Last week markets broadly traded with a risk on bias supported by hopes of economic recovery as vaccine approvals continued and vaccination programmes ramped up. Markets looked through the continued spread of covid infections forcing the UK into another lockdown, an extension of restrictions in Germany and Tokyo declaring a state of emergency. Clearly, the ramp up of vaccination programmes around the world is now seen as the route out of continued lockdown. On a positive note, the Moderna vaccine received regulatory approval in the EU and UK.
Political events in the US were a key focus for investors. A Democrat victory in the run-off of the State of Georgia Senate election spurred further hopes for additional fiscal stimulus as the Democrats gained control of the Senate. The certification of the electoral college votes and the confirmation of Joe Biden’s election victory was marred by scenes of violence as Trump supporters stormed the Capitol. President Trump’s actions received widespread condemnation but equity markets proved resilient to these events with the S&P, Dow and Nasdaq indices ending the week on closing highs. The S&P, Dow and Nasdaq gained 1.83%, 1.61% and 2.43% respectively.
However, the prospect of a Democrat controlled Senate and greater stimulus expenditure put USTs under pressure: the UST yield curve steepened with the 2s30s spread widening 21bps to 173bps at Friday’s close. The yield on the UST 10-year backed up 20bps to yield 1.12% at Friday’s close. USTs remained under pressure into Friday’s close even with the disappointing US non-farm payroll data: non-farm payrolls fell 140,000 in December, the first decline since April 2020, and was well below market expectations for 50,000 jobs created. The greatest number of job losses came from the hospitality and leisure centre reflecting covid related disruption. However, there were upward revisions to the prior two months of +135,000 jobs. The unemployment rate was unchanged at 6.7% and the labour force participation rate was unchanged at 61.5%. The US ISM data earlier in the week did exceed market expectations: the ISM manufacturing for December came in at 60.7 which is the highest level since August 2018. The ISM services gauge for December also hit its highest reading since September at 57.2. The main takeaway from the FOMC minutes released mid-week was some further detail on asset purchases highlighting that “All participants judged that it would be appropriate to continue those purchases at least at the current pace, and nearly all favored maintaining the current composition of purchases,” although “A couple of participants indicated that they were open to weighting purchases of Treasury securities toward longer maturities.”
Crude oil benefited from Saudi Arabia announcing a voluntary cut in oil production by 1m bpd in February and March: Brent crude ended the week at USD55.99 per barrel (+8.1% wow). The GCC also benefited from the news that Saudi Arabia, UAE, Bahrain and Egypt rift with Qatar that had run since June 2017 had reached a resolution restoring diplomatic ties.
In the week ahead, progress on the roll-out of vaccination programmes around the world will continue to be monitored as it seems to be the only path out of economic disruption caused by continued lockdowns. News-flow from the US is also likely to be a key focus as the Democrats are threatening to launch impeachment proceedings against Donald Trump on Monday unless Vice President Mike Pence acts to remove him from office. However, with Joe Biden due to be inaugurated on January 20th the market focus has been turning to the next administration’s policies. Nevertheless, following the NYSE confirming last week that it would in fact delist 3 Chinese telecoms companies and reports that Trump was considering adding Alibaba and Tencent to the investment blacklist for US investors (although they were not named on Friday’s updated list) there is still potential for the Trump administration to try and reinforce its ‘tough on China’ legacy.
In terms of central bank news-flow, the minutes of the ECB meeting in December are due on Thursday and Christine Lagarde is also due to speak on Wednesday at an online conference on the EU post-covid and post-Brexit. Jerome Powell is due to speak at a Princeton Economics webinar on Thursday. Other Fed speakers over the week include Raphael Bostic, Robert Kaplan, Eric Rosengren, Pat Harker. BoE speakers include Silvana Tenreyro speaking on negative rates and Ben Broadbent on coronavirus and spending. Key US data releases include CPI data and the Fed Beige Book on Wednesday and US December retail sales and the University of Michigan Sentiment Gauge for January due on Friday. The US CPI data will be a focus in the coming months given the expected step up in fiscal expenditure by the Democrats: the survey data is looking for US CPI for December to increase 0.4% mom and 1.3% yoy. Elsewhere, key data releases include Euro area industrial production for November released on Wednesday, China December trade data on Thursday and UK GDP for November due to be released on Friday: Given the UK was in lockdown in November the market is looking for a 4.6% mom decline.