Stoxx600 index has made a strong rally in November and currently stands at -6.80% YTD. S&P500 has also made a rally in November during which it reached new all-time highs. Currently it stands at +12.40% YTD.
Global Macro & Markets Overview – November 2020
In the near term, most concern come from Central and Eastern Europe, which enjoyed a strong GDP rebound in Q3 but is now slowing sharply because of renewed virus outbreaks and the risk of another round of lockdowns. This deterioration is likely to be temporary there might be a sharp improvement in the spring on the back of higher temperatures and ultimately a vaccine. But the next few months are likely to be tough.
Under a split U.S. government, more modest fiscal stimulus is expected which will lead to a greater tendency for interest rates to be range-bound and inflation to remain low in the near term.
The Fed plans to respond only to shortfalls from full employment, not overshoots. In other words, the Fed will not tighten rates simply because unemployment is too low; inflation or other risks would need to be present as well.
The pandemic has accelerated some key structural trends, such as increased flows into sustainable assets and the dominance of big tech companies. The U.S. market has a favourable sector composition compared with other major equity markets. It boasts a higher share of quality companies in sectors backed by long-term growth trends such as tech and healthcare. Information technology and communication services represent nearly 40% of the market value of the MSCI USA Index, compared with just 11% in Europe.
China has largely recovered from the pandemic-driven slowdown, and brought GDP back to nearly the pre-crisis trend, with high-frequency indicators suggesting further growth in Q4 and at least some possibility of trade de-escalation with the US under Biden administration. Chinese policymakers have started to redirect their attention to the risk of future financial instability from excessively loose lending conditions. For the financial markets, the main implications are higher interest rates and an appreciation in the currency.
The business sector has coped with the downturn better than many commentators had expected. Bankruptcies are actually down on the year across the major economies, in sharp contrast to the significant increases after the 2008 crisis. Much of this reflects the efforts by central banks and fiscal policymakers to keep credit flowing, as well as the expectation that the health emergency will be relatively short.
The amount of debt trading at distressed prices has fallen sharply amid the market rally that began in March, from over US$400 billion to around US$73 billion as of August 31, 2020, and the implied fiveyear cumulative default rate on CCC bonds has declined from 61% at the March highs to around 45% as of September 27, 2020.
Many countries and regions are now accelerating their transition to a carbon-neutral economy. Europe and China have recently announced their aims to be carbon neutral by 2050 and 2060, respectively. Even though these deadlines seem far away, they imply reaching peak carbon emissions within less than a decade, which will require massive interventions in the functioning of the global economy.
The state of emerging market (EM) sovereign issuers has evolved since past cycles. Market participants’ tolerance for higher debt ratios, a low inflation landscape and a yield-starved investor base have combined to change EM fiscal authorities’ and central banks’ reaction functions.
The way EM policymakers responded to past crises followed a well-established pattern: seeking to restore confidence by raising interest rates, withdrawing liquidity, and cutting back markedly on fiscal deficits. This time has been different. In response to the COVID-19 recession, EM central banks have cut interest rates even in the face of currency weakness; injected significant amounts of liquidity; eased regulations to keep money and bond markets functioning; and even undertaken QE, to varying degrees, to keep bond yields broadly stable.
The FP Asset Management Aggregate Macroeconomic Index for the G8 countries has improved again during November.
