The rising number of new infections around the world, the lack of new US stimulus, and the increased risk of a hard Brexit, all weighed on the market during the week of 8 December, pushing riskier assets into the negative.
The good news on the vaccine front included the UK becoming the first nation to roll out a vaccination programme for its most vulnerable citizens. It was closely followed in the US, after the US Food and Drug Administration (FDA) approved the Pfizer/BioNTech vaccine on Friday 12 December, meaning that inoculations in the US could start¹.
Despite the advances on the vaccine front, new cases continue to mount, with Germany announcing that it was introducing a hard lockdown until at least 10 January1. The US continues to struggle with the virus spread, reporting its highest number of daily cases, more than 232,700, on Friday 11 December¹.
In the US, weekly initial jobless claims rose to 853,000 last week, which is its highest level since mid-September, and raises the prospect that the labour market progress over recent months is slowing significantly. This is especially when you consider the +137,000 increase in claims from the week of 30 November, which was the largest one-week jump since the pandemic began back in March². Staying with the US, consumer price index data for November showed month-on-month inflation rose by +0.2%, which meant the year-on-year number remained at +1.2% ‒ both slightly higher than was expected³.
A lot happened in terms of fiscal spending during the week of 8 December as governments looked to add additional support to their economies. In the US, Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi both indicated progress was being made toward a new COVID-19 relief deal. However, both sides continue to differ on state and local taxes, as well as the liability protections for employers¹. There is now a new deadline to get a funding deal done by the end of this week.
Over in Europe, leaders finally came together on the massive €1.82 trillion seven-year budget and recovery package, after reaching a compromise with both Hungary and Poland, who had raised concerns over certain ‘rule of law’ mechanisms attached to the spending packages⁴.
The European Central Bank (ECB) expanded its €1.35 trillion emergency bond-buying programme by a further €500 billion, with the purchases extended by nine months until March 2022¹. Furthermore, a programme which offers cheap loans for banks was extended until June 2022, and it was confirmed that four pandemic emergency longer-term refinancing operations will also be offered next year. This was all signalled prior to the meeting, although the markets baulked at the statement by the ECB President Christine Lagarde that this additional support “need not be used in full”⁴.
In terms of Brexit news, talks will continue this week as a joint statement, on Sunday 13 December, from Prime Minister Boris Johnson and President of the European Commission Ursula von der Leyen, was slightly more upbeat, agreeing to “go the extra mile” in the coming days to try to reach an agreement¹.
In the UK, gross domestic product (GDP) expanded by just +0.4% in October, which was the economy’s slowest monthly growth since the economic rebound from the pandemic began⁵.
Finally, Japan also announced a new fiscal bill last week worth US$708 billion⁴.
The news left the MSCI All Country World Index down -0.50% in US Dollar terms, but up +1.36% in Sterling terms, with the difference down to the weakness in Sterling due to Brexit concerns. Within equities, growth stocks (+1.61%) marginally outperformed their value (+1.12%) peers.
Sector-wise, communication services (+2.44%) and consumer staples (+2.21%) were among the two best performing sectors. We also saw a further bounce in energy stocks (+2.74%) last week, with Brent oil hitting US$50 dollars per barrel for the first time since March⁴, following the OPEC+ deal on oil production agreed earlier in November. At the other end of the spectrum, falling bond yields weighed on financials (+0.33%) and increased lockdown measures in the US, and some parts of Europe, were a headwind for real estate (+0.09%).
In terms of regional performance, Emerging Markets (+2.42%) outperformed, especially Asia (+2.08%), as the region emerged more quickly from its COVID-19 slump and performing better than many developed nations (+1.19%). Brexit-related concerns also weighed on European (+0.86%) and UK (-0.17%) markets.
Within bonds, the risk-off environment meant government bond yields outperformed corporate credit. In fact, the best performing area was UK government bonds (+2.85%) as increasing concerns of a hard Brexit caused a classic flight to safety, with UK 10-year bond yields falling 0.20% over the five-day period and finishing the week yielding just O.16%⁴.
Staying with government bonds, and as a reminder of the distorted world in which we currently live, last week Spanish 10-year government bonds were briefly admitted into the ’10-year negative yield’ club, joining the likes of Switzerland, Germany, Netherlands, Denmark, Belgium, France, Ireland, Sweden and Portugal, among others⁴.
Within equities, exposure to defensive sectors, via Morgan Stanley Global Brands and Fundsmith Equity Fund, was helpful. TT Emerging Markets Equity performed strongly. Nedgroup Global Equity was negatively impacted by a few stock-specific holdings (such as Facebook, MasterCard, and Unilever), while Dodge & Cox was held back given its overweight exposure to financials, which lagged the broader market. Nonetheless, our equity portfolio remained in positive territory.
Within bonds, our short duration and bias towards corporate bonds/credit were both headwinds for returns, as the more risk-off environment meant spreads widened and government bond yields fell.
In terms of property, our exposure to global real estate investment trusts (REITs), via Nedgroup Global Property, marginally outperformed REITs in general, as its underweight the weaker more traditional parts of the real estate market. Our exposure to traditional UK commercial property, via BMO Commercial Property, was under pressure over hard Brexit concerns combined with the rising risk of London and the South East of England going into a more restrictive lockdown, which was confirmed on Monday 14 December.
The care home investments proved more resilient, helped by the fact that care home staff and residents will be some of the first to get the vaccine in the UK.
Our alternatives were affected by their UK stock market listings, which got caught up with the Brexit-related weakness. We see this weakness as temporary but, if it persists, it could offer some attractive opportunities or entry points within our alternatives asset class. Our renewable energy holdings should benefit from weaker Sterling, as the rising cost of natural gas would push up UK electricity prices. 3i Infrastructure has mostly European exposure, and our music royalties revenue is mainly generated in US Dollars.
The big story on the music front was Hipgnosis, which celebrated its 50% stake in Mariah Carey’s song ‘All I Want for Christmas Is You’ as it reached number one in the UK charts for the first time in its 26-year history⁶. Hipgnosis only acquired the track in September, but it has been streamed over 10.8 million times over the last seven days, making it the most streamed song over a week in 2020⁶.
On Monday 14 December, the US Electoral College vote finally confirmed Joe Biden’s presidential victory with a 306 to 232 margin¹.
On the other side of the Atlantic, Brexit negotiations continue to dominate headlines as both sides look to reach an agreement before the hard deadline at the end of the year.
It is a packed week ahead on the data front. One of the key highlights will be the release of the December flash purchasing managers’ indexes (PMIs) from around the world on Wednesday 16 December, which will give one of the timeliest indications of how different economies have been performing.
There’ll also be an increasing amount of data from the US for November, with the release of figures on industrial production, retail sales, housing starts and building permits. China will also be releasing its November industrial production and retail sales figures next week. In Germany, the ifo Institute’s latest business climate indicator will be published.
It’s also a busy week for central banks, with the Federal Reserve (the Fed), Bank of England and Bank of Japan all meeting for the last time this year. No major policy changes are expected from any of the banks, although the Fed is likely to announce an enhancement to its quantitative easing guidance by adopting qualitative outcome-based language. On top of this, its latest Summary of Economic Projections will be released, with most economists expecting there to be upgrades to the US growth and unemployment forecasts.
Finally, in terms of COVID-19 developments, Thursday 17 December will see the US FDA meet to discuss an emergency use authorisation for the Moderna vaccine¹.
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Sources: Nedbank Private Wealth and (1) Reuters; (2) US Department of Labor; (3) US Bureau of Labor Statistics; (4) Bloomberg; (5) Office for National Statistics; and (6) BBC News.
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