Global Markets Overview: North America
By Elliot Sanders, Analyst at the York IFS Global Market Telegraph
US equity markets hit record highs. Investors move into riskier corporate debt. US oil and gas producers continue their bullish bet on oil.
Wall Street indexes reached record highs after data from both Pfizer’s and Moderna’s vaccines signalled that a vaccine may be ready for mass use in 2021. Late stage trial tests by Moderna showed their vaccine to be 94.5% effective in preventing COVID-19 for participants, whilst Pfizer’s vaccine was approximately 92% effective. Such has been the extent of investor sentiment, investors added $32 billion to US equity funds in the week to Wednesday 11th November. This was the second largest weekly commitment in at least two decades as investors pinned their hopes on the vaccine developments, resulting in a reopening of economies and industries globally in 2021.
The huge inflows in US equity markets have pushed Wall Street to record highs, the S&P 500 hit a record high of $3628 on Monday afternoon as more than 95% of companies within this benchmark advanced. Hopes of a global recovery from the pandemic has pushed investors away from beneficiaries of COVID-19 towards riskier assets and hard-hit industries such as travel and hospitality. Delta Airlines has risen over 20% since Pfizer published the data from their vaccine trials whilst Amazon has fallen by 4.6%. It would be naïve to assume that the successful vaccine trials would solve COVID-19 and normality will resume in 2021. Many US companies are still bearing the scars from the COVID-19 pandemic with limited cash and huge debt burdens, while a fresh round of lockdowns in states such as Michigan and California threaten to halt the already weak economic recovery. Despite the reopening economy, weak US consumer data “signalled that November and December will be tough periods for US business”, according to The Chief International Economist at ING. This is because restricted mobility would squeeze income and raise concerns over the rising number of COVID-19 cases which would depress consumer confidence.
Equity markets on Wall Street paint a very different picture of the US economy to US economic data and the sentiment of the Federal Reserve. The disparity is most striking when studying the Russell 2000 index. The Russell 2000 is seen as a barometer of the US domestic economy as it is made up of small-cap US companies. The Russell 2000 hit a record high on Monday in response to the data from Moderna’s successful vaccine trials. Although a vaccine would undoubtedly benefit small-cap domestic firms the most, one would argue that this is overshadowed by further restrictions preventing many US businesses from opening. This leads to the likely possibility of a Biden administration without a majority in the senate, which would jeopardise the prospect of a quick and substantial stimulus deal. Without a fresh round of stimulus and the easing of lockdown restrictions soon, many domestic US businesses cannot afford to wait until next winter for a vaccine. One wonders how much longer the vast disparity between US equities and the US economy can continue without a fresh round of stimulus.
Increased investor sentiment stretched further than equity markets in the aftermath of Pfizer’s announcement of successful vaccine trials. Investors piled back into risky corporate debt boosted by the prospect that a COVID-19 vaccine would lift the fortunes of some of the hardest hit companies. Funds purchasing US high-yield bonds took in $3.3 billion for the week ending November 11, reversing the $3 billion withdrawn in the run up to the US election. The main beneficiaries have been travel companies such as Royal Caribbean Cruises, who have a credit rating of B1 according to Moody’s, and have seen their bonds which are set to mature in 2028 appreciate to 81 cents on the dollar up from 74.5 cents on the dollar in the past week. Greater investor appetite is good news for corporations with junk ratings, as greater demand for riskier assets makes it easier to raise debt at a lower cost. This is paramount for the survival of US businesses, particularly as the likelihood of a Republican controlled senate will reduce the scale and speed of any fresh US stimulus package. Despite yields on US junk bonds hitting a record low of approximately 5%, investors are expected to continue to pile into risker corporate debt due to a weak USD and low hedging costs .
One would expect oil to have been one of the largest beneficiaries from the vaccine news. So why in the days following Pfizer’s vaccine announcement were Brent Crude futures for December 2023 available for $48 a barrel, a mere $3 more than the current price? The answer is two-fold. Firstly, major oil producers are still limiting supply and therefore any rise in oil demand from a global economic recovery due to a successful vaccine will be countered by a rise in oil supply. OPEC and Russia are currently keeping almost 8 million barrels per day offline. Secondly, the future of global energy supply is increasingly turning away from oil and gas and towards renewables. With the election of Biden, the US is turning away from the oil friendly Donald Trump towards Biden who promises a Green New Deal, net-zero emissions by 2050 and a fully electrified US Transport sector. Meanwhile, even without EU environmental regulations, the UK seems set to support a Green Industrial Revolution, as Boris Johnson outlines the £12 billion plan which involves a ban on new petrol and diesel cars from 2030.
If oil traders are correct and oil is set to stay below $50 a barrel for the foreseeable future, then how does this reflect on the bullish outlook of US oil producers? European oil producers, namely BP, have used the pandemic to shift towards renewables whilst writing down their non-core assets affiliated with oil production. However, US oil producers have at large used the pandemic to buy up undervalued shale gas producers and increase their scale in the oil and gas industry. ConocoPhillips acquisition of Concho Resources is the most recent example of this and means that ConocoPhillips is now the largest independent oil and gas producer in the world. As I wrote in the previous GMT article, the acquisition by ConocoPhillips is clever as Concho Resources are highly profitable frack on non-federal land providing protection against Biden’s new fracking ban. This would allow production at a cost of below $30 a barrel which means production will remain viable if oil futures are to be believed. But even if this is the case, are US producers missing a prime opportunity to move into the renewables market and gain market share as the industry grows? The cost of renewable power has plummeted over the past decade with wind power production costs falling 70% and Solar PV 90%.
With European oil producers buying into these industries, such as BP’s recent $1.1 billion acquisition of two offshore wind projects, are US producers missing an opportunity by being too bullish on oil? If the future of energy lies in renewables, accelerated by government regulation and shifting investor sentiment, then I would argue that they are.
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