- The stock market has shrugged off the turmoil in Washington, and investors are focusing on Joe Biden’s plans for the economy.
- Bond yields are around their highest for a year, with traders bracing for much less stimulus from the Federal Reserve.
- The profit season is kicking off, with Goldman Sachs, Netflix and IBM, among others.
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Stock markets ended the second week of January after hitting all-time highs, neglecting some pretty gruesome data in the US labor market, the continued explosion in COVID-19 cases and unprecedented political unrest in the past few days of Donald Trump’s presidency, as he faces impeachment – again.
Reflation has been the name of the game in the markets and everything, even remotely, economically sensitive has surged, including small cap stocks, oil and gas and, of course, cryptocurrencies, in especially in the wake of Joe Biden’s plans for a $ 1.9 trillion stimulus package.
Next week will bring an intoxicating mix of politics, macroeconomics, business and crypto. Here are five things we’ll be looking at
January 20 bids farewell to one of the most controversial American presidents in living memory. After four years in the White House, Trump will step down, leaving Biden as the 46th president. Trump will also be the first U.S. president to be indicted twice for his role in the assault on Capitol Hill by violent supporters on Jan.6 who tried to stop the electoral college vote count.
The siege had little impact on financial markets as the S&P 500 hit record highs, supported by economic optimism and hope that COVID-19 vaccines will eventually provide a permanent way out of lockdowns and mobility restrictions. Even if Trump says he won’t attend the inauguration, there will be more troops in Washington DC on that day than in Iraq and Afghanistan combined to quell any potential security threats.
After sleeping for years, inflation might come back. Market-based inflation expectations have risen sharply over the past week, as the steady rollout of COVID-19 vaccines has helped fuel a sense of optimism that although things are rather bleak right now , they are on the verge of turning a corner.
With a Democrat-controlled Congress, investors believe there will be less pressure on the Federal Reserve to step in and provide additional support to the economy, whether through a rate cut or a hike. its bond purchases that help keep credit cheap.
Bond yields have risen and yield curves – the difference between short and long-term bond yields – have widened, pushing the dollar higher and reflecting this perception that inflation will start to take hold as the The economy will recover, which ultimately, in theory, will merit a rate hike.
But for now, investors shouldn’t be too worried about a damaging inflationary spiral. This initial increase in expectations is more about making inflation “less low” and is expected to remain the case over the next year, at least, according to RBC Global Asset Management chief economist Eric Lascelles in a note last week.
Most notably, the 10-year breakeven inflation rate in the United States – a market-based measure of inflation expectations based on the difference between nominal bond yields and their inflation-linked counterparts – has exceeded 2% for the first time since the end of 2018. The consumer dominating the inflation rate is well below there. At the last count, it was 1.4%.
“Far from forcing central banks to prematurely raise rates, central banks are probably celebrating this development. This is in part for the aforementioned reason: it brings inflation and expectations closer to their target,” Lascelles said.
Read more: Morgan Stanley says more than 20% could be wiped off Nasdaq 100 valuations if US Treasury yields normalize
Investors will have the opportunity to see how some of the world’s most influential central bankers respond to rising inflation expectations, as a number of them meet next week to discuss monetary policy . And, on top of that, we’ll get inflation readings from UK, Eurozone, Germany, Canada, Japan and New Zealand.
UBS Global Wealth Management said last week that the main question asked by its clients was: “Central banks around the world are trying to create inflation, but how can they be reconciled: higher inflation means higher Higher rates and higher rates will lead to an increase in the debt burden for most counties? “
The People’s Bank of China, the European Central Bank and the Bank of Canada all meet to discuss interest rates and the likely direction of monetary policy in their respective economies.
Dealing with the ongoing fallout from the COVID-19 pandemic, as economies across Europe, the Americas and parts of Asia impose heavy movement restrictions and even full lockdowns, will be the focus of concern. . But, with the advent of mass vaccination, no one should be doing more than they are currently committing to.
Following the excruciating contraction of the economy in the second quarter of 2020, corporate profits have started to turn around. CEOs expressed confidence in the outlook for earnings and economic growth, and their optimism was reflected in a series of third quarter results that contained the most upside surprises in a decade.
This week, investors will see how Wall Street weathered the turbulent last three months of the year, in a contested presidential election, another surge in global COVID-19 cases and the euphoria of the emergence. of a vaccine designed for an unstable trimester.
Bank of America, Goldman Sachs and Morgan Stanley report their results and there will be an in-depth look at what they say about the arrangements they have made to deal with struggling consumers, market volatility and the outlook. for 2021 and beyond.
In the tech sector, Netflix, the “winner” of the pandemic, reports fourth quarter results. Particular attention will be paid to the number of subscribers of the streaming platform to see if it has been able to keep audiences glued to its TV screens and away from its rival Disney +, even after the economy has effectively reopened to. from the middle of the year.
A few “real economy” companies are also reporting next week, which could give another boost to “Great Rotation” trade in late 2020. Oil services companies Schlumberger and Baker Hughes – both of whom have hit by the historic drop in crude prices in the spring when global transportation ceased to operate – will report fourth quarter results, alongside semiconductor maker Intel and “OG” company Big Tech IBM.
Read more: BANK OF AMERICA: Buy these 8 US stocks that are set to soar in Q1 2021 – and avoid them at all costs
It’s impossible to talk about markets right now without talking about crypto. Bitcoin hit record highs of nearly $ 42,000 on January 8 and since then has been shrouded in enormous volatility which has seen the price drop as much as 20% in 24 hours, only to regain it within 24 hours. .
Renowned investors have sung its praises and some investment banks have even talked about it as a viable alternative to gold as a safe haven. Last week, however, a growing number of voices began to talk about a possible bubble in cryptocurrencies. They drew comparisons to the dot-com crash of the late 1990s, in which valuations of tech companies were sky-high by investors eager to jump on the ‘digital bandwagon’ to bring those prices up. collapse within a few weeks.
Google searches for “Bitcoin” are at about their highest level since late 2017, when the coin hit a then-record high of around $ 19,890, down from around $ 4,000 in about three months. Over the past three months, the price of a Bitcoin has more than doubled to around $ 35,000 from closer to $ 14,000 and most market watchers agree that a correction is not beyond the domain of the possible.
This week’s chart of the week examines the evolution of market-based inflation expectations and the stock market, including the S&P 500, over the past five years.