Market Review 11/2020

November turned out to become a great month for the financial markets. One after another, vaccine news reached investors around the globe and started massive rallies in many asset classes. Trump’s fight attempts at vote recounting did not yield any changes to the election outcome and US courts swiftly dismissed all lawsuits based on lack of evidence.

Politics? What politics?

In all, financial markets were mostly ignoring US political twists and turns. Equities and high-yield fixed income securities were the main beneficiaries of this risk-on sentiment, leaving investment grade corporates in the dust. The Bloomberg Barclays Pan-European High Yield Index gained an impressive 4.16% in November, outmatching the US Corporate High Yield Total Return Index that rose by 3.96%.

Meanwhile government bonds were a tad lower, experiencing a couple of highly volatile days on the way. European government yields remain entrenched in negative territory, with Germany leading the herd. For the time being, the US sovereign debt curve remains the last one offering investors positive yields among developed nations.

Awaiting Santa Claus

With Christmas and New Year ahead, thoughts of a Santa rally come to mind. For the market however, this is no longer a Christmas miracle, but rather an inertia, a routine of previous years. At the end of November, even bulls in precious metals market surrendered, probably relocating a portion of their gains into stock market. As a result, gold lost about 10% in price and silver dropped 15.8%. The price of Brent crude in November increased by 30% from $36.50 to $49.10 per barrel. As expected, the oil market won back almost the entire drawdown after the price collapse in March-April of 2020.

European and US equity markets

Thin ice under USD and precious metals

Since July, EUR/USD is trading in a narrow range, trying to gain energy for a directional move. Well, it does sound as our usual monthly FX outlook – “nothing happened, so let us wait for a bit longer”. Still, EUR/USD monthly chart gives us some new information. There is a twelve-year-old downtrend in the pair and prices have reacted off that trend line numerous times. Back in the summer EUR/USD closed above it, then spent four months in consolidation and then pulled back to test it. With the strong November close, we have probabilities lining up in favor of EUR trying to go to the critical level of 1.25.

Normally, dollar being under pressure is good news for precious metals, but correlations seemed to disappear this month with gold and silver experiencing serious suffering. Can it mean larger stress for metals in weeks to come? Ideally, we would want to see some additional weakness before the bottoming process in metals begins, but so often these days the market is excessively greedy in giving us a much-desired opportunity to add to the long positions. Hence for those who trade in a long term the price adjustment for precious metals should be viewed as a buying opportunity.

Benchmark 10-year bond yields

Strict measures during first Covid-19 wave in Asia pay off

In November, economic activity in China accelerated at the fastest pace in the decade indicating that world’s second-largest economy recovers to its pre-COVID levels with Caixin/Markit Manufacturing PMI rising to its highest reading since November 2010. China has seen a strong rebound in activity achieved by strict virus containment measures, infrastructure-driven stimulus and strong exports of medical supplies. Other Asian economies did great too – the surveys showed factory activity growing in Taiwan, Indonesia and South Korea. Korean IHS Markit PMI showed its highest reading since February 2011.

High Yield bond Indexes

All sad and grim in Europe; US data mixed

Renewed coronavirus lockdown measures across Europe cooled Eurozone factory growth – IHS Markit’s final Manufacturing PMI fell and economic sentiment dropped for the first time in seven months in November. Sentiment in services, the Eurozone’s biggest sector, slipped to -17.3 from -12.1. Sentiment among consumers fell to -17.6 in November from -15.5 points in October.

US economic indicators for November gave mixed signals. Business activity expanded at the fastest rate in more than five years in November boosted by the quickest pickup in manufacturing since September 2014 with services also rising. On the other hand, US consumer confidence fell more than expected in November because of widespread resurgence in new infections and business restrictions. Also, the number of Americans filing first-time claims for jobless benefits increased further last week – to a seasonally adjusted 778,000 for the week ended Nov. 21, that was the second straight weekly increase in claims.

Our “base case scenario” is barely alive

After the elections, we wanted the market to prove that the rally from September and October lows was “real”. Oh boy, it did. The possible test of S&P 500 levels of 3350-3400 never came and 3050 levels can be now viewed as “very unlikely”. Good news, of course, is that our bullish bias survived all the criticism. A grain of salt – an unallocated portion of the portfolio. Still, if our aggressive projections of 5000+ in S&P 500 within next 2-3 years will play out, we are not missing anything in any case. As for now, should we be able to break out of 3700 mark and hold it, we have our first support for the bulls at 3500 level as a good long-term entry position. If we first see the 3600 taken down, we then get back to an already-mentioned test of 3350-3400. Probabilities say that bulls will be able to hold those levels.

Gold price, USD/oz