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Last week markets were egged on by rising inflation expectations worldwide, as pandemic cases levelled out, with health authorities upbeat over the initial indications that the vaccine program is beginning to have the desired effect. Copper is outperforming gold, indicating a rebound in industrial activity and oil has recouped all its losses, collectively driving rates higher.
Policy expectations have remained constant, with implied real-rates at low levels, notably as low as they were just before the start of the taper tantrum in 2013. However, risks of policy tightening remain low at this point as both the Fed and the ECB are aiming for higher inflation today than in previous cycles. Inflation has been subdued for much of the pandemic, but price pressures are starting to build as the recovery continues. US inflation expectations have risen notably over the last two months, and are currently at their highest level since mid-2018.
The encouraging headlines on the vaccines and the positive developments in Italy have led to a strong snapback of risky assets, particularly Italian bank credit and BTPs, which have some room for spreads to tighten further.
From a technical standpoint, supply of new bonds globally has declined considerably, down 40% compared to 2020, strengthening the argument for downward pressure on spreads, due to the strong technical bid in the market.
With nearly a third of EU corporate reporting earnings, beats have outpaced misses for most sectors. In aggregate earnings have beat estimates by around 7 percent, led by basic industry and communications, while COVID-exposed sectors have surprised to the downside. This week a number of European banks including Societe Generale, UniCredit, BPCE, Commerzbank and ING Groep are due to report earnings.
Over in the US nearly half of US companies have already reported, mostly surprising to the upside. Banks, known to report early in the season, are showing that headwinds to loan growth are expected to persist through 2021. Management teams are increasing guidance across most sectors, however the pace of recovery for airlines has slowed, namely due to international travel restrictions. In aggregate, earnings have beat estimates by around 3 percent, led by banking and capital goods, while communications and utilities have surprised by the smallest margin.
This week investors will be looking at the earnings announcement of Walt Disney, in what is expected to be a strong year for the company due to its steaming services. General Motors and Toyota also report, with investors looking out for further insight into the companies’ future EV plans, especially given the Biden administrations bold green agenda.
Other companies due to report this week include Softbank, Global Payments and Simon Property Group on Monday , then on Tuesday we’ll get results from Cisco Systems, Dupont de Nemours, Twitter and Fiserv. Wednesday brings releases from Coca-Cola Co., Uber, Equinix, Deutsche Boerse, MGM Resorts, Vestas and AP Moller-Maersk. On Thursday, we’ll hear from PepsiCo, L’Oreal, AstraZeneca, Duke Energy, Illumina, Kraft Heinz and Credit Agricole.
In terms of calendar events, this week is a relatively quiet one with few macroeconomic data points. Data highlights will include the January CPI print on Wednesday, with the consensus on Bloomberg being currently at +0.4 month on month, and various sentiment surveys from the US, along with industrial production results for many of Europe’s largest economies. While it is a relatively slow week for central banks, we expect to hear from both ECB President Lagarde and Fed Chair Powell this week.
The focus of investors will remain on the vaccination programmes in various countries and how quickly distribution is translating to better case and hospitalization rates. There is a significant level of concern over the South African variant of Covid-19, for which the current vaccines are being found to be far less effective than other strains.
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