In November, almost all risky segments of financial markets were able to benefit from the news about effective corona vaccines. 'safe-haven' investments are losing ground.
Equity market trends: growing optimism
The equity markets closed in November at a considerably higher level. The S&P500 reported a new record level, and the Dow Jones closed over 30,000 points for the first time in history. The European stock markets reported by far the best performance. The Stoxx600 reached its highest level since February. In the emerging markets, the non-Asian stock markets made up for part of their loss.
The explanations for this growth in optimism are apparent: the American presidential elections and the news of a breakthrough in searching for an effective corona vaccine. Predominantly European stock markets benefited from the news about the corona vaccine. The cyclical and value sectors that had suffered the most from the restriction measures lagged behind other sectors in the stock market. But it is the latter who will benefit the most from the arrival of a vaccine. Those sectors have a greater weighting in the European stock market indices, which explains European stock markets' outperformance since these announcements. On the other hand, the sectors that benefitted the most from the inevitable @home-trend (growth equities) had to deal with profit takings. Those sectors have the most robust representation in the American stock market indices. The market upturn and sector rotation took place against a backdrop of increasing corona infections. But the news of a vaccine makes it possible to look beyond this challenging period.
Bond market trends: vaccine news briefly drives up interest rates
The interest rates for reference bonds in Germany and the United States rose due to the news of effective vaccines. The German 10-year rate rose to -0.45% during the month, and the American rate remained only a few base points below 1.0%, a level not reached since March. Government bond rates fell slightly again in the second half of the month. From a market perspective, monetary policy will remain very loose for years to come, even if the economy improves following the deployment of the vaccine. All in all, the movement in rates over the month remained virtually unchanged.
In Europe, Hungary and Poland's veto against the multi-year budget and the stimulus plan had little impact on the markets. The spreads of the southern countries of the eurozone reduced further. The 10-year government bond rate from Spain and Portugal is nearing zero percent.
In this climate of risk-taking on the markets, the spreads of corporate bonds dropped again and are now close to their pre-corona level, both for quality bonds (‘investment grade’) and ‘high yield’. But the underlying picture is not that unambiguous: companies that are hardest hit by the pandemic (cyclic sectors, leisure etc.) still report spreads that are considerably higher than their pre-corona levels.
Central banks: status quo
In anticipation of the December announcement, the minutes of the November ECB meeting confirmed the extension of the instruments used at the moment: the Pandemic Emergency Purchase Programme for bonds (PEPP) and the Targeted Longer-Term Refinancing Operations for banks (TLTROs).
The Swedish central bank increased its purchasing program by 200 billion Swedish kronor in November and extended the term to 2021.
The minutes of the November meeting of the Federal Reserve indicated that changes in the monetary policy are not required. As circumstances change, the modalities of the existing programs can be adjusted (for instance, shift to longer terms in the bond purchasing program).
Currencies: 'Safe-haven' currencies drop
The Japanese yen and Swiss Franc dropped against the euro, a decrease that predominantly took place after the news of the corona vaccine. The American dollar lost some more ground. Most likely, the election victory of Joe Biden will reduce uncertainty over the American trade policy.
The British pound rose slightly despite the absence of a trade deal between the EU and the UK. Apparently, there is progress in the negotiations, but significant differences remain.
Generally speaking, the emerging market currencies - supported by the weaker dollar and the more positive investor sentiment -slightly compensated for some of the previous losses in the last month.
Commodities: gold no longer favorite
The gold price saw a brief jolt at the beginning of last month to 1,950 dollars per ounce due to uncertainty around the American presidential elections. But as it became clear that the legal wrangling of the outgoing president Trump would fail, and in particular as a result of the news of effective vaccines, gold was sliding rapidly to approximately 1,800 dollars per ounce. In this environment, investors have moved away from safe-haven investments.
Industrial metals continued their rise owing to the prognosis of normalization of economic activity in 2021.
As for the oil price, it rose considerably. The price remained just below 50 dollars per barrel, the highest level since the beginning of March. Here too, the arrival of corona vaccines gives rise to hope of normalization. In early December, OPEC+ will decide on the extension of production limitations.