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Weekly market update - 30th of November 2020

Written and accurate as at: Nov 30, 2020 Current Stats & Facts

November was heading for the best monthly return for the S&P/ASX 300 since 1988 despite a quieter period last week.  The index lifted 0.98% to take the month’s gains to 11.58% at the end of Friday.  Some experts consider equity markets to be looking a bit extended in the near term and expect a period of consolidation. Nonetheless, the sentiment seemingly remains positive given the combination of stimulus, negative real rates, vaccine roll-out, growth momentum and earnings upgrades.  US Covid cases remain a risk. But European restrictions are taking swift effect with far less economic impact than before. With vaccines on the horizon, the market seems to be looking through near-term Covid risks to focus on a more positive 2021.

Health outlook

New daily cases in the US fell last week though this is distorted by delays in reporting in some States due to Thanksgiving. The next couple of weeks remain important with concerns that cold weather and more travel could see an acceleration in case trends.  Recent hospital admissions remain high; nonetheless, most states retain spare capacity.

European trends continue to improve. New daily cases in France have plummeted as lockdowns take effect. Importantly there has been a lower economic cost than last time. Toll road traffic troughed with an 80% fall in the first lockdowns. This time it was down 40% and is already showing signs of improvement.  French hospitalisations appear to have peaked for this wave and are broadly the same as the first wave despite many more infections.

On the vaccine, front questions emerged over the quality of the most recent AstraZeneca trials. They appeared to be small in sample size with a skew in age profile. This may lead to a delay in approval as further data from different trial groups is collected.  This is a material issue for vaccination plans in countries outside the US. The US plan is skewed towards Pfizer and Moderna. In places such as the EU, UK and Australia, the AstraZeneca vaccine plays a bigger role. In Australia, this means far more significance on the Novavax trials.  This could see a vaccination program rolled out faster in the US than in other parts of the world, with implications for relative rates of economic growth.

Economic outlook

Data points are emphasising a paradox in the US economy.

On the one hand, consumer sentiment remains soft. Real-time economic indicators have stalled or even show signs of deterioration. On the other hand, GDP indicators continue to accelerate.  The gap is partly explained by inventory rebuild and net export growth. Industrial production remains strong as a result. The housing market also remains strong, which is flowing through to other parts of the economy. Corporate profits have rebounded faster than many expected, which is feeding through to CAPEX and jobs.  One of the key swing factors for the economy is the savings rate. After peaking at about 34% of household income earlier in the year, it fell to 13.6% in October. If this returned to a normalised level of about 8%, it would add a further 4% to 2021 GDP. This potential pent-up demand could be released as a vaccine rolls out.

Liquidity and monetary stimulus remain supportive. Combined money supply across the US, EU and China was up 18% year-on-year in October. 

It is worth noting that forward indicators such as credit spreads continue to trend down, also supporting markets.

Market outlook

Confidence in the economic recovery continues to drive commodity price gains. Copper was up 3.2% last week and is up 11.7% for the month — well above pre-Covid levels.

Brent Crude gained 7.2% and is up 28.6% for the month. At US$48.18 a barrel, it is nearing the major technical resistance point of US$50. Demand remains a key difference between copper and oil. A lack of air travel continues to weigh on the latter.  Several experts have made comments expecting a near-term pullback in oil but equally forecast a recovery to the U$60 range next year once air travel recovers.

Bond yields are holding recent levels despite good news on vaccine and economic growth and the improvement in sentiment suggested by commodity prices. There is a suggestion yields are being supported by a view that less need for stimulus means less bond issuance and debt. 

Gold continues to sell off as the need for safe-haven reduces for now.

There is much debate about where the US dollar goes as the US dollar index (DXY) continues to trend down. Bears point to a weaker dollar given the surge in Covid alongside twin deficits. Either way, a weaker USD is helpful for markets.

Locally the market’s recent breadth has been encouraging with both growth names and cyclical stocks making gains.

Energy (+6.38%) and Resource (+4.36%) stocks led the way last week while Healthcare (-2.79%) and defensives such as Consumer Staples (-1.04%) lagged. These thematic trends explained most of the large stock moves in the index last week.

The gold miners were the weakest in the ASX 100. Northern Star (NST) was down 8.41%, and Saracen (SAR) fell 8.05% as investors saw a reduced need for portfolio insurance.

Treasury Wines (TWE, -6.67%) took a hit on Friday on the news of Chinese tariffs on Australian wine, before going into a trading halt. With interim tariffs in the region of 170% on its Chinese imports, this is a huge blow to TWE. Exports to China and HK accounted for 38% of Group EBIT in FY19, with material implications for wine supply more broadly.

Origin Energy (ORG, +11.13%) benefited from a higher oil price, but also delivered a well-received strategy day which focused on the potential for improving free cash flow. It was the best performer in the ASX100.  Ampol (ALD, +7.74%) also hosted a strategy day and announced an off-market buy-back, alongside a reasonably constructive update on operations. Refining continues to lose money; however, on the retail fuel side, higher margins are helping offset weaker volumes.

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