The Lowdown │ Global Markets to 15 January 2021

The Lowdown Global Markets to 15 January 2021

Published January 18, 2021


  • A mixed week on the COVID front: good news on vaccines, but concerns over new variants.
  • Biden pledges a further COVID stimulus package, but tells wealthy individuals and corporations to pay their fair share.
  • The Democrats win the Senate: Wall Street is already experiencing the “blue wave” effect.
  • The UK opens ten new vaccine hubs around the country and is on track to vaccinate 15 million people by mid-February.
  • The usual turbulence and turmoil notwithstanding, the financial markets are predicting better times ahead as the global economy recovers.

Global Market Summary

Positive news on the vaccine front this week was tempered by reports of COVID-19’s continuing spread and the emergence of several new variants in other parts of the world.
The latest retail sales data showed lower consumption growth in the fourth quarter, pushing down crude oil prices at the end of the trading week and hitting Wall Street. The world’s largest economy is still very much feeling the strain from COVID.
As the US’s fourth-quarter corporate earnings season gets under way (JPMorgan, Citigroup and Wells Fargo have already reported), Wall Street will now turn its attention to the technology- and consumer-led sectors to get a sense of how the wider market is doing.
Meanwhile, President-elect Joe Biden announced his incoming administration’s economic rescue plan: US$1.9 trillion in fiscal stimulus pledged in response to coronavirus, and an appeal to wealthy individuals and corporations to pay their fair share.
The Democrats’ victories in the Senate earlier this month came as a surprise to the market. The party now controls both the White House and Congress: the “blue wave” has started to wash over the country. The effects have started to be felt across all sectors: technology stock prices have drifted back, while commodities’ prices have risen, pushed upwards by numerous proposed infrastructure projects.
The US bond market has also begun to react to the possibility of further debt issuance and higher inflation. This is putting pressure on the Federal Reserve Bank to wind down its bond-buying programme, which would mean interest rates rising earlier than the market is currently expecting.
However, when asked about his plans to raise interest rates, Federal Reserve Bank chair Jerome Powell said that he would do so when the time was right, but that “that time [… was] no time soon”. He went on to confirm that the Federal Reserve Bank had the tools to tackle any pick-up in inflation, and that it would have no hesitation in using them. This would seem to indicate that the Fed chair is keen to let the US economy run hot for a while to make sure that it is on the right road to recovery.
In the meantime, Mr Biden is due to be sworn in as the US’s 46th president on Wednesday 20 January.
Although the first few trading days of this year have been extremely positive for equity markets, the reality of the damage that has been done to many domestic economies by COVID-19 is starting to weigh heavily on them. Company profits and dividends have also been hit, and individuals are struggling to meet their financial obligations.
But there has been good news on the vaccination front: Johnson & Johnson’s Covid-19 vaccine candidate provides protection after a single dose, which should help with the logistics of vaccinating the world (if it is approved by the regulators).
In the meantime, the UK’s vaccination programme is well under way: Foreign Secretary Dominic Raab indicated that the UK was on track to meet its target of all adults having been offered a vaccine by the end of September. He went on to confirm that the plan was to deliver 15 million jabs by mid-February, followed by another 17 million by the spring.
In more good news, 24-hour vaccine centres are to be opened in the next few days, and ten new mass vaccination “hubs” are being brought online. Weekend data shows that a further 324,233 people have received their first injections across the country, taking the total number to 3.5 million.
The UK is to close all travel corridors starting this Monday, which – it is hoped – will provide protection against the risk of as yet unidentified new strains of COVID entering the country. The government also announced the creation of a financial support scheme for airports, designed to help the aviation sector through this period of travel restrictions.
Any euphoria that the financial markets might have enjoyed on the back of vaccination programmes being rolled out has been slightly dampened since the beginning of the year by concerns over new variant strains and the global fatality rate reaching two million.
The strong recovery in risk assets (equities) under way since last March has created a number of excessive valuations in “COVID friendly sectors”… while others are still suffering. The result is a two-tier backdrop of winners and losers, and performance being extremely widely dispersed between growth and value strategies.
In recent weeks, many investors appear to have adopted a “buy on the rumour/sell on the facts” approach. This – combined with algorithmic and momentum trading over the vaccine news – has propelled the markets upwards. Overall, this has been extremely good news for risk assets. But after the shortest bear market in history followed by one of the strongest ever recoveries… where do we go from here?
The markets are already predicting better times ahead as the global economy recovers. But there is uncertainty regarding current equity valuations and bubbles – they have risen extremely aggressively. This is likely to create higher turnover and volatility over the coming months as traders and investors contemplate making changes to their portfolios.
Markets and their investors will always have to deal with booms, bubbles and crises (in addition, one would hope, to returns). People have forever bought on greed before selling on fear, and numerous crises over the centuries have disheartened global investors who have lost their nerve and ended up selling out.
As economies become more complex, the world becomes more innovative and stock markets become more automated, extreme volatility is practically an inevitability. But markets tend to be very resilient, bouncing back even stronger than they were at the height of the previous bull market. So nerves of steel really do pay off, alongside a very long-term time horizon – even when words like “crash”, “meltdown” and “Armageddon” are dominating the daily headlines.