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Stimulus continues, but markets are mixed

Before the rain

For financial professionals only

Despite bullish sentiment at the start of the year, January ended with broad falls across asset classes.

The Global vaccination effort was a cause for optimism, reaching just under 100m people by the end of January, although notably over two thirds of the coverage so far has been across just 4 countries – the US, China, UK and Israel. The path ahead remains unclear, as new COVID variants have spread beyond their origins and questions remain around current vaccine efficacy against newer strains and for the most vulnerable patients.

A new dawn for the US

Newly inaugurated President Biden is making his mark, having signed a record number of executive orders, many of which reversed policies introduced under President Trump.

BBC graph on # of executive orders signed by US presidents

Source: BBC

He will seek bipartisan support to push a proposed $1.9trn stimulus package through the Senate, with a second, multibillion-dollar recovery plan to fund infrastructure, green energy, health care and education in the works for later this year.

New Treasury Secretary Janet Yellen laid out the case for the legislation, remarking “…with interest rates at historic lows, the smartest thing we can do is act big”1.  Her expectations of continued accommodating monetary policy were reflected in the US 10-year Treasury yields, which retreated slightly after Fed Chair Jerome Powell described the idea of paring back the Federal Reserve’s $120bn monthly asset purchase program as premature2.

A mixed bag for equity markets

Graph from FE fundinfo

Source: FE fundinfo

With Brexit all but resolved and a reasonable market rally kicking off the year, 2021 started promisingly for the UK, only to be stymied by a new national lockdown. In the weeks that followed, we saw teething problems for trade escalate into something altogether less comfortable after the EU decision to trigger the Northern Ireland Protocol over vaccine transportation. It’s clear that whatever agreement was met, relations are strained, and it remains to be seen how this translates into further deals around the UK’s all-important services sector.

US equities ended the month marginally down, though with trading activity around Gamestop and similar stocks, local volatility in markets may be worth looking through in the short term. The most pronounced equity falls in January were in Europe, with vaccination rollout weighing heavily on sentiment. Emerging and Asia Pacific ex Japan equity returns were positive, a continuation of recent strong performance, and perhaps reflecting that China is likely the only major economy to grow through 20203.

Despite this, we’ve seen an unusually busy start to a year for global IPOs ($63bn4), with no signs of investor demand dwindling for new listings. This was partly fuelled by a record month for special purpose acquisition vehicles, or SPACS, where a shell company lists to raise monies on the understanding that it will acquire an actual trading company later on to offer a return to investors. Dubbed “blank cheques”, these businesses are booming:

Bloomberg graph

Inflation on the horizon?


Market commentators have pointed to a potential inflationary environment with measures from the US to Germany rising higher in January. But we would expect to see inflation figures tick up strongly in the months ahead with weak readings from 2020 setting a low base for year-on-year calculations. With US employment still 10m jobs below the pre-pandemic peak, social restrictions continuing worldwide, and vaccine rollouts sluggish in some regions, it’s hard to see a trigger for an economically sustained increase in real prices in the near term.

References

[1] FT.com 2021 Janet Yellen tells confirmation hearing that US should ‘act big’ – 2021 [online] Accessed at: https://www.ft.com/content/72ca778e-4486-45fe-a990-74551dc95a8f [Accessed 10 February 2021]

[2] Bloomberg.com 2021 Powell Refuses to Bite on GameStop or Tapering – 2021 [online] Accessed at: https://www.bloomberg.com/opinion/articles/2021-01-27/fed-meeting-powell-refuses-to-bite-on-gamestop-or-tapering [Accessed 10 February 2021]

[3] Bloomberg.com – 2021 China’s Economy Picks Up in January, Building on 2020’s Recovery – 2021 Accessed at: https://www.bloomberg.com/news/articles/2021-01-26/china-s-economy-picks-up-in-january-building-on-2020-s-recovery [Accessed 10 February 2021]

[4] Bloombergquint.com – 2021 SPAC Listing Boom Drives Record $63 Billion January for IPOs – 2021 Accessed at: https://www.bloombergquint.com/business/spac-listing-boom-drives-record-63-billion-january-for-ipos [Accessed 10 February 2021]