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.
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.
Indexed performance of government bonds in Swiss francs
100 = 01.01.2020
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
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 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
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
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.
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 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
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)
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.
The currency markets could not escape the recent optimism, either. While commodity and emerging market currencies benefited, the US dollar slumped temporarily.
Currency pair Price PPP Neutral range Valuation Currency pairEUR/CHF Price1.08 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 ValuationEuroundervalued Currency pairUSD/CHF Price0.91 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 ValuationUSD neutral Currency pairGBP/CHF Price1.20 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 ValuationPound sterlingundervalued Currency pairJPY/CHF Price0.87 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 ValuationYen undervalued Currency pairSEK/CHF Price10.60 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 ValuationKrona undervalued Currency pairNOK/CHF Price9.97 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 ValuationKrone undervalued Currency pairEUR/USD Price1.18 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 ValuationEuro neutral Currency pairUSD/JPY Price105.11 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 ValuationYen undervalued Currency pairUSD/CNY Price6.61 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 ValuationRenminbi 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.
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
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.