US equity indexes were up on the week: DJIA +1.0%.  S&P 500 +1.7%, NASDAQ +2.1%. 

 

On Wednesday, the UK became the first Western country to approve a Covid-19 vaccine when its regulator cleared the Pfizer/BioNTech vaccine.  Pfizer put out a press release titled: “Pfizer and BioNTech Achieve First Authorization in the World for a Vaccine to Combat Covid-19.” The press release went on to say that “U.S. FDA and EU EMA decisions on authorization are expected in December.”

 

Positive vaccine news has triggered a regime shift in relation to global risk assets. Outflows from US investors into international equity continues to accelerate.  Investors are sensing a potential bottom in global growth, and are turning their attention to EM assets. Following horrifically bad flow performance in Jan-Oct, EM inflows have picked up impressively over the past two months especially more growth-sensitive equity flows. Our monthly tracker (chart below) shows the dramatic spike in November – it is the strongest month of EM equity inflows in more than 5 years. 

 

In terms of the composition of flows, we note that ‘Bad EMs’, defined as those with particularly troubled performance in Jan-Oct, have also been key beneficiaries of the recent bounce in sentiment and flows. Brazil, Turkey and Russia, which have lagged the rest of the EM, have seen a significant bounce in portfolio flows in recent weeks. Price action this week is consistent with these ongoing flows, with RUB and BRL rising 3% and 4% respectively vs USD in the last four sessions. 

 

Looking ahead, Founder Jens Nordvig notes that “the EM flow picture is likely to remain bullish as strategic optimism about global growth is boosted by vaccine news.”  In a note published this week, the Exante Data team concluded,  “Even in a ‘low growth’ scenario for 2021, with growth at par with the softer 2014-2019 period, there is plenty of potential for additional EM flows, although equity flows would likely not be able to sustain the fast pace of the last two months. In a high growth scenario, at par with 2003-2013 period, flows are set to be substantially stronger for equities, and there is very substantial potential for continued robust flows, perhaps even at par with the very elevated recent pace.”

The chart below shows how global growth and EM portfolio flows are closely linked with the dotted line based on IMF WEO forecasts for 2021.

Ahead Next Week:  Select economic releases: Sunday, Dec 6: China Trade Balance (Nov)   Monday, Dec 7: Canada Ivey PMI (Nov), Japan Current Account (Oct), Japan Q3 GDP, Australia House Prices (Q3), Australia NAB Business Confidence (Nov). Tuesday, Dec 8: German ZEW Economic Sentiment (Dec), EZ GDP Q3, Australia Westpac Consumer Sentiment (Dec), China CPI (Nov).  Wednesday, Dec 9: Germany Current Account (Oct), Bank of Canada monetary policy decision. Thursday, Dec 10: UK Trade Balance (Oct), ECB monetary policy decision and press conference, EU Leaders Summit, US CPI (Nov), US Initial Jobless Claims,  Friday, Dec 11: EU Leaders Summit, German CPI (Nov), US U of Mich Consumer Sentiment (Dec).

 

USD Comment

USD broadly weakened since last Friday. The DXY fell further, ending the week at 90.80. Continued positive vaccine news combined with hopes for additional US fiscal stimulus on renewed talks in Washington DC supported risk seeking, weighing on USD. EURUSD ranged 1.1923-1.2175 – breaking both 1.2000 and 1.2100 topside.  GBPUSD was volatile as a Brexit decision nears, ranging 1.3298-1.3529. EM FX – KRW and MXN performed well along with commodity FX. USDCAD broke 1.3000 support ending the week at 1.2783.  On Friday, CAD was supported by a better-than-expected Canadian jobs report for November, in contrast to the weaker than expected November US Payroll report released the same morning. 

 

Since it is the start of December, take a look at USD seasonality for the month  from our proprietary FX factor model here. USD seasonality is less pronounced this month than last, but there is a fairly clear pattern for LATAM currencies. December seasonality is strong for BRL, COP, and CLP, but not for MXN. 

Coronavirus Update

US: Regarding a possible spike in US cases related to Thanksgiving, the data in coming days will be important, as it will have enough lag relative to the event to capture possible Rt spikes. Meanwhile, the US has seen improvement in the Mid-West region (specifically Michigan, Illinois, Missouri and Iowa). Case growth in other regions has resumed trending higher (chart below).  Week-on-week growth in new cases is increasing in Arizona (West),Tennessee and Mississippi (South), and New Hampshire and Connecticut (Northeast).  You can see the heatmap of week-on-week growth in new Covid cases by state here.

 

The charts below compare trends in Covid cases and fatalities across the US regions. Our forecast shows that the South region will have 932 fatalities by December 25, while the West is seeing the greatest increase in fatalities over the forecast period. 

International:  Germany and Netherlands, which have done only lockdown lite, are on track to reopen at around 60-70 days after the start of these measures (Germany started on 2-Nov and Netherlands on 13-Oct). Though Netherlands seems likely to end its lockdown in mid-December, we are yet to see a significant decline in Germany’s cases so currently we cannot be confident about its reopening in early January.  However, trends in other major economies look very good. Notably, Poland has seen important falls in cases in 10 days.

The chart below shows daily Covid cases in Germany. The red bar indicates a peak and the parenthesis are cumulative cases. 

Exante Data Happenings & Media

We are excited to announce the pre-launch of our Exante Data Substack blog. Our Substack account is named: Money: Inside and Out. You can subscribe to it here. The first blog is by Senior Advisor Chris Marsh. Read what Chris has to say about money velocity in the US.  There will be a more official launch next week. We hope that many will engage and debate with us in this blog project. The concept for Money: Inside and Out is to touch on big policy issues without any constraint – more to follow!

 

Founder, Jens Nordvig was on CNBC’s Power Lunch Friday talking US capital outflow, USD weakness and how investors are searching for alternative safe haven assets. 

 

If you are an institution and would like more information on our Macro Strategy, Global Flow Analytics, and/or Exante Data API — please reach out to us here.