Monthly Pulse #2 21

Review and Economic Outlook

With mass vaccinations launched across the world, investors’ optimism pushed markets to the all-time high in January. However, it soon became clear that there are major issues that still remain to be resolved: from vaccine production and transportation, to convincing people of their safety and efficacy. This realization raised the tension in the markets, so when a little “black swan” - the “rebellion” of Robinhood traders – happened, markets underwent a correction and VIX sharply jumped and remained at an elevated level of over 30 during the last week of January.

Macroeconomics

With a Democratic Majority in the US Senate, it is likely that a new large stimulus package is going to be passed. However, it might still end up smaller than the ambitious $1.9tn proposed by President Biden, since some Republican votes are needed to pass the bill and their proposed package is much more modest: $618bn. Therefore, investors are closely watching for the outcome of negotiations. 

As the economic situation on both sides of the Atlantic is still strained and a double-dip recession in Eurozone is likely, markets are concerned of the possibility of an unexpected premature tapering by central banks, which is why the Fed’s repeated message, including the one in the January meeting, has been that no change in asset purchases is planned so far and that there will be a lot of guidance before it actually happens. Similarly, at the last meeting, the ECB kept the rates and asset purchases unchanged, since it is not expecting the inflation in the EU to raise above 2% in the coming months.

Fixed Income

The US Treasury yields rose in the first half of January on the vaccination optimism, but amid the risk-off mood in the second half of January, the yields briefly dropped below 1%, although did not stay at that level long and went up to 1.13% on February 3^rd. Moreover, the US Treasury yield curve is at its steepest level since 2016, which means that the rates market remains optimistic about the upcoming recovery even despite the correction in the equity market.

Despite lagging in January, Emerging Markets still remain attractive in light of improving commodity consumption. Issuance of new bonds in January was at a record level, with governments and companies trying to lock in low interest rates, especially for (ultra-)long maturities. Investors were eager to buy the new bonds, signaling confidence in the Fed’s intention not to start tapering in the upcoming months.

Equities

Beginning of mass vaccinations across the globe, accompanied by the prospect of a new large US stimulus bill extended the year-end equity rally into the first half of January and gave a push to pro-cyclical rotation. However, problems in vaccine production and distribution - especially in Europe - amid the still raging virus gave investors a reality check, so the markets fell in the second half of January erasing most of the month’s gains. Eurozone was hit especially badly, while emerging markets, namely China, showed positive performance. 

In light of prolonged lockdowns in Europe, large tech and healthcare stocks once again fared better than the more cyclical ones. However, consumer staples, as a typical defensive sector, was one of the losers in January, which shows investors’ willingness to prepare for a recovery despite the short-term uncertainty.

Alternatives

Gold price fell in January in line with the risk-on mood, but during the end-of-January correction, it failed to regain the losses and got stuck around 1850. This is partially due to the strengthening of USD, propelled by the large fiscal stimulus prospects and the European vaccination lags. Nonetheless, EUR/USD is yet expected to rise in the next months.

Oil prices rose in January on the expectation that OPEC+ will adhere to their production quotas amid clearer economic recovery prospects. The oil futures prices now are in backwardation, indicating that currently demand is picking up and travel and production are on course for recovery.