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Positive news points to an inevitable rotation


The global financial markets certainly did not lack drama in the past couple of weeks.

Three significant happenings, notably: the US presidential election, positive outcomes on the coronavirus vaccine trials, and the ECB paving the way for further stimulus, to alleviate the Euro area economy, have certainly played a part in the more recent market movements.

Following a prolonged period of uncertainty, mainly fenced by the Covid-19 pandemic and its significant impact on the global economy, the recent developments, conferred above, indeed went down well. Investors, wary of the downside risks, transmitted optimism, driving markets higher.

The importance of the said election was mammoth and came at a time, where uncertainty, stemming from the Covid-19 pandemic, was on a high.

Although the outcome of the much-anticipated election was expected, the eventual confirmation of Joe Biden as president of the US drove markets higher. This, probably based on the fact of increased stability and a tumulus fiscal package, set to alleviate the U. economy from the despair brought about by the coronavirus pandemic.

Funded in part by tax hikes and fiscal stimulus, a Biden administration is expected to boost spending on both infrastructure and energy to support US growth. Albeit possibly difficult to immediately implement as he initiates his four-year term in administration, the probability of president-elect, successfully getting a sizeable package passed early in the new year – either by getting a majority vote or by working alongside several Republicans in Congress, is high.

Recent announcements from Pfizer, Germany’s BioNTech, and Moderna bringing forward the timing of when we might expect a viable vaccine, also added to the positive momentum. The news that the vaccines produced are over 90% effective has undoubtedly further instilled investor confidence that the vaccine can help end the pandemic and its drag on the economy.

The recent string of positive news, particularly that of a potential Covid-19 cure, prompted investors to dispose of the so-called safer instruments, particularly treasuries and jumped into riskier assets – a trend we expect to continue into next year, pushing treasury yields higher. Similarly, German yields, albeit to a lesser extent, showed similar movements as investors shifted to riskier assets from the safe-haven bonds, which are less needed now.

In addition to the latter shift, a sector rotation was inevitable, with sectors proving more vulnerable at the peak of the pandemic, benefitting, as investors bet that a return to normality and thus a quicker economic revival is indeed plausible.

With the Covid-19 pandemic seemingly back to full force in October, spreads of corporates, highly dependent on human interaction, mainly the leisure and retail industry, forced to borrow to survive the pandemic, significantly widened. Although the restrictions imposed were now less strict, when compared to those introduced earlier this year, a continued downturn within the two sectors was foreseeable. Inevitably, the sectors worst impacted pointed higher following the news. In the first two weeks of November, spreads of leisure corporates, factoring in the vaccine news, tightened by 177 bps and 119 bps in European and US high yield names respectively.

Albeit lower, similar upward moves and tightening in credit spreads were noted within the also heavily impacted retail segment.

Lastly, against a backdrop of the auto sector seemingly reaching a bottom and stronger-than-expected recovery in sales across Europe, but more remarkably so in China, the automotive industry recorded a substantial tightening in spreads in October. Further supported by the more recent positive news, the spreads of auto corporates in European and US high yield, albeit the latter to a lesser extent, tightened further.

Although doubts remain, related to the vaccine; particularly on the accessibility and logistics side to it, and central bank actions going forward, particularly given recent news, which may lead to them becoming less eager to dig deep into their pockets, and thus provide stimuli, the recent positive news shall prove crucial going forward.

Financial markets, certainly posting a turbulent year, are now seemingly getting the relief needed, with the outlook going forward becoming less grim, and possibly dictating market movement for the coming weeks. The possibility of further sector rotation, with funds flowing into the sectors worst hit by the unprecedented Covid-19 pandemic is now warranted.

Disclaimer: This article was written by Christopher Cutajar, Credit Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

For more information visit https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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