Gold prices shed around 5% in November as positive vaccine news stirred a strong risk-on sentiment in markets. Gold is expected to remain highly relevant and important for investors in the coming year for many reasons: accommodative fiscal and monetary policy in major economies including the US; weakness in the US dollar; rising levels of inflation as the global economy recovers; and the continued prevalence of negative-yielding debt. Physical gold held in exchange traded products (ETPs) globally sold off only slightly in November standing at just under 108m tonnes at the end of the month, compared to a high of 111m tonnes in October, and 83m tonnes at the start of the year. Gold prices have bounced back in December (as of 09 December).

Vaccine news has helped lift market sentiment and raised hopes for normalcy and economic growth in 2021. Treasury yields, nonetheless, are only making a steady ascent as monetary policy is likely to remain accommodative from the US Federal Reserve even as inflation rises in the coming year. The US breakeven inflation curve (the curve that represents the difference between nominal and real yields at each maturity) has practically returned to where it was at the start of the year after making a parallel shift downwards in the first half of the year. This signifies that inflation expectations are on the rise.

Brexit uncertainty and a pervasive second wave have held UK equities back from recovering their losses from earlier in the year. The FTSE 100 Index is still down around 13% year-to-date (in GBP terms) as the end of the Brexit transition period approaches without a clear resolution of issues between the UK and the European Union. Even a weak Sterling – normally favourable for UK exporters – has failed to lift benchmark UK indices this year. In contrast, the Euro Stoxx 50 Index is down around 6% year-to-date (in EUR) while the S&P 500 Index is up over 14% year-to-date (in USD).

 
Source: Bloomberg, data as of 09 December

The ongoing pandemic has hit European equities particularly hard as European indices generally have a higher weight in ‘old economy’ sectors like energy and financials compared to US indices. While US indices have reached new highs this year, largely due to the strength in the tech sector, European indices are still recouping their losses from earlier in the year. Having said that, November was an encouraging month for Europe with the Euro Stoxx 50 Index up around 18% (in EUR) as distressed sectors, like energy and financials, responded most positively to vaccine news.

November was a strong month for industrial metals as the cyclical commodity sector added to its positive momentum from recent months. The Bloomberg Industrial Metals Subindex was up around 10.5% in November buoyed by positive sentiment in risk assets, further weakening in the US dollar, and encouraging economic data – particularly from China.

The US dollar has been getting weaker since June this year and now stands at its weakest point since April 2018. The start of 2018 is when US-China trade relations started becoming increasingly tense forcing markets to question the economic outlook for the US. At present, markets are expecting monetary policy from the US Federal Reserve to remain accommodative even as economic conditions begin to improve and inflation picks up. This can potentially keep the pressure on the dollar for a longer period.

March 2020 saw financial markets experiencing volatility comparable to levels previously seen during the 2008 global financial crisis. The CBOE Volatility Index (VIX), an important gauge of market risk, shot past 80 in March (compared to an average level of around 15 in 2019), but has since then been on a steady downward trajectory. November was a positive month for risk sentiment with the US elections now done and encouraging vaccine news raising hopes of a better 2021 for the global economy. The VIX Index currently stands just below 21 – its lowest level since February.

Front month ICE US Cocoa prices have risen close to 25% in between 12th and 19th November 2020. It’s a strange occurrence given that demand for cocoa has generally been weak in the COVID-19 pandemic era. Earlier this year top cocoa producers, Ivory Coast and Ghana implemented an extra fee of US$400 per ton of cocoa on top of the Free Onboard Price (FOB), which they call a living income differential (LID). That is applied to the 2020/21 marketing year (which started in October 2020) and will remain for the rest of the marketing year (and a new fee will be decided next year). Essentially buyers importing cocoa from the two countries through bilateral contracts are paying more for the cocoa to help reduce poverty of the farmers producing the crop. However, market prices for cocoa are weak reflecting the subdued demand for cocoa in the pandemic-stricken era. So, New York traded cocoa futures contracts up until last week were reflecting weak demand. Some buyers have turned to the New York futures to purchase their cocoa.  Monday 16th November was the first date traders had to notify counterparties they intend to take physical delivery to settle contracts expiring December 15th. On Monday 16th November, the price of the December 15th contract  surged, reflecting that the contract was under-priced last week. That has taken the futures curve that was in contango (futures price higher than spot price) on Thursday 12th November into a steep backwardation (spot price higher than futures price). The timing indicates the price move was driven by commercial traders rather speculators.

Source: Bloomberg. Orange line: 20/11/2020; Pink line: 16/11/2020; Green line: 12/11/2020
X-axis is the maturity date of the futures contract and y-axis is the price of the contract in US$/metric tonne.

  Historical performance is not an indication of future performance and any investments may go down in value.

¹ The difference between the first and second generic contracts on the ICE US Cocoa contract reached US$251/metric tonne on 18/11/2020, the highest since 14/05/1985 when it reached US$265/ metric tonne according to Bloomberg Data.

The S&P 500 Index is up around 8.8% month-to-date as of 20 November with energy, industrials, and financials being the top three sectors. Energy and financials have been the worst performing sectors in the index year-to-date and are therefore benefitting the most from the ‘reopening trade’, i.e. an expectation of economic activity returning to ‘normal’ if vaccines deliver on their promise.

The MSCI Emerging Markets Index is up around 9.6% month-to-date as of 20 November (in USD). Emerging markets have made gains due to the following: 1. Positive risk sentiment globally since the US elections and vaccine developments; 2. Weak US dollar; and 3. Positive news from China including economic data, the recently announced 5-year plan, and the Asia Pacific trade deal.