Market Analysis



Benchmarks reach new records on vaccine and political optimism

A new round of vaccine optimism and diminishing political uncertainty helped stocks build on recent gains for the holiday-shortened week. Most of the major benchmarks hit record highs, with the narrowly focused Dow Jones Industrial Average gaining the most attention by crossing the 30,000 thresholds for the first time. Reopening hopes boosted cyclical shares, particularly energy stocks, while health care, utilities, consumer staples, and real estate shares lagged. The market was closed Thursday for the Thanksgiving holiday, but weekly trading volumes remained unusually elevated.

The third announcement of positive preliminary vaccine results helped markets get off to a strong start to the week. AstraZeneca announced on Monday before the start of trading that the vaccine it was developing in partnership with Oxford University was up to 90% effective for one of two dosing regimens used in the study. The company’s shares fell back over the following days as reports emerged that the regimen had been mistakenly given to a smaller and younger test cohort, but investors generally seemed reassured that more vaccines that are easier to distribute appeared to be on their way.

Investors welcome Yellen appointment

The political environment also appeared supportive. Shares rallied Monday afternoon following reports President-elect Joe Biden was preparing to nominate former Federal Reserve Chair Janet Yellen as Treasury Secretary. T. Rowe Price traders noted that Yellen’s dovish tenure while at the Fed and, more importantly, the fact that’s she’s a known entity, appeared to put investors at ease. Reports that Biden’s transition team was pushing Congressional Democrats to compromise with Republicans on fiscal stimulus also appeared to boost sentiment, although these were later denied by a spokesperson. On Tuesday, stocks rallied further on news that the General Services Administration (GSA) was formally beginning transition measures in preparation for a Biden administration. While still refusing to concede, President Donald Trump tweeted that he was authorizing the GSA’s action “in the best interest of our Country.”

Economic data appeared to play a role in draining some of the week’s gains on Wednesday. Initial jobless claims rose unexpectedly to 778,000, their highest level in five weeks, while personal incomes fell 0.7% in October, offsetting September’s gain. The University of Michigan’s gauge of November consumer sentiment was revised slightly lower and hit its lowest level (76.9) since August. The Conference Board’s measure of consumer confidence, reported Tuesday, also fell more than expected. Core (excluding defense and aircraft) capital goods orders surprised on the upside, however, rising 0.7% in October and building on September’s surge of 1.9%. New home sales also surprised on the upside.

Muni investors continue hunt for yield

Vaccine and political developments helped push the yield on the benchmark 10-year Treasury note modestly higher. (Bond prices and yields move in opposite directions.) The broad municipal bond market posted slightly positive returns through most of the week and outperformed Treasuries. With high-grade tax-exempt yields little changed, strong demand for lower-rated bonds led to a further tightening of credit spreads—the extra yield offered over Treasuries, and an inverse measure of the sector’s relative appeal. The week’s issuance of BBB rated JFK International Airport revenue bonds, which repriced to meaningfully lower yields, provided evidence of strong demand for higher-yielding segments of the market.

Investment-grade corporate bond spreads tightened amid more positive vaccine headlines, according to our traders. Although overnight demand from Asia slowed at the start of the week, the beginning of month-end trading activity and low levels of new issuance added technical strength. U.S. trading volumes were healthy before pulling back ahead of Thanksgiving Day.

Positive macro sentiment, progress in the development of a vaccine and therapeutic treatments, and solid equity gains bolstered risk appetite, which aided the performance of high yield bonds.


European shares rose for a fourth consecutive week, fueled by positive vaccine developments, fading U.S. election uncertainties, and expectations that the U.S. Congress may compromise on a smaller economic stimulus. However, the advance lost steam after the UK and Germany extended coronavirus restrictions and vaccine euphoria waned. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.93% higher, while Germany’s DAX Index advanced 1.51%, France’s CAC 40 rose 1.86%, and Italy’s FTSE MIB added 2.92%. The UK’s FTSE 100 Index was little changed.

Core eurozone bond yields held firm overall despite a mixed week. Germany’s 10-year bund yield initially rose on more positive vaccine news. However, dovish messaging from the European Central Bank’s Philip Lane ahead of the European Central Bank’s (ECB) policy meeting next week reaffirmed market expectations for more stimulus, dragging yields back down to Monday’s levels. This dovishness pushed peripheral bond yields lower overall, with Portugal’s 10-year yield falling into negative territory. UK gilt yields also fell. Lingering Brexit worries and renewed concerns over economic growth prospects drove the decline, outweighing earlier increases in sentiment supported by vaccination progress.

Germany, UK extend coronavirus restrictions

In Germany, Chancellor Angela Merkel announced in Parliament that current coronavirus restrictions would be tightened and extended until December 20, warning they may be extended again until the end of January. The UK outlined a stricter tier system to replace the month-long lockdown ending on December 2. Most of northern England will be placed on tier three, while London and the southeast will be on tier two. Conservative MPs said the government would face a rebellion when Parliament votes on the new regime next week. Portugal imposed a state of emergency for 15 days.

Sharp drop in eurozone business activity

The preliminary IHS Markit eurozone composite purchasing managers’ index fell in November to a six-month low of 45.1 from 50.0 in October (50 separates expansion and contraction), dragged down by a sharp decline in the services sector due to coronavirus restrictions. Manufacturing activity continued to expand, but the rate of growth slowed. In the UK, business activity contracted, ending four months of expansion, as services sector output dropped to the lowest level since May due to temporary closures of leisure and hospitality companies.

UK, Germany plan to raise borrowing in 2021

German Finance Minister Olaf Scholz is planning to ask lawmakers to suspend the debt break again in 2021 and increase borrowing by EUR 160 billion, more than the EUR 94 billion that was initially foreseen, to support businesses hit by the coronavirus and to pay for a vaccine, Reuters reported, citing government sources.

UK Chancellor of the Exchequer Rishi Sunak unveiled the government’s plans for spending next year and the latest economic forecasts, which showed much higher debt levels (underlying debt will rise to 91.9% of gross domestic product), a sharp rise in unemployment to 7.5%, and severe pressure on public finances until at least 2024. The economy was forecast to shrink 11.3% this year and then bounce back strongly for two years, but output is not expected to return to pre-crisis levels until the end of 2022. He also announced a pay freeze for 1.3 million public sector workers, although health workers and the low paid will see a rise; a sharp cut in the foreign aid budget; and extra funds for infrastructure in the north. ECB signals bank dividends ban may be lifted next year

Eurozone banks will be allowed to pay dividends again next year if they convince supervisors that their balance sheets are strong enough to survive the fallout from the coronavirus pandemic, Yves Mersch, vice chairman of the ECB’s supervisory board, told the Financial Times that it would be difficult to continue the ban, which started in March, citing legal uncertainty over its enforceability and expectations that other countries may allow banks to restart payouts.


Japanese stocks surged in the holiday-shortened trading week. Japan’s stock markets were closed on Monday, November 23, for Labor Thanksgiving Day. For the week, the Nikkei 225 Stock Average advanced 4.4% (1,117 points) and closed at 26,644.71, capping a 16% advance thus far this month and marking its highest level since April 1991. For the year to date, the benchmark is ahead 12.6%. The large-cap TOPIX Index and the TOPIX Small Index, broader measures of Japanese stock market performance, also recorded strong weekly gains. The yen strengthened versus the U.S. dollar and traded near JPY 104 on Friday.

Japanese investors dump foreign equities, buy JGBs

Bloomberg reports that in the six months ended September 30, Japanese investors sold the largest volume of global stocks and bought the biggest amount of Japanese government bonds (JGBs) since 2013. Data from the Japan Securities Dealers Association revealed that Japanese investors dumped JPY 3.9 trillion (USD 37 billion) of foreign stocks as markets recorded strong gains since the first-quarter lows and bought almost JPY 11 trillion of domestic sovereign debt. Bloomberg believes that concern over global economic conditions and investor affinity for a 60% stock/40% bond allocation are driving the rebalancing. The steepening JGB yield curve is also contributing to the moves, as record stimulus spending has widened the yield spread between 10- and 30-year JGBs to 60 basis points (0.60%) from 24 basis points at the low this year.

The Nikkei reports that Japan’s Global Pension Investment Fund (GPIF), the world’s largest pension fund with assets of JPY 162 trillion (USD 1.5 trillion), trimmed its stock exposure in the in the third quarter of 2020. The GPIF targets an even split of stocks and bonds with half of the equity exposure in Japanese companies. The GPIF attempts to closely adhere to its target allocations, and the fund has become overweight in stocks thanks to the recent strong equity market returns. GPIF President Masataka Miyazono said that, despite the pandemic conditions, the fund remains focused on owning companies that meet certain environmental, social, and governance criteria, although there are no specific numerical target allocations. Coronavirus infections in Japan at all-time high levels

In the past seven days, the number of coronavirus infections in Japan has spiked to record levels. The new high in daily infections (2,592) was recorded on Saturday, and on Thursday the tally exceeded 2,500. Tokyo reported 570 new cases on Friday, following several days in excess of 500 earlier in the week. Economy Minister Yasutoshi Nishimura’s coronavirus advisory panel recommended avoiding travel to the highest infection prefectures and that the government would have to consider declaring another state of emergency if voluntary efforts fail to contain the latest resurgence. The government panel also recommended that establishments serving alcohol shorten their hours of operation or shut down temporarily.


Chinese stocks rose for the week as solid economic data outweighed concerns about rising defaults among domestic bond issuers. The blue chip CSI 300 Index added 0.8% while the Shanghai Composite Index gained 0.9% for the week, according to Reuters. In fixed income markets, the yield on the sovereign 10-year bond ended the week roughly unchanged. In currency trading, the yuan ended broadly flat against the U.S. dollar. A recent uptick in defaults in China’s high yield bond market has raised expectations that Beijing will focus on corporate sector deleveraging in the near term, as opposed to further stimulating the economy.

During the week, some state-owned enterprises (SOEs) whose bonds have been under pressure experienced a sell-off in their shares. For example, shares of China Hongqiao, parent of an aluminum producer, fell 8% on Wednesday, when the company said it would raise HKD 1.9 billion via a share placement with institutional investors at a roughly 14% discount to the previous day’s close. A domestic ratings agency downgraded the onshore bonds guaranteed by Hongqiao, raising worries for other bond issuers with maturities in the coming 12 months.

Though year-to-date bond defaults are only slightly higher than year-ago levels, the recent rash of SOE bond defaults comes as several large state enterprises have moved their most valuable assets off balance sheet before allowing their bonds to default—a move that has drawn the ire of Beijing and highlighted a power struggle between central and local governments in China.


New vaccine enthusiasm tempered by data questions

T. Rowe Price traders noted that recent positive developments regarding a coronavirus vaccine have boosted investor sentiment toward emerging market assets. AstraZeneca’s vaccine announcement on Monday sparked particular interest among some investors because its ease of transportation and low cost could increase the vaccine’s impact in developing nations. However, by the end of the week, the questions about AstraZeneca’s testing protocols and the efficacy results reported in different dosing regimens weighed on investor enthusiasm.

Amid much uncertainty, Mexican central bank predicts return to growth in 2021

In its latest quarterly report, the Mexican central bank, known as Banxico, predicted a return to economic growth in 2021 after an expected 9% contraction in 2020. Banxico’s baseline forecast was for 3.3% growth in the new year, a number that the bank said was premised on a gradual recovery in the global economy. However, the bank emphasized that there is an “environment of high uncertainty associated with both the global and domestic evolution of the pandemic” as long as the pandemic restricts activity. As a result, the bank forecast that economic growth could actually end up between 0.6% to 5.3% in 2021. The central bank also predicted a slight downturn in inflation in the near term, although its inflation forecast for the next 12 to 24 months remains around 3%. Banxico unexpectedly held interest rates steady at its monetary policy meeting earlier in November, citing a need to confirm the direction of inflation. In a separate report, data released on Thursday showed that the Mexican economy grew 12% in the third quarter, a strong recovery from the nearly 19% decline in the second quarter. However, the economy still remains below pre-pandemic levels.