Weekly market update - 8th of February 2021
Written and accurate as at: Feb 08, 2021 Current Stats & Facts
Confidence in policy stimulus, some better US earnings and easing concerns over vaccines contributed to strong equities last week. The local market gained 3.5% last week, led by banks and technology. In the US, the S&P 500 rose 4.7%.
Covid and vaccines outlook
Hospitalisations and cases continue to trend down in the US and the UK, while vaccinations continue apace. In the US, the number of Covid-19 patients in hospital per million people is down 30% from the peak, easing stress on the system. There have been big improvements in the past week in the hardest-hit states such as Texas and California.
The pace of vaccinations continued to accelerate in the UK and the US – although the latter saw some impact from poor weather.
Almost 15% of the UK population has received a first dose – roughly 90% of those aged 80 and older. The UK and Israel are two bellwether countries to watch. This is where the impact of vaccines on the severity of cases will become evident earliest.
Projections suggest the UK will have vaccinated half its population by mid-March. The US is on track for the same target in the first half of May. Australia is expected to achieve 50% by early July. There is a tactical element to this for investors. Markets, where the roll-out has been faster, can expect to open up earlier and recover faster.
Economics and policy outlook
US payrolls rose 245,000 in November — well below the consensus estimation of 460,000. This reflects the impact of rising case numbers on retail and service sectors in that month.
The US unemployment rate dropped from 6.9% to 6.7%, resulting from a fall in the participation rate. The pandemic has forced roughly 6 million people out of the labour force. This is important in the context of the Fed’s employment milestone towards tighter policy. There are still a lot of people to come back into the workforce.
The data was not all bad. Hours worked (+0.9%), and income (+1.1%) were both better. The lead indicators on consumer spend are still tracking sideways. But with the stimulus, lower cases and warmer weather coming through the picture could look very different in two months.
The Democrats look set to pass the Biden stimulus package through Congress via reconciliation – which would not require Republican votes. This means some measures are likely to tighten up — for example; there could be greater restrictions on who gets the full stimulus cheques. There also may be less allocated to States which are already seeing better-than-expected revenues. However, it also means the aggregate package amount is likely to be at the high end of the expected range.
It is worth noting that despite a fragile near-term outlook for GDP, the Bank of England reduced negative rates' expectation. The outlook is for a rapid recovery, helped by a roll-back of restrictions as the vaccine program takes effect. UK banks rallied on the news. We may see a repeat of this in other countries.
Finally, while there is plenty of worried commentary about the risk in equities given the recent strong run, it is worth reiterating the extraordinary moves in fundamentals which could continue to support markets:
- In the US, money supply (M2) is up 26% year-on-year.
- The combined balance sheets of the Fed and ECB are up 70% year-on-year.
- US fiscal stimulus, as measured by the budget deficit, is up to US$2 trillion year-on-year.
- Global short interest rate yields are down by 100bps to 0.65% year-on-year.
Macro risk and uncertainty remain elevated. Equity markets have had a strong run. Nevertheless, the combination of these effects is extraordinary and may provide a substantial foundation for economic recovery and equity markets.
Markets
Despite some evidence of continued hedge fund de-grossing, the markets had a sharp, broad-based recovery last week as the focus returned to liquidity and better earnings in the US.
Normal correlations remained in place across asset classes. Equities were up; US 10-year bond yields rose 10bps, the USD weakened, gold was down 2% and Brent crude up 6.2%.
The Australian market more than caught up with the prior week’s losses. Defensives generally lagged. Staples were only up 0.57%, and Utilities fell 1.0%.
Resources (+1.5%) lagged the rebound. We continue to see very supportive fundamentals, but the iron ore price was down 1.4%. There is a sense that resources have been a crowded trade and there may be some rotation to other sectors — potentially exacerbated by hedge fund de-grossing. Worley (WOR, -8.3%) was the worst performer in the ASX 100. Management downgraded full-year guidance and signalled that demand remained soft. This disappointed those who hoped that a recovery in the oil price would drive more CAPEX investment in the sector. This disappointment is a symptom of the ESG lens and subsequent capital discipline being applied to investment in “old energy” projects at a broader level. This is likely to mean more muted CAPEX cycles for companies such as WOR.
Origin (ORG, -4.4%) and AGL (AGL, -0.7%) also issued downgrades. This reflected lower electricity prices – a stiff headwind in the power sector – as well as low near-term gas prices.
Tabcorp (TAH, +15.0%) surged as potential bidders emerged for its wagering business. This segment has been something of a millstone for TAH in recent years following the integration with Tatts. Divestment of wagering should lead to a material re-rating, based on the much better quality lotteries business.
Nine Entertainment (NEC, +13.3%) benefitted from growing confidence that there would be a media deal in Australia, leading to higher revenue for their news content. Advertising remains strong as companies leverage their brands to the optimism surrounding a roll-back in restrictions and a re-opening economy.
Afterpay (APT, +12.0%) was also among the leaders. Paypal’s earnings report highlighted the swift inroads they are making into the buy-now, pay-later space, with its new product – only launched in August – off to a solid start. This emphasises the increasing competitive risk in the sector, which is likely to impact costs and margins.