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November was a busy month for news. The markets largely welcomed Joe Biden’s election as President of the United States, but the real boost for risk assets came when Pfizer and BioNTech, followed by Moderna, announced very encouraging developments regarding the effectiveness of their COVID-19 vaccines. These events had a substantial impact, leading to an abrupt sector rotation within the equity component. Read on for the inside story.

Equity markets rally strongly

Since the start of November, we have seen a relatively large uptick for equity market performance from both a geographical and sector viewpoint.

The energy and financial sectors, which have been hit especially hard since the start of the pandemic, have bounced back since the month began. Prospects of a return to a more normal social and economic life over the coming quarters favoured cyclical sectors that have struggled in recent months. These sector-based movements also explain the strong rally seen on markets in Eastern Europe, Latin America and, to a lesser degree, Western Europe.

Conversely, it stands to reason that the sectors that have benefited most from the health crisis – IT, communication services (including Facebook and Google in particular) and consumer discretionary (a sector that now includes Amazon) – did not progress as much. This had an impact on the major US and Asian indices, which are heavily weighted towards these sectors.

Steepening of the US yield curve

On the bond markets, the US sovereign bond yield curve has steepened over the last three months. Yields in the 10-30-year segment alone have increased by around 20 basis points. This significant movement has seen the spread between the 10-year yield and the 3-month yield to come fairly close to its five-year average.

Euro performing well against the dollar

On the currency markets, 2020 has been a good year for the euro. The announcement of a sweeping recovery plan and initial steps towards the pooling of debt at the European level worked in the euro’s favour, particularly against the dollar.

Gold still in a strong position

In terms of commodities, gold has been in an extremely strong position since the start of the year (+25% in USD) and is benefiting from what remains a highly favourable environment, given that real yields are so low and monetary policy in developed countries is so expansionary. 

US election result disrupts the markets

The markets’ reaction to the US election results demonstrated once again just how fruitless it is to try to anticipate (market timing) their short-term movements. Indeed, many analysts were assuming that a close race would prove highly damaging for the markets.

The fact that there was no Democratic landslide (“blue wave”) and the prospect of the Republicans retaining control of the Senate decreased the likelihood of radical measures as regards both tax policy and the regulation of the tech giants.

On a less positive note, hopes of a large-scale fiscal stimulus are likely to be dashed since the Republicans are talking about far smaller levels than those discussed by the Democrats on the campaign trail. Moreover, any new stimulus plan would probably take longer to materialise and may not see the light of day until 2021. Household incomes were bolstered in the second quarter by large transfers from the authorities. These transfers paved the way for businesses to recover after the lifting of lockdown measures. A number of support measures have now expired though, and household spending could suffer in the coming months unless they are extended.

Business activity bounces back in the third quarter on both sides of the Atlantic

On the economic front, the United States and the eurozone saw a sharp uptick in activity in Q3. However, levels remain well below those seen at the end of 2019 in Europe and the US alike.

The outlook for the final three months of the year is somewhat bleak. European economies are expected to contract. A resurgence of infections and fears that the hospitality sector will be snuffed out entirely have forced the authorities to severely limit citizens’ movements.

Damien Petit
Head of Private Banking Investments
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