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By: Andria Pichidi
It’s been a November to remember, or maybe forget, and it’s not even half over. Looking ahead, there is a lot to be thankful for although the record increases in virus cases, and renewed restrictions may weigh on sentiment heading into the winter. But for now, the US economy continues its expansion and upcoming data should underscore that outlook.
Asia meanwhile ignored slightly the virus rise as Asian stock markets rallied at the start of the week, with risk appetite buoyed by a rebound in Japan GDP and the signing of the world’s largest free trade agreement. The MSCI Asia-Pacific equity index rallied over 1% to its highest level since its inception in 1987. Leaders from 15 Asia-Pacific nations on Sunday sealed one of the biggest trade deals in history, seeking to reduce barriers in an area covering a third of the world’s population and economic output. This deal will cover nearly a third of the world’s population and GDP, while economists estimate that ot could add almost $200bn annually to the global economy by 2030.
The deal along with GDP data out of Japan and China data which signaled that the recovery continues as retail sales picking up further and industrial production and investment beating expectations, extended stock rally further. China reaffirmed a picture of stronger economic conditions compared to recently prevailing expectations.
Following Friday the 13th which didn’t turn out to be unlucky for equity bulls as Wall Street posted solid gains, the positive tone continues so far this week. Investors have been caught between optimism on a vaccine, ongoing signs of the US expansion, dovish central banks, hopes for stimulus in 2021, and better than expected earnings, against pessimism over the record surge in virus cases and hospitalizations, and worries over more restrictive policies into the winter. Optimism won out on Friday and so far today with the major indexes in the green.
JPN225, which has been an investor favorite in the ‘great rotation’ into cyclical stocks, resumed its outperformance, rallying over 2% to a new best since 1991. European and US index futures are also rising, with the USA500 rising by nearly 1% (above September highs), and GER30 and UK100 futures meanwhile are posting gains of 1% and 0.6% respectively.
The risk-on theme has been less pronounced so far today. A similar theme has been seen in the US, despite surging Covid cases and Trump’s political machinations. This comes with Pfizer’s candidate Covid vaccine having given investors confidence to look to return normalcy in 2021. The circumstance of massive monetary and fiscal stimulus, coupled with still-low inflation, and commitment of the Fed and other central banks to hold interests lower for longer, enhances the value of company earnings, which along with spare capacity, which keeps costs low, is a potent bullish cocktail for stock markets.
BUT, faith in the sustainability of the V-shaped recovery wavered and will continue to be put to the test this week. In that light, close attention will be on retail sales and production data from the US and China.
Retail sales will be a focal point this week and the Survey Medians point to another month of gains, albethey not as robust as in September. Headline sales are projected rising 0.4%, with a 0.6% increase excluding autos. And there could be some extra support from the shift in Amazon’s Prime Day to October. Meanwhile, industrial production is expected to bounce 1.0% in October after the unexpected -0.6% September decline. The regional manufacturing indexes are seen remaining in expansion though at differing rates with the November Empire State index projected improving to 13.8, while the Philly Fed index falls back to 22.0. And housing starts should remain robust, rising to a 1.460 mln pace.
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