(Reuters) – 1/ RECOVERY ALPHABET SOUP
The world economic outlook is suddenly a little bit brighter after upbeat news on the Pfizer COVID-19 vaccine.
Hopes of a strong “V” or even a “U” -shaped recovery faded after a second wave of infections forced major economies to lock down again, setting them up for a double-dip “W” growth path.
Upcoming readings on Chinese and U.S. industrial output will show whether a speedy economic rebound is still possible. But even if a vaccine rollout happens sooner than expected, pandemic damage won’t be easily undone. W, V, or whatever the shape of recovery, central bank stimulus will stay in place.
(GRAPHIC – W-shape recovery?: https://graphics.reuters.com/HEALTH-CORONAVIRUS/yxmpjeomovr/chart.png)
2/ ROLL UP FOR BONDS
After months of slumber, U.S. Treasury yields have sprung to life and Wednesday’s record-sized auction may show which way they might head.
Pfizer’s encouraging update on its COVID-19 vaccine sent 10-year borrowing costs to the highest since March and drove the yield curve to its steepest in more than two years. Those moves have since been offset by the resurgent coronavirus and doubts the Federal Reserve will permit yields to rise too far.
Demand at the Treasury’s Nov 12 sale of $27 billion in 30-year bonds was below this year’s average. Unexceptional results at the upcoming $27 billion in 20-year bonds could become another factor pushing yields higher.
(GRAPHIC – Yields on longer-dated Treasury debt: https://fingfx.thomsonreuters.com/gfx/mkt/xlbpgzgdzvq/yields.png)
3/ STAND AND DELIVER
Just some days back, the lira slump was threatening to propel Turkey into full-blown crisis but a change of finance minister and central bank governor later and the currency has enjoyed its best week in nearly two decades.
On Thursday Nov 19, the central bank must show that its policymaking really has changed as much as President Tayyip Erdogan’s recent moves suggest. What it means is that new central bank chief Naci Agbal has no choice but to deliver what markets want — a 400-575 basis points interest rate hike.
Anything below 350 may seen as a cop-out. More importantly, any rate hike needs to stick — and for that investors need to see proof Erdogan has overcome his oft-stated hostility to high borrowing costs.
(GRAPHIC – Turkey’s lira and bonds have found hope: https://fingfx.thomsonreuters.com/gfx/mkt/bdwvklarypm/Pasted%20image%201605261542532.png)
4/ RED LINES IN CHINA DEBT
Bubbling fears of debt defaults in the Chinese public sector are tempering some of the euphoria felt towards Chinese markets after the U.S. election.
With debt running at three times annual GDP, this market is prone to letting off steam. This time, as monetary reins tighten and the pandemic impact starts to show, companies such as property developer Evergrande <3333.HK> and BMW’s state-backed parent Huachen Automotive Group are in the crosshairs.
China’s new ‘three red lines’ indebtedness rules may to a degree help alleviate solvency concerns. But the latest jitters and the extent of government support may give pause to investors thronging to the world’s second-biggest bond market.
(GRAPHIC – China’s debt pile: https://fingfx.thomsonreuters.com/gfx/mkt/xklpybgbovg/Pasted%20image%201605196373053.png)
5/ LAST SHALL BE FIRST
The summertime easing of lockdown restrictions allowed a chunk of European and U.S. companies to post better-than-expected Q3 earnings but U.S. hegemony remains in place.
European companies are expected to report a 23.8% year-on-year decline in Q3 earnings, compared to 50.8% tumble in Q2, according to Refinitiv I/B/E/S data. But the U.S. Q3 profit drop is expected at just 7.8%.
That’s because of the larger European exposure to cyclical sectors such as travel or luxury or banks, which are more closely tied to the state of the economy.
The upside is that a credible vaccine could help Europe Inc roar ahead. Indeed, recent vaccine news induced investors to up forecasts for Europe to 30% for the first 2021 quarter — double the S&P500’s rate.
(GRAPHIC – Europe vs U.S. earnings: https://fingfx.thomsonreuters.com/gfx/buzz/jznpnnbnbpl/Pasted%20image%201605194984681.png)
(Reporting by Dhara Ranasinghe, Joice Alves and Marc Jones in London, Vidya Ranganathan in Singapore; compiled by Karin Strohecker; editing by Louise Heavens)