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Markets and macro insights with Bernard Swords, Chief Investment Officer
What happened in markets last week?
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It was a strong week to end a dramatic month for financial markets. Since the end of October, world equities are up 4.1% in local currency terms and 6.7% in euro terms. We have been talking a lot about regional disparity, and it is quite stark over the month in review.
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In a strong month for equity markets, two of the major regions, the euro area and Asia Pacific ex-Japan, are down. Nearly all the performance is coming from the US, which is up 5.3% since the end of October. The reasons being the prospect of an ‘America First’ policy and economic woes in both China and the euro area. These trends will likely hold until the new year, but, performance is starting to diverge greatly.
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Unfortunately, the narrative around euro area inflation is not changing. In November, the year-on-year rate of core inflation remained unchanged at 2.7%. It has flatlined for three months in a row now, suggesting that the ‘last mile’ remains difficult to complete.
Is the result of the US election still affecting markets?
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Since late October, potential policy changes from a new administration in the US have been impacting sector performances. The top-performing sector in November was financials, largely due to expectations of easier regulation in the US.
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One of the weakest sectors, proving to be a disappointment, is healthcare. Down this month due to the concern over how the new Health Secretary could affect the vaccine industry and what direction state-sponsored research will take under his leadership.
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The bright side is that the Med-Tech sector, to which we moved a large portion of our healthcare exposure to, is up and outperforming the broader market. But sector moves have not all been about the prospect of policy changes in the US. The weakest sector was materials (miners; chemicals; construction, etc.), and this is being driven by the prospects of a fiscal boost in China. That expectation continues to fade.
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The last US Republican sweep was in 2016. Back then, there was hope for policy changes: easing regulations, cutting corporate taxes, and tariffs on China. A big infrastructure package was also hoped for. It led to the out-performance of the US market and within the US strong performance by cyclical sectors. These trends started after the election in November 2016 but had mostly run their course by February of 2017. The trends we are seeing today are likely to have a similar lifespan.
The week ahead: what to watch out for
All eyes will be on the US non-farm payrolls report, also known as the jobs report. Also released will be the Institute for Supply Management (ISM) manufacturing index. This is the monthly indicator of US economic activity based on a survey of purchasing managers at more than 300 manufacturing firms. In the euro area, we will get the latest retail sales data. China will also release the Caixin Manufacturing Purchasing Managers’ Index (PMI).