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The week in review – US financial markets

Economic and political backdrop

Stock futures rose on the heels of two significant vaccine announcements during last week. Last Monday, Moderna reported early data showing its mRNA vaccine was 94.5% effective in preventing coronavirus infections while also appearing to prevent severe disease in the few test subjects who did contract the virus. Investors seemed further encouraged that Moderna’s vaccine confirmed the efficacy of the mRNA approach also used by Pfizer in partnership with Germany’s BioNTech. Indeed, on Wednesday, the two companies announced revised data showing their vaccine was 95% effective, a higher level than the 90%+ initially reported. On Friday morning, Pfizer announced it had filed for emergency use authorisation of the vaccine with the US Food and Drug Administration.

Further evidence emerged during the week that the pandemic and its drag on the economy would get worse before the vaccines would become widely available, however. New local shutdowns and restrictions were announced across the country as case counts rose and hospital systems grew more stressed. Sentiment seemed to take a particular blow from news Wednesday that the New York City public school system, the nation’s largest, would be switching to remote learning. Meanwhile, mobility measures, credit card purchases and other high-frequency data showed that consumers were growing more cautious and staying closer to home, whether because of mandates or personal choice. In a grim milestone, the number of US fatalities attributed to the disease crossed 250,000.

It also appeared unlikely that substantial federal fiscal aid would help offset the impact of the surge in the virus, as it had in the spring. The chances for a bipartisan agreement on a new stimulus package appeared to remain slim, especially with President Trump continuing to refuse to concede the election. The market did catch a bid late in the afternoon Thursday, after rumours surfaced that Senate Majority Leader Mitch McConnell had agreed to resume negotiations with Democrats in Congress.

Around the same time, however, Treasury Secretary Steven Mnuchin announced in a letter to the Federal Reserve that he would allow several of the central bank’s emergency lending programmes to expire at the end of the year. Mnuchin cited improved financial conditions in requesting the return of USD 455 billion of unused funding, but in a rare move, Fed officials quickly released a statement announcing their disagreement with the decision, citing a “still-strained and vulnerable economy.” On Friday, Mnuchin stated he planned instead to use the money to fund direct grants to workers and small businesses, perhaps muting the impact of the decision on markets.

Last week’s economic data arguably provided evidence for the Fed’s continued caution. Weekly jobless claims rose for the first time in over a month, from 711,000 to 742,000. Continuing claims through state insurance programmes continued to fall, from 6.8 million to 6.4 million, although the drop was mostly offset by rising claims through a federal programme providing extended benefits, from around 4.1 million to 4.4 million. Retail sales excluding autos in October missed expectations and grew at the slowest pace (0.2%) since April. Industrial production rose a bit more than expected in October, but regional manufacturing gauges indicated slowing expansion. The housing sector remained the standout in the recovery, with sales and construction indicators hitting their highest levels since 2006–2007.

Equity markets

The S&P 500 lost 0.7% (11.9% YTD) as good news on the vaccine front continued to be offset by worries about the worsening of the pandemic in most parts of the US. The Dow Jones Industrial Average, the S&P MidCap 400 and the small-cap Russell 2000 all reached new intraday highs in the first part of the week before surrendering some of their gains. Energy shares outperformed as oil prices rose on hopes for an end to the pandemic in 2021, as well as signals that OPEC and other major oil exporters would delay a global production increase planned for January. Healthcare and utilities shares lagged. Value outperformed growth and small caps outperformed large caps, with Russell 1000 Growth returning -0.5% (29.2% YTD), Russell 1000 Value 0.1% (-2.6% YTD) and Russell 2000 2.4% (8.3% YTD).

Fixed income markets

The mixed economic outlook and growing coronavirus concerns pushed the US 10-year Treasury yield from 0.90% to 0.83%, its lowest level in two weeks.

Positive vaccine headlines led investment-grade corporate bond spreads tighter to start last week, with higher-risk energy and pandemic-sensitive issuers, including air lessor and leisure names, outpacing the broader market. The economic backdrop was dampened by the rapid rise in COVID-19 cases, but spreads largely held or moved tighter, supported by strong demand from Asia and healthy trading volumes. The primary calendar was active, and the levels of new issuance surpassed expectations.

Solid equity returns early in the week supported the performance of high yield bonds. Favourable technical conditions due to steady new issuance and positive flows were also supportive, and investors generally seemed to focus on putting money to work in new deals. Credit spreads tightened across all quality tiers.

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