Equities recover after stumble
Faced with such a bleak picture, global equities lost 0.9% on 15 January. They have managed to recover since: On 19 January, the MSCI AC World index practically regained the level of 14 January (-0.07%).
There are two possible explanations for these recent movements: On the one hand, the acceleration of vaccination campaigns, and, on the other, the continuing prospects of a cyclical recovery in 2021.
The pace of vaccination is modest in most major countries. It is unclear whether or not there are enough vaccines available. Governments have reaffirmed their determination to deliver vaccines to all who need them, and participation by the public has generally been better than expected.
In addition, the news on the effects of vaccination appears quite encouraging. In Israel, where a quarter of the population has been vaccinated, initial results suggest that good protection against the virus will soon be achieved.
Short-term growth concerns
As far as economic activity is concerned, the first consequences of COVID’s autumn resurgence and the restrictions imposed to counter it are beginning to make themselves felt. In China, for example, Q4 GDP growth was higher than expected, but the trend at the end of the year looked less favourable. December retail sales growth had been expected to accelerate, but in fact slowed to 4.6% from 5% in November.
As the lunar New Year approaches, drastic new lockdowns have been put in place to counter new clusters of infections, raising short-term risks to domestic demand. However, China’s economic policymakers still have significant room to manoeuvre and can take action if needed.
In the US, retail sales fell by 0.7% month-on-month in December compared to revised-down data for November, disappointing market expectations. Personal consumption expenditure, and hence GDP growth, are likely to be more modest than expected in Q4.
This unfavourable momentum towards the end of the year may also persist in Q1 growth. Consumer confidence fell in December. With 10 million fewer jobs compared to pre-pandemic levels and unemployment benefit claims on the rise again, households will need support.
US: Prospect of colossal new fiscal package
At her confirmation hearing, incoming Treasury Secretary Janet Yellen called for ‘thinking big’ on government spending given the risk of a long and deep recession. Perhaps as an echo of her role as chair of the US Federal Reserve, Yellen stressed that "with interest rates at record lows, the smartest thing we can do is act big". Markets interpreted this to mean that the door to very long bonds was open.
President-elect Joe Biden has spoken of a fiscal stimulus package of USD 1 900 billion. Adding this sum to the COVID-19 recovery bill approved in late December, 13% of GDP could be put on the table to support the economy (consumption and small businesses) in the short term. It is a colossal sum, and even if were to be watered down by Congress, such a fiscal effort would still be remarkable.
Against this background, the reaction of US bond markets was indeed that – remarkable. Pressures on nominal long-term rates are limited and real rates are both stable and negative (see Exhibit 1). Monetary policy is, of course, the prime issue. There is no doubt that Fed chair Jerome Powell's guidance on the future policy course in his 27 January press conference will be watched closely.
Meanwhile, in Europe
As the inauguration of Joe Biden as the 46th president ushers in a new era in the US, political issues have returned to centre stage in Europe without, for now, any significant consequences for financial markets.
In Germany, CDU members appointed Armin Laschet chairman, providing continuity after Angela Merkel, particularly on European issues. The CSU Bavarian conservative party still has a card to play in selecting the CDU-CSU candidate for the September elections, but its leader, Markus Söder, is also politically aligned to Angela Merkel.
In the Netherlands, according to polls, the elections in March are not expected to result in any change. In Italy, after Matteo Renzi's Italia Viva party defected, Giuseppe Conte managed to gain the confidence of both chambers, but his coalition no longer has an absolute majority. This situation could continue as early elections could change the Italian political landscape to the detriment of traditional parties. During these few days of crisis, interest-rate spreads between Italy and German government bonds widened relatively modestly.
What is the European Central Bank going to say?
At the press conference after the ECB Governing Council meeting on 21 January, Christine Lagarde will likely not refer to the political situation in Italy or elsewhere. The ECB president may comment on the results of the bank lending survey in the eurozone, which revealed a tightening of credit standards.
The ECB's view of the pace of economic recovery and the outlook for inflation is likely to be the main point of focus, while changes to monetary policy are not expected.
More cautious in the short term
The cyclical recovery expected for this year will likely be delayed, but not cancelled. Our medium-term scenario is favourable for equities, given fundamental factors and economic policy support.
In a tactical move, we reduced our exposure to market risk, for market technical reasons and given the uncertainties over the evolution of the COVID-19 pandemic.
We are constructive on risk in the medium term. In the context of our flexible approach to asset allocation, any market consolidation in the short term can be seen as a buying opportunity.
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.
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