Current market themes

The New Year has started on the same foot that it ended, with animal spirits pushing markets to record levels. Sentiment has been supported by the passage of fresh Covid-19 relief in the US, as well as the agreement of a post-Brexit trade deal between the UK and the EU, which was announced on Christmas Eve, thus removing a couple of tail risks heading into the new year.

Equities ultimately experienced a surprisingly strong yet extremely volatile year, which were supported by unprecedented levels of fiscal and monetary policy support following the pandemic, as well as the promising vaccine news that arrived in November.

The key themes for the first half of 2021 are an expected weaker dollar, the vaccine rollout and subsequent to freedom of movement, the new virus strain and the US-China relationship in the President Biden era.

As the holiday season ends, coronavirus cases are increasing exponentially worldwide, fuelled by the more conductible strain, leading to authorities warning that further restrictions are on the horizon. UK Prime Minister Johnson warned yesterday that restrictions in England were “probably about to get tougher” as calls mounted for school closures and even another national lockdown. Meanwhile in Germany discussions are ongoing, with expectations for an extension of lockdown until the end of January.

Against this backdrop, the big question for the global economy over the year ahead will be how quickly populations are vaccinated, particularly among vulnerable groups like the elderly and those with underlying health conditions who make up the majority of hospitalisations. The pace at which these groups can be vaccinated will pave the way for a gradual easing of restrictions and a return to something closer to normality, thereby it is a metric which will be closely monitored by market participants.

To date, the US and the UK have now given at least 1% of their population the first dose, and the UK is hoping to accelerate their vaccination programme as people begin to receive the Oxford/ AstraZeneca vaccine from today. Anxiety remains over the vaccines’ effectiveness on the new strains reported in the UK and South Africa. Health authorities have largely down played concerns however one must appreciate that we are navigating uncharted territory therefore the risks persist.

This week US politics will be in the limelight, with tomorrow’s runoff elections in the state of Georgia determining which party will control the Senate over the coming 2 years. This is an important one for markets, since the results will affect how much of President-elect Joe Biden’s agenda will be able to pass through Congress, as well as the size of any fiscal stimulus package. A democratic victory is market positive as it assumed that a larger fiscal stimulus package would be likely.

The secularly low treasury yields and tentative economic outlook in the US is expected to weigh on dollar demand throughout at least the first half of 2021. Attention will also be focused on US-China relations under the new President Biden administration. President Trump locked horns over economic practices, emerging technologies and security during his administration. Given the universal support among US institutions against the growing threat that china poses, the Biden administration could be pressured into retaining a tough stance.

Echoes of a confrontation, especially given the US authorities’ recent push to regularise reporting practices by Chinese firms listed on US exchanges, with the imminent threat of delisting, could lead to market volatility at a time when world economies need to find their feet, given the economic strains posed by the virus induced crisis.

The Calamatta Cuschieri Traders Blog is available daily on CC WebTrader. Other market coverage including coverage of the International Bond Markets is also available.

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