Things That Make You Go Hmm…
by: George Boyan
Markets are diverging. Political leaders are warning against a ‘dark winter’ as COVID cases are peaking around most of the country. However, markets are looking past the current figures to the promise of a highly effective vaccine and apparent advancements in therapeutics that have the mortality rate of the virus plunging. Many are scratching their heads on why this might be, but the reason is quite clear. The market is a discounting mechanism that looks 6-9 months in the future. The prospects of a divided government in the United States and a COVID vaccine are exceeding the near term setbacks of state-specific restrictions, and the market is portending greener pastures ahead. Our faith is in the market.
by: Rose Maguire
It was a short week last week with the Veteran’s Day holiday breaking up the week. The UST 10year touched 1.0% last week on the positive vaccine news that a large trial showed 90% effective rate but that was short lived and the 10yr fell back to 0.90% by the end of the week on spiking Covid cases across the USA. In one week, the US went from 10mm cumulative Covid cases to 11mm with the average daily rate of new infections reaching 150,000 and daily death tolls topping 1,000. States continue to increase lockdown measures to combat the spread of the virus which has worsened the economic outlook for the short term. There wasn’t much in the way of data last week. CPI came in a 0.00% vs the 0.1% expected and PPI at 0.3% vs the 0.2% expected. Weekly job claims were better than expected at 709k vs the 731k from surveyed economists giving more strength to the V shaped economic recovery. This morning there was more positive vaccine news and while it drove the equity markets higher, the bond market shrugged off the news as the surging cases in the US are keeping longer term rates lower.
Fixed Income Market:
by: Joseph Colleran
Despite the resurgence of positive COVID cases, the corporate market remains in “risk on” mode with continued and significant spread tightening versus USTs. Most attribute this to the wave of recent positive developments regarding vaccines and the market’s forward looking view. Investment grade spreads have tightened an impressive 15 basis points since the first announcement regarding a vaccine. The BIG move; however, has been in High Yield bonds which have tightened by close to 100 bps over the same period. This puts high yield bonds at levels last seen in February, back before the effects of the pandemic had begun to effect the markets. This is a remarkable move, driven in part by lack of secondary supply and near record inflows to US HY Bond funds (see table below).
Amidst this spread tightening, we’ve continued to see steady client interest in new issue Structured Notes. On the other hand, secondary trading volumes in corporates and municipal bonds remains relatively light.
Lipper Fund flow data for the week showed:
Domestic Equity Funds down $1.6 BLN
IG Bond Funds up $3.5 BLN
HY Bond Funds down $4.6 BLN
Municipal Bond Funds up $0.55 BLN
MMKT Funds down $4.3 BLN
Domestic Equity Funds down $8.6 BLN
IG Bond Funds up $0.3 BLN
HY Bond Funds up $0.1 BLN
Municipal Bond Funds up $0.15 BLN
MMKT Funds down $4.2 BLN
by: Anthony Minardo
As the results of the presidential election begin to fade, and Joe Biden likely the next president of the United States, the markets are turning their focus back to the COVID-19 pandemic. Positive news over the weekend reported that Moderna’s COVID vaccine was found to be 94.5% effective. Risk assets have started the week with a modest rally as optimism that the global economy may return to levels prior to the pandemic sooner than previously forecast. The US dollar remains soft due to risk appetite on the back of the positive vaccine news. However, we must continue to be cautious of the increasing pace of COVID cases which may cause risk aversion and a higher demand for the US dollar through safe-haven flows as a flight to safety.
by: James Zurovchak
Equity markets were mixed last week with DJIand S&P gaining 4.2% and 2.2%, respectively,and NASDAQ falling 0.5%. The marketscontinue to try and digest the news of Covid-19’scontinued global resurgence coupled withPfizer’s, and now Moderna’s, announcementthat an effective vaccine could be just around thecorner. 10 of 11 GICS sectors were up with Tech(-0.4%) being the lone loser on the week. Energy led the way with a stellar 17.1% gain. Financials (8.3%), Real Estate (6.2%) and Industrials (5.4%) all showed strong gains as well, indicating the markets anticipation of a continued economic rebound and possible inflation. Value reversed the prior week’s performance, outpacing Growth 5.7% vs -1.1%. The VIX continued its retreat closing at 23.1, a drop of 7.1%.
by: Brian Stigliano
What Tax Changes Are We Likely to See With a Divided Congress?
The Georgia runoff elections for their two Senate seats on January 5, 2021 may be the determining factor regarding tax policy for the next two years. President-elect Biden’s plans for significant changes to high-income and high-net-worth individuals’ capital gains’ rates, FICA taxes, and estate taxes could come to fruition if both seats go to the Democrats (Vice President-elect Harris would be the tie-breaking vote in a 50/50 split Senate). Additionally, we could see an increase in the corporate tax rate from 21 percent to 28 percent.
However, should at least one of the two seats remain Republican, the GOP will retain control of the Senate. With that control, they would be able to block major changes to current tax law. Current laws would remain in effect with the only changes (likely minor) expected to come from negotiations over a new stimulus bill. Because so much hinges on the runoff, it is no surprise that both Democrats and Republicans are pouring resources into the campaigns.
Last Week's Economic Data for 11/16
|Last Week's Economic Data||Actual||Survey|
|Initial Jobless Claims||709k||731k|
|PPI Final Demand MoM||0.3%||0.2%|
This Week's Economic Data for 11/16
|This Week's Economic Data||Release Date||Survey|
|Retail Sales Advance MoM||11/16/2020||0.5%|
|Industrial Production MoM||11/17/2020||1.0%|
|Initial Jobless Claims||11/19/2020||700k|
|Existing Home Sales||11/19/2020||6.45m|
Market Data for 11/16
|1 Month Libor||0.14%||+1.4 bp||(0.8 bp)||(159.0 bp)|
|3 Month Libor||0.22%||+1.5 bp||+0.2 bp||(168.2 bp)|
|6 Month Libor||0.25%||+0.7 bp||(0.9 bp)||(167.0 bp)|
|12 Month Libor||0.34%||+0.7 bp||+0.5 bp||(162.1 bp)|
|Fed Funds Effective||0.09%||(146.0 bp)|
|SOFR||0.09%||(0.0 bp)||(148.0 bp)|
|US Treasury Yields||Current||WoW||MoM||YoY|
|12-Month||0.11%||(1.0 bp)||(0.8 bp)||(142.3 bp)|
|2-Year||0.18%||+0.7 bp||+3.4 bp||(143.3 bp)|
|3-Year||0.23%||+0.2 bp||+5.4 bp||(137.7 bp)|
|5-Year||0.41%||(2.0 bp)||+8.6 bp||(123.9 bp)|
|7-Year||0.66%||(2.5 bp)||+13.3 bp||(108.8 bp)|
|10-Year||0.90%||+0.7 bp||+3.4 bp||(143.3 bp)|
|30-Year||1.66%||+0.7 bp||+3.4 bp||(143.3 bp)|
|US Swap Rates vs 3ML||Current||WoW||MoM||YoY|
|12-Month||0.22%||+1.0 bp||+0.9 bp||(150.4 bp)|
|2-Year||0.27%||+1.5 bp||+3.4 bp||(134.2 bp)|
|3-Year||0.32%||+1.4 bp||+4.8 bp||(126.0 bp)|
|5-Year||0.47%||(0.9 bp)||+7.5 bp||(111.1 bp)|
|7-Year||0.67%||(1.9 bp)||+10.6 bp||(96.1 bp)|
|10-Year||0.91%||(2.9 bp)||+12.7 bp||(80.8 bp)|
|30-Year||1.33%||(3.9 bp)||+15.2 bp||(57.0 bp)|
|US Swap Spreads||Current||WoW||MoM||YoY|
|12-Month||+11 bp||+2.1 bp||+1.6 bp||(8.1 bp)|
|2-Year||+9 bp||+0.9 bp||(0.0 bp)||+9.1 bp|
|3-Year||+8 bp||+1.2 bp||(0.6 bp)||+11.8 bp|
|5-Year||+7 bp||+1.1 bp||(1.2 bp)||+12.8 bp|
|7-Year||+1 bp||+0.6 bp||(2.6 bp)||+12.7 bp|
|10-Year||+0 bp||(3.5 bp)||+9.3 bp||+62.5 bp|
|30-Year||(33 bp)||(4.5 bp)||+11.8 bp||+86.4 bp|
|Canadian Dollar||1.3078||(0.5 %)||+0.8%||+1.0%|
|Swiss Franc||0.9138||(0.1 %)||+0.1%||+8.3%|
|Crude Oil||42||+4.0%||+2.5%||(27.4 %)|
Source: Bloomberg L.P.
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