Equity markets saw a strong start to the year globally, with major indexes hitting fresh record highs last week. Democrats secured the Senate majority following a pair of narrow runoff victories in Georgia, potentially paving the way for more fiscal stimulus later in the year to aid the recovery. Democrat control also raises the prospects of higher corporate tax rates but considering the razor-thin majority and current state of the economy, tax reform might not be a priority in 2021.
Despite some shocking scenes of violence in Washington by supporters of President Trump whilst Congress prepared to officially ratify Joe Biden as the 46th president of the US, markets looked through this instead focusing on greater expectations of fiscal stimulus and higher inflation with the hope that 2021 brings a close to the Covid19 pandemic as vaccines are increasingly rolled out.
US equities rose 1.3% over the week, whilst US technology stocks were up 1.4%. European stocks rose 3.0% and UK equities were up a massive 5.6%, despite the UK entering a third national lockdown at the beginning of the week, benefitting from greater exposure to economically sensitive areas such as energy, miners, and financials. Japanese stocks increased by 2.8% and Australian stocks rose 2.6%. Emerging markets were up by 2.4%, with South Korea, a country with high exposure to exporting companies, rising by 9.7% over the week.
As news came through that the Democrats had won the Senate, US Treasuries sold off, with the yield on the 10-year, which moves inversely to price, rising above 1% for the first time in 9 months. US 10-Year Treasuries are currently trading at 1.07%, whilst German Bunds are trading at -0.52% and UK Gilts 0.28%.
Crude oil has continued to steadily climb, with Brent trading at $55.2 a barrel, up over 6% for the week, helping to make energy one of the best performing sectors for the start of the year, having been deeply unloved last year. Copper, considered a good barometer for the health of the global economy, also continued its steady rise, now trading at levels last seen in 2013, above $8,000 a tonne. Copper has had a further boost from expectations that President-elect Joe Biden’s green agenda will increase demand for electric vehicles, requiring large amounts of copper.
However, gold fell almost 3% to $1,890 an ounce, as investors increasingly look towards economic recovery.
The Chinese Renminbi crossed through US$6.5 this week, for the first time since June 2018, erasing most of the losses against the dollar since President Trump began the trade war.
The beginning of the year has seen clear support for so-called ‘value’ stocks, those that are more economically sensitive, although technology has continued to perform, suggesting that greater evidence of the recovery will need to be seen before a more powerful stock rotation is seen. This rotation will depend greatly on the success of Covid19 vaccines for which we remain at the very early stages of the rollout.
The coming week marks the unofficial start to the earnings season, with several national and regional banks reporting quarterly earnings. On the economic front, important data being released include inflation, retail sales and industrial production.
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