Ample monetary policy support and the prospect for the rollout of Covid-19 vaccines in late 2020/ early 2021 supported risk assets in November
Investors’ risk appettite remained robust in the past week, with global equities and speculative grade corporate bonds recording stellar performances overall in November. Indeed, the MSCI ACWI index was up by 2.3% wow and by 13% in November (cut-off date: November 27th | +10% ytd). Year-to-date laggards over-performed in November (making up though a part of their lost ground), both sector-wise (e.g. Banks: +24% | -16% ytd, Energy: +31% | -31% ytd) and region-wise (e.g. Spain’s IBEX35: +27% in November | -14% ytd). At the same time, high yield corporate bond spreads in November were down by 90 bps to 435 bps in the USD spectrum and their EUR peers by 110 bps to 371 bps. Finally, oil prices surged in November in view of brighter demand prospects (past the very short term), with Brent up by 29% to $48.2/barrel (still -27% ytd) and the WTI by 27%, to $45.5/barrel (-25% ytd).
Financial markets continue to discount the stronger prospect of a sustained, robust, recovery of global economic activity as of Q2:21, taking in stride the gloomy economic outlook for the next months due to the evolving 2nd wave of the pandemic and the subsequent drop in mobility (see graph). Continuing (and expected to intensify) monetary policy support and the strong probability of highly effective vaccines starting to be deployed even as soon as in the current month, provide support. Regarding the latter, applications for approval have been filed to US and European authorities for the Pfizer/BioNTech’s and Moderna’s candidates. Both vaccines, reportedly, have an efficacy rate of close to 95% (a remarkably high one, if confirmed), without any serious safety issues.
On monetary policy, in the US, the minutes from the November 4th – 5th Federal Open Market Committee meeting (unchanged monetary policy), revealed a lengthy discussion regarding asset purchases. Overall, the possibility of changes in the upcoming (December 15th -16th) meeting, either in the monthly pace (increasing from c. $80 bn in Treasury securities and c. $40 billion in mortgage-backed securities, currently) or/and the composition (extending the average maturity of purchases), is considerable. In terms of the respective forward guidance, “most” participants favored moving to “qualitative outcome-based guidance” involving the tapering of quantitative easing “sometime before” the liftoff in the federal funds rate.
On the other side of the Atlantic, new action is widely anticipated from the European Central Bank (ECB) at its meeting on December 10th, which will also be accompanied by the staff’s quarterly economic projections. The minutes of the meeting on October 29th did not provide much information regarding the possible scale of the upcoming further easing of monetary policy. Having said that, the most likely moves remain an expansion of the Pandemic Emergency Purchase Programme (probably of €500 - €650 bn to a total envelope of €1850 – €2000 bn | holdings of €697 bn as November 27th or c. €80 billion per month since inception), combined with an extension of its duration (current: at least up to the end of June 2021 | a 6-month - or more – extension is on the cards). In addition, further rounds of TLTROs or/and changes in the terms of those already underway (to become even more favorable in relation to further incentivizing commercial banks to extend credit to the real economy), are likely.