Economic and political backdrop
The third announcement of positive preliminary vaccine results helped markets get off to a strong start to the week. AstraZeneca announced last 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.
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. Yellen’s dovish tenure while at the Fed and, more importantly, her being a known entity, seemed 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 Trump tweeted he was authorising 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, hitting its lowest level (76.9) since August. The Conference Board’s measure of consumer confidence, reported Tuesday, also fell more than expected. Core (excluding defence 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.
The S&P 500 gained 2.3% (14.5% YTD). 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 threshold for the first time. Reopening hopes boosted cyclical shares, particularly energy stocks, while healthcare, utilities, consumer staples and real estate shares lagged. Value outpaced growth and small caps outperformed large caps, with Russell 1000 Growth returning 2.4% (32.2% YTD), Russell 1000 Value 2.8% (0.1% YTD) and Russell 2000 3.9% (12.5% YTD). The market was closed Thursday for the Thanksgiving holiday, but weekly trading volumes remained unusually elevated.
Fixed income markets
Vaccine and political developments helped push the US 10-year Treasury yield modestly higher to 0.84% from 0.83%.
Investment-grade corporate bond spreads tightened amid more positive vaccine headlines. 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. US 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, aiding the performance of high yield bonds. Subdued new issuance and inflows to below investment-grade funds created favourable technical conditions, and credit spreads narrowed.
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