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Vaccine news puts a rocket under Value stocks

Local and most global equity markets rose whilst the US equity market looked likely to finish flat for the week, as the positive vaccine news saw investors rotate into more virus and economically exposed companies.
In local news, Macquarie Group reported a 32% fall in half year profit due to $447 million in credit and write-down charges due to the impact of the virus. 

Commonwealth Bank announced that its cash profits for the first quarter have fallen 16% on the same time last year but said that growth in its lending divisions was helping to slowly offset the impacts of Covid-19. 

Wesfarmers reported that Bunnings saw a 25% increase in sales in the four months to October than it did for the same period last year. Officeworks sales were up more than 23%, whilst Kmart was up 3% and Target fell 2%. 

Telstra will undergo is biggest restructure in 24 years, splitting its business into 3 entities. Long overdue. The 3 divisions will include their infrastructure assets, mobile towers, and the retail business. 
The Reserve Bank of Australia has upgraded their Australian economic outlook, with their central scenario seeing the economy contract by 4% this year before expanding by 2% in 2021 and 4% in 2022. The Bank has also lowered their unemployment forecasts whilst maintaining their inflation forecasts. 

New figures show the Australian services industry expanding for the first time since November 2019 as government stimulus and improved confidence leads to an increase in sales, new orders, and deliveries. 

The cost of state border closures and lockdowns is becoming clearer with the South Australian government announcing it will spend big to revive its economy, with $4 billion allocated to protect businesses and jobs and the state also hit by a $1.3 billion cut to GST returns, which will likely result in a state budget deficit of $2.6 billion. Northern Territory’s budget revealed a $2.45 billion deficit, with forecasts it will likely take almost 10 years to balance the books. 

Australian consumer sentiment showed another solid rise of 2.6% in November after a strong lift in October. Confidence around current conditions and expected conditions continued to lift. 

A key Australian business survey indicates an improvement in both confidence and conditions in October. Confidence rose stronger than conditions, with confidence levels the highest since May 2019. Trading and profitability conditions have recovered strongly, but forward orders and export sales remain weak. The results also suggest soft employment growth ahead. 

The European Union negotiators reached a deal on the region’s long-term spending plans, moving a step closer to finalising its landmark 1.8 trillion EURO budget stimulus package. If wrapped up now, it will be operational next which will help with the recovery. 

The European Central Bank President has largely confirmed another big stimulus package at its next meeting in December, with a focus on emergency bond purchases and long-term loans. Rate cuts are highly unlikely, considering the rate is already negative and preference to move it back to 0% over time. 

Chinese President Xi Jinping told the Communist Party’s central committee that China’s economy could double in size by 2035, which implies an average annual growth rate between 4.7-5.0%. This is substantially less than in recent decades, but still an incredible growth rate if achieved. 
Drug company Pfizer announced that their phase 3 Covid-19 vaccine result was positive reporting 90% effectiveness (versus 40-70% for the flu vax), which is significantly higher than expected. However, there’s some uncertainty regarding how long it would maintain effectiveness. Frontline workers will likely get the vaccine before the end of the year, with broader availability from Q1 2021. It’s likely that those very young and very old won’t get the vaccine in the first instance due to safety concerns (i.e. broader safety data required). 

The Australian Government has secured two more vaccines, bringing their investment program to $3.2 billion across 4 vaccines, including Pfizer/BioNTech, Novavax, University of Oxford/AstraZeneca, and University of Queensland/CSL. Hedging bets makes plenty of sense at this stage considering the speed at which these vaccines have been produced and considering their importance in light of suppression being the chosen health policy path. 

Virus cases continued to rise across Europe and the US with a subsequent response of increased restrictions on concerns regarding potential hospital capacity. At the same time, death rates haven’t seen a subsequent rise. Given available therapeutics and earlier learnings, hospital overloading shouldn’t become a problem. Protests against restrictions and containment have also broken out across Europe. 

The US election results remain unconfirmed as counting has yet to be completed in many areas whilst President Trump and his lawyers launch legal challenges in no less than 4 states. The state of Georgia, which has Biden leading by a small margin, will soon start recounting votes by hand. There’s roughly another 3-4 weeks for legal challenges to play out. The state of Georgia will also need to re-vote for their Senators given neither senate seat candidates finished with a 50% majority. Voting closes on the 5th January, so we won’t know the make up of the US Senate until then. It’s likely we end up with Republican controlled Senate which largely means status quo for US domestic policy. At this stage, markets appear favourable to that outcome (i.e. the less change, the better). 

The diplomatic spat between Australia and China appears to have gotten worse this week with a blacklist, apparently delivered verbally to commodities traders, including coal, barley, copper, sugar, timber, wine, and lobster. Iron ore and natural gas have not been targeted as these are essential for China’s recovery efforts. 

Brexit risks are rising as the UK and the EU are still are loggerheads with deadlines looming for a trade agreement and formal exit. Without an agreement, a disorderly exit would ensue. UK PM Johnson had vowed to push ahead with a plan to re-write the agreement which would breach international law. However, the upper house of UK parliament has rejected these plans, putting the onus and pressure back on the PM.  

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