Global Markets Overview: North America
By Elliot Sanders, Analyst at the York IFS Global Market Telegraph
Wall Street continues to gain whilst the dollar depreciates in the face of a global economic recovery
Vaccine breakthroughs have lifted investor confidence in the future outlook of the US economy. Inflation expectations for the US economy hit 1.83% on Tuesday, their highest levels since May 2019, as investors factored in a potential rebound in growth going into the spring as economies reopen [i]. With accommodative monetary policy for the foreseeable future, the Fed is likely to allow inflation to run and not choke the accessibility of capital by raising interest rates. Inflation is good news for equity markets as investors anticipate higher dividends and margins to reflect rising prices and economic growth, but not for bond markets as it erodes the real value of fixed interest payments. Therefore, the yield on 10-year Treasuries has continued to rise, reaching 0.94% on Tuesday which is substantially higher than the 0.7% yield in September [ii]. Meanwhile, equity markets have continued to rally as Wall Street’s leading benchmarks recorded their best monthly performances since April with double digit gains for the month. The S&P finished 10.8% higher and the Nasdaq Composite also 11.8% higher, whilst indexes most sensitive to the US economy recorded even higher returns, namely the Russell 2000, which finished 18.3% higher for the month, its best monthly performance in its 41-year history [iii].
On Tuesday, the US Dollar weakened against a basket of major currencies to its lowest level since April 2018 [iv], completing a depreciation of 11.34% since its highs in March [v]. The counter-cyclical nature of the US Dollar as the world’s reserve currency has been a primary factor in its depreciation, as investors move out of hedged positions taken over spring and summer. Goldman Sachs predicts that a continued sharp economic recovery in line with vaccine developments, alongside negative real interest rates, will see at least a 15% depreciation in the real trade-weighted dollar by 2023 [vi]. The election of Joe Biden has also contributed to the depreciation of the US Dollar, as increased corporate tax rates and increased technology regulation threaten foreign demand for equities and therein US dollars. However, one could argue that a depreciating dollar is simultaneously good for multinational US businesses as their cross-border revenue streams appreciate in value thereby increasing margins and the attractiveness of US equities, which will then appreciate the dollar. Although theoretically true, US businesses will face greater import prices which will similarly erode margins. The main beneficiaries of the depreciation of the dollar tend to be oil and gas companies who produce in the US, or technology companies such as Apple who have a large proportion of their revenues in other countries. Expect a depreciating dollar to continue in the face of negative real interest rates, a growing global economy and an increase in outflows from US equity markets slowing gains on Wall Street.
Continuing the Wall Street trend of 2020, Perella Weinberg Partners is in advanced discussions to publicly list its deal advisory business through blank-cheque vehicle FinTech Acquisition Corporation IV at an equity valuation of $760 million [vii]. The $230 million raised in Fintech Acquisition Corp’s September IPO will be used to pay down PWP’s existing debt whilst the rest of the proceeds will be paid to the PWP founders and backers [viii]. This is another high-profile SPAC in a year where SPACs have risen to prominence again on Wall Street, citing their 2.0 structure as more sustainable and effective in acquiring good private companies that will generate returns [ix]. However, what is striking about PWP publicly listing through a SPAC is that they are not a fresh start-up usually in a developing industry such as Virgin Galactic. Instead, PWP is an established investment bank who has been considering going public since 2018 with solid but unspectacular returns who has found itself competing in a crowded boutique market since the financial crash. One would question if PWP is the type of investment that blank-cheque investors are after. Blank-cheque investors typically have a high-risk profile and invest in the hope that the SPAC executives can make a deal with a high growth company that can provide significant returns. Not only is PWP not a high growth company, but a substantial amount of cash raised from the Fintech Acquisition Corp’s IPO will be given to the founders and not invested in PWP for future expansion and growth. Given the unconventional nature of the deal, it is definitely one to watch!
This article was first published in University of York Investment and Finance Society's Global Market Telegraph (GMT) Edition 13.1 in early December 2020.
Reference list: [i] https://www.ft.com/content/609239e8-ca3a-4a20-aa64-0ba1f31c2003 [ii] https://www.ft.com/content/609239e8-ca3a-4a20-aa64-0ba1f31c2003 [iii] https://www.ft.com/content/4da65570-f747-4992-8a95-9e991e379518 [iv] https://www.ft.com/content/12f805b5-d6d5-4184-87ee-7cbbc77b9c6f [v] https://www.marketwatch.com/investing/index/dxy [vi] https://markets.businessinsider.com/news/stocks/goldman-sachs-us-dollar-depreciate-end-of-2023-election-outcome-2020-11-1029757863 [vii] https://www.ft.com/content/7bca0413-45ec-4063-ab14-e4aa6daf9c10 [viii] https://www.ft.com/content/7bca0413-45ec-4063-ab14-e4aa6daf9c10 [ix] https://www.ft.com/content/6eb655a2-21f5-4313-b287-964a63dd88b3
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