Market overview: markets defy second wave of coronavirus

There has been no sign of the November blues on the markets so far – in fact, quite the opposite. The anxiety of recent months gave way to fresh optimism in early November. This is due to greater clarity over the US election and the good news regarding a highly promising coronavirus vaccine. Little attention is being paid to the second wave of coronavirus and its economic fallout.

  • Greater risk appetite amongst investors following the US presidential election has resulted in a fall in demand for secure government bonds. The credit spreads on higher-risk corporate bonds are also continuing to narrow.

    Indexed performance of government bonds in Swiss francs

    100 = 01.01.2020

    This graphic shows the performance of government bonds from Switzerland, the USA and Germany in Swiss francs. After the global sell-off on the financial markets in March, there was strong demand for secure government bonds for a time. However, in the wake of the coronavirus recovery rally on the equity markets, demand for secure forms of investment has increasingly declined. The positive news of recent weeks – Joe Biden’s election victory and the prospect of an imminent coronavirus vaccine – have added momentum to this trend.
    Source: SIX, Bloomberg Barclays

    The greater clarity following the US election was clearly evident on the bond markets. Demand for secure government bonds fell. 10-year US bonds in particular were yielding a new record-high return at 0.95 percent – the last time this level was achieved was in March. Swiss and German government bonds also experienced a fall in demand last month. At the same time, the recent announcement of further measures by the European Central Bank for December sparked further increased demand for Italian government bonds. They recently yielded a new record-low return of 0.63 percent.

    Trend in 10-year yields to maturity

    In percent

    The graphic shows the performance of yields on 10-year government bonds in Switzerland, the USA and Germany. 10-year yields to maturity are an important benchmark for interest rate developments. A strong downward trend can be observed over the long term. While this was temporarily interrupted in March, it has slipped back again recently. The interest differential between Swiss and German bonds narrowed in September. The yield on German government bonds is now lower than that of their Swiss counterparts once again.
    Source: SIX, Bloomberg Barclays

    The positive news of recent weeks – which includes decreasing risks and, in particular, raised hopes of an effective vaccine – has not just had a major impact on demand for secure investments, such as US, German and Swiss government bonds. With greater optimism on the market, investors are also putting more faith in higher-risk bonds. Russian government bonds, for example, have benefited from greater demand lately.

    Credit spreads on corporate bonds

    In percent

    This graphic shows the difference between the yields to maturity on government and corporate bonds in US dollars, euros and Swiss francs. These credit spreads rose sharply in March. This means that higher-risk debtors had to pay more interest than secure government issuers when borrowing. Interest rates are increasingly approaching their pre-crisis level and reflect growing risk appetite among investors. They received a further boost following the US presidential election.
    Source: Bloomberg Barclays

    In light of the upbeat mood on the financial markets, corporate bonds have also been in demand of late. They entail greater investment risk than secure government bonds, which is reflected by higher credit spreads. These spreads narrowed significantly again last month. Investors are once again differentiating less between secure and higher-risk bonds – despite the fact that a wave of coronavirus-triggered bankruptcies is still to be expected.

  • Growing anxiety on the equity markets subsided in early November. Greater clarity over the US election and the prospect of an imminent coronavirus vaccine have spurred the stock exchanges on. The second wave of coronavirus is playing a minor role on the equity markets.

    Indexed stock market performance in Swiss francs

    100 = 01.01.2020

    This graphic shows the performance of the equity markets in Switzerland, worldwide and in emerging markets over the past 12 months in Swiss francs. The phenomenal recovery rally over recent months on the equity markets was increasingly becoming divorced from economic reality. The US and Swiss stock markets have already returned to their pre-crisis levels, but the emerging markets have also made a strong recovery. Rising coronavirus figures and the countdown to the US presidential election have caused greater uncertainty of late. However, this gave way to optimism in early November.
    Source: SIX, MSCI

    A split picture emerged on stock exchanges worldwide last month: while October was marked by growing anxiety in the run-up to the US presidential election, there was a change in mood at the beginning of November. The outcome of the US presidential election became ever clearer, and it also emerged that the Democrats would not hold a majority in the Senate, making tax increases unlikely. Equity prices worldwide were spurred on by fresh optimism and rose sharply. The S&P 500, an equity index for the US market, climbed by just under 10 percent within two weeks. The great sense of relief amongst investors was also reflected in the sharp decline in market volatility: in the last week of October, the VIX volatility index rose by almost 50 percent to a level of 40, only to fall just as quickly in the first half of November.

    Momentum of individual markets

    In percent

    The graphic shows the momentum of 12 key equity markets worldwide. The momentum compares the current 10-day average with the average of the past 240 days. The sense of relief on stock exchanges worldwide last month is also reflected in the positive momentum on individual markets. These have now consistently returned to positive territory. Positive momentum can now be seen again primarily in China and Canada, but also in the UK.
    Source: MSCI

    As well as the results of the US election, the breakthrough in research for a coronavirus vaccine also provided fresh hope that the epidemic will soon be brought under control. Optimism on the equity markets worldwide added further impetus to the positive momentum. Momentum worldwide has now returned to the positive range, and even the UK equity market, which has been dogged by negative Brexit headlines recently, also followed this trend.

    Price/earnings ratio

    The graphic shows the price/earnings ratio (P/E ratio) for the stock markets in Switzerland, worldwide and in emerging markets since 2000. The P/E ratio declined sharply in all three equity markets after the sell-off in March. However, it then benefited from rising prices during the recovery rally. It received further impetus in early November from Joe Biden’s election victory and a breakthrough on a coronavirus vaccine.
    Source: SIX, MSCI

    Optimism on the equity markets has also seen valuations soar. Globally, the price/earnings (P/E) ratios hit new highs for the year. Equity prices remain high, despite the fact that economies face a hard winter owing to the second wave of coronavirus.

  • The prices of Swiss real estate funds are maintaining their high levels. They currently stand at around 2 percent above the year-opening level.

    Indexed performance of Swiss real estate funds

    100 = 01.01.2020

    The graphic shows the indexed, average performance of listed Swiss real estate funds over the past 12 months. After recovering from the slump in March, they then trended sideways for weeks. The highest point since March was reached at the beginning of October. Since then, the price has predominantly trended sideways again.
    Source: SIX

    The recovery of the Swiss real estate market has continued since the slump in March. Listed Swiss real estate funds are currently yielding around 2 percent above their year-opening level. The recovery is supported by stable dividend returns of just under 3 percent on average, and 2.5 percent for large funds. The daily trading volume has been quite low recently.

    Premium on Swiss real estate funds and 10-year yields to maturity

    In percent

    This graphic shows the yield to maturity of 10-year Swiss government bonds and the premium on real estate properties contained in Swiss real estate funds since 2000. This premium skyrocketed last year and reached new all-time highs in February of this year, before plummeting in March. With the Swiss real estate market recovering to its year-opening level, premiums recently rose to 27 percent.
    Source: SIX

    The upturn of listed real estate investments is also reflected in the premiums placed on the properties contained in the funds. In relation to the current level of interest, they stood at slightly above the fair value, at 27 percent on average.

    Vacancy rate and real estate prices

    100 = January 2000 (left) and in percent (right)

    This graphic shows the vacancy rate of Swiss residential property and the price trend for single-family homes, rental properties and apartments. While rental prices and the real estate prices of apartments have been on a downward trend over the past five years, vacancy rates are continually rising. The economic difficulties caused by the coronavirus crisis have seen a further increase in vacancies. Rental apartments have been particularly severely hit. There has been a further rise in the price of single-family homes.
    Source: SNB, SFSO

    The coronavirus crisis is also having an impact on the real estate market. The second wave of coronavirus this autumn has seen the trend towards working from home increase further. In light of this development, there is increasing demand for larger and more attractive living space. This is not just indicated by an increase in sales at furniture retailers and DIY stores, but also in growing demand for private property. Prices in this segment have climbed further since the beginning of the year.

  • Currencies

    The currency markets could not escape the recent optimism, either. While commodity and emerging market currencies benefited, the US dollar slumped temporarily.

    Currency pairPricePPPNeutral rangeValuation
    Currency pair
    EUR/CHF
    Price
    1.08
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    1.19
    Neutral range Range of historically normal fluctuations.
    1.11 – 1.27
    Valuation
    Euroundervalued
    Currency pair
    USD/CHF
    Price
    0.91
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    0.93
    Neutral range Range of historically normal fluctuations.
    0.82 – 1.05
    Valuation
    USD neutral
    Currency pair
    GBP/CHF
    Price
    1.20
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    1.43
    Neutral range Range of historically normal fluctuations.
    1.23 – 1.63
    Valuation
    Pound sterlingundervalued
    Currency pair
    JPY/CHF
    Price
    0.87
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    1.06
    Neutral range Range of historically normal fluctuations.
    0.89 – 1.22
    Valuation
    Yen undervalued
    Currency pair
    SEK/CHF
    Price
    10.60
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    12.38
    Neutral range Range of historically normal fluctuations.
    11.16 – 13.59
    Valuation
    Krona undervalued
    Currency pair
    NOK/CHF
    Price
    9.97
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    12.97
    Neutral range Range of historically normal fluctuations.
    11.59 – 14.36
    Valuation
    Krone undervalued
    Currency pair
    EUR/USD
    Price
    1.18
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    1.28
    Neutral range Range of historically normal fluctuations.
    1.11 – 1.45
    Valuation
    Euro neutral
    Currency pair
    USD/JPY
    Price
    105.11
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    88.07
    Neutral range Range of historically normal fluctuations.
    72.42 – 103.72
    Valuation
    Yen undervalued
    Currency pair
    USD/CNY
    Price
    6.61
    PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.
    6.41
    Neutral range Range of historically normal fluctuations.
    6.16 – 6.66
    Valuation
    Renminbi neutral

    The upbeat mood on the financial markets also spread to the currency markets. In particular, there has once again been strong demand for the commodity currencies recently – especially the Australian and New Zealand dollars. In contrast, the value of the US dollar tumbled for a short time after the US election. There was also once again less demand for other safe-haven currencies, such as the Swiss franc or Japanese yen, due to the risk-on sentiment. The euro recently traded at 1.08 against the Swiss franc. The Turkish lira also hit the headlines in recent weeks. It rose sharply after President Erdogan indicated a U-turn on monetary policy.

    Gold

    The price of a troy ounce of gold dropped further and now once again stands at below the USD 1,900 mark.

    Indexed performance of gold in Swiss francs

    100 = 01.01.2020

    This graphic shows the indexed performance of gold in Swiss francs over the year. Owing to greater uncertainty on the market over the spread of coronavirus, there was strong demand for gold as a safe haven. Its value has risen by around 18 percent since the start of the year, which means it remains the highest-yielding asset class. After reaching a record high in August, the price per troy ounce has mainly fluctuated just below the USD 1,900 mark.
    Source: Web Financial Group

    Gold is one of the losers of the recent emergence of market optimism. The value of the “crisis-proof investment” fell again in recent weeks and has now once again slipped below the mark of 1,900 US dollar per troy ounce. This can be seen as a further indication of greater risk appetite amongst investors, even though the price of the precious metal remains high by historical comparison. Overall, demand for gold worldwide fell by 892 tonnes or 19 percent year-on-year in the third quarter.

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