford vaccine can be manufactured in massive quantities very quickly and does not need deep freezing. If the Oxford vaccine doesn’t work, there’s a good chance that one of the six others under trial will.
As the steady rise in virus cases in Europe, the surge of infections in countries like India and the second waves in the US all show that the policy of suppressing the virus isn’t working, news of a successful vaccine would be a game changer. Complete failure of all vaccines would obviously be a major negative for the markets, but we also think that success is far from being fully discounted either.
A vaccine breakthrough would be good for risk assets, bad for bonds…
Our view is that the potential successful news on the vaccine is a major positive for risk assets. It is also bad news for bonds though. Central banks have pushed rates down to extraordinarily low levels as well as cranking up their QE programmes precisely because of the virus-induced recession.
If we can see the virus being eliminated over the next year, then markets will begin to price interest rate increases back into the curve. Of course, the virus will leave deep economic scars; interest rates will stay low for an extended period. But the course back towards something like normality will be there.
…but bonds in the US could rally with ongoing failure to agree new support package
We certainly need some good news given the shenanigans in Washington. Congress and the White House failed to agree on a budget package. As a result, millions of Americans will miss out on the $600 a week in extra unemployment pay. They will get $300 as a result of Donald Trump’s presidential decree, but not until the end of the month at the earliest. And there are doubts over the payroll tax cut too. Most commentators think that a deal will eventually be reached, and it will be big, but probably not in the next few weeks and risks have definitely risen, which mean bonds may rally, especially if the US data turn down.
Relations between the US and China took a further step down too last week, with Trump’s renewed attack on Tik Tok. Scheduled talks to discuss progress on the trade deal have been postponed but we do not think the US will impose further tariffs on China.
Biden still the front runner – with notable impact on policy and markets
The race for the White House is far from over but Biden remains the front runner, with the potential for corporate taxes to go up, along with tax on high earners. Estimates suggest earnings per share on the S&P could fall by $10-$15 – a big hit. A Biden administration might also increase regulation on the social media giants, possibly breaking up Google and Facebook. There would also be offsetting positives for markets: the long-awaited infrastructure plan would finally take place, for example. And while Biden would keep up the pressure on China with respects to human rights and climate change, he’d be less aggressive on tariffs.
All in all, there are many cross currents at present. But I’d keep your focus on the medical news, specifically vaccines, and I think that would be good news for equities.