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Financial market and economic update - December 2020

Written and accurate as at: Dec 22, 2020 Current Stats & Facts

The US election has come and gone (almost) and markets have reacted positively to the likelihood of a Democrat President and a Republican Senate, which would be able to moderate Democrat policies such as tax increases on corporations and capital gains.

Overall, we see some positive signs which are generally supportive of risk assets. Liquidity in markets remains strong, the equity premium relative to bonds still supports holding risk assets, and earnings are trending back to pre-Covid levels. Risks remain, notably the rising numbers of Covid-19 numbers in Europe, the US and more recently Sydney’s Northern Beaches. 

 

Here are some of the recent developments across the major financial markets.

Australian Equities

The Australian share market enjoyed a strong month in November, building on October’s momentum as the rotation into cyclical sectors continued. The easing of Covid-19 restrictions, a string of better-than-expected economic data, and positive news from vaccine trials all contributed to the rally. It was not all smooth sailing, however, with some businesses hit hard by Chinese trade measures. Treasury Wine Estates went into a trading halt after the Chinese Ministry of Commerce announced it will apply provisional anti-dumping measures on Australian wine. Treasury plans to reallocate its Penfolds Bin and Icon ranges from China to other luxury growth markets and will switch its luxury grape sourcing to other premium Australian portfolio brands. Harvey Norman announced an increase in aggregated sales revenue for the period 1 July 2020 to 21 November 2020 of 28.2% on the prior corresponding period. Australian franchises saw a 30.4% increase in comparable sales, while New Zealand sales rose 20.4% and Ireland sales rose 52.7% (in local currency). Insurance Australia Group announced it is raising up to $750 million in equity in response to the unfavourable ruling on its business interruption insurance test case. IAG intends to recognise a post-tax provision of $865 million to reflect the potential impact of the judgement.

Global Equities

November was a solid month for global equities. In the US, the focus shifted to the deployment of vaccines countrywide following successful trials, while Joe Biden firmed as the apparent victor of the presidential election. The Dow Jones blew past 30,000 points, and the S&P 500 Index rose above 3,700 points in early December even with record new cases of the coronavirus. Monetary policy remains exceptionally accommodative around the world, while further fiscal stimulus in the US and other regions will plug the liquidity gap until vaccines are widely available. In Europe, cyclical sectors, including energy and financials, regained favour, while previously beaten-down sectors like travel and retail, posted substantial gains. Despite fears that the second wave of infections could sweep across the continent, EU governments have so far managed to avoid a return to strict lockdowns. It is unclear exactly when herd immunity will happen or even when vaccines deploy, but investors see an end in sight and look past short term restrictions.  

Fixed Interest/Bonds

Yields came under pressure in November, with the US 10-year Treasury yield rising early in the month from 0.88% to 0.98%, before retreating to 0.84% by month-end. At its December meeting, the RBA decided to keep its policy settings on hold, including its 0.10% target for the 3-year bond yield, along with the conditions of the Term Funding Facility (TFF) and its new quantitative measures announced in November. Authorised deposit-taking institutions have drawn down $84 billion under the TFF and have access to a further $105 billion. Since the start of 2020, the RBA has expanded its balance sheet by $130 billion, and under its new quantitative easing program, the RBA will buy $100 billion worth of bonds over the next six months. These measures have helped to keep funding costs low, extend much-needed liquidity to businesses, and support balance sheets. RBA Governor Lowe stated the Bank will continue to review its policy settings and is prepared to do more if necessary. Lowe said the Bank is paying close attention to asset prices and household debt but considers unemployment to be the most significant risk to the stability, rather than excess borrowing.

Listed Property

The listed property sector eclipsed the Australian shares in November, following a mixed performance in October. Giant leaps from the likes of Unibail-Rodamco Westfield (+73.1%) and Vicinity Centres (+36.4%) were undoubtedly due to positive vaccine news. However, in Unibail’s case, the share price was boosted by the rejection of the supervisory board’s €3.5 billion capital raising, with the opposition led by a group of activist shareholders. The only straggler over the month was Cromwell Property Group (-2.3%), which suffered a board spill triggered by the rejection of its remuneration report. Quality assets are in demand, and Australian property is still attracting capital flows from offshore. Rent collections have improved and remain high across the office and industrial sectors, while retail has seen a significant lift from its June lows. The retail sector will likely benefit from the reopening of the economy, with foot traffic already improving significantly. However, large discretionary malls may continue to be affected as social distancing measures remain in place for some categories like cinemas, gyms and restaurants. US-listed property also had a strong month, posting 9.1% in US dollar terms, with large gains coming from hotels (+43.6%), shopping centres (+34.3%) and regional malls (+31.6%).

Fixed Interest/Bonds

Yields came under pressure in November, with the US 10-year Treasury yield rising early in the month from 0.88% to 0.98%, before retreating to 0.84% by month-end. At its December meeting, the RBA decided to keep its policy settings on hold, including its 0.10% target for the 3-year bond yield, along with the conditions of the Term Funding Facility (TFF) and its new quantitative measures announced in November. Authorised deposit-taking institutions have drawn down $84 billion under the TFF and have access to a further $105 billion. Since the start of 2020, the RBA has expanded its balance sheet by $130 billion, and under its new quantitative easing program, the RBA will buy $100 billion worth of bonds over the next six months. These measures have helped to keep funding costs low, extend much-needed liquidity to businesses, and support balance sheets. RBA Governor Lowe stated the Bank will continue to review its policy settings and is prepared to do more if necessary. Lowe said the Bank is paying close attention to asset prices and household debt but considers unemployment to be the most significant risk to the stability, rather than excess borrowing.

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