18th January 2021

Stock markets were mixed last week, with US and European shares down, whilst Japanese and other Asian shares rose solidly. This follows a very strong recent run of performance for global share markets and came alongside some weak economic data, notably in the US which showed some weak retail sales numbers and a rise in jobless claims. This week starts quietly (with the US markets closed today) but is likely to ramp up towards the end with the inauguration of Joe Biden, a slew of corporate reporting and central bank meetings in Europe and Japan.

Last Week

  • Stocks were mixed, but falls in core markets such as the US and Europe made for falls in the global index
  • Bond markets were a mixed bag, with inflation-linked bonds gaining the most
  • Incoming President Biden announced plans for a $1.9 trillion stimulus package
  • Economic data was fairly poor
  • Chair of the Federal Reserve Jerome Powell looked to quell fears around tapering

This Week

  • There’s a fair amount to focus on this week after a quiet start which sees the US market closed today for Martin Luther King Day.
  • Joe Biden’s inauguration is on Wednesday and we have both the European Central Bank and Bank of Japan meeting on Thursday.
  • In addition to this, earnings season in the US sees 43 S&P 500 Index companies reporting including Bank of America, Netflix, Goldman Sachs and IBM.
  • Friday sees the release of flash PMIs – these will give a good indication of how economies and businesses are faring this month.

Last Week’s Highlights​

Global stock markets fell by about 1.5% last week, with Western markets falling as Asian markets gained. The US market dropped by about 1.5% (and remains the weakest performer so far this year) as “growth” shares lagged, whilst the UK market dropped by just shy of 2% on the week, taking gains for the year to 3.6%. The Japanese market rose by about 1.35%, whilst emerging markets in general rose by 0.86% which brings them up to be the best performer so far this year, up by 5.4%.

Within the UK market, there was a bit of a pull-back of recent winners, with the materials sector being the worst performer, down 3.9% on the week. However, this sector remains up over 9% so far this year and is up nearly 30% since the 9th November 2020 when the first vaccine news announced (by Pfizer and BioNTech). From a stock perspective, Just Eat, Fresnillo and B&M European Value Retail were the worst performers in the FTSE 100: down by 12.5%, 9.7% and 7.4% respectively, with Aveva Group, Next and IAG being the best performers: up by 7.8%, 4.4% and 3.5% respectively.

Earnings season kicked off last week, with banks such as JPMorgan Chase, Citigroup and Wells Fargo reporting their results on Friday. Despite beating on earnings’ estimates, shares in all three fell by 1%, 6.4%, and 7.3% respectively. Analysts are expecting that 4th quarter earnings in the US will show a fall of 6.8% year on year, and a fall of 13% for 2020 as a whole.

Bond markets were a mixed bag, with the main moves coming from the inflation-linked markets. Global inflation-linked bonds rose by about 0.6% on the week as 10-year inflation breakeven rates in the US rose to 2.09%. This is the highest that they have been at since October 2018 and marks a big rise from the 0.55% level that they dropped to on 19th March last year. Elsewhere, government bonds were pretty flat: UK gilts rose by 0.06% on the week, with US Treasuries up by 0.1% as 10-year yields in these markets fell to 0.28% and 1.08% respectively. Elsewhere, credit markets gave up a bit of return as spreads in these markets rose, with high yield markets falling by 0.3% (as spreads rose to 405 basis points) and UK investment grade markets fell by 0.18%, as spreads rose to 113 basis points.

The big news of last week was perhaps the announcement of a planned $1.9 trillion stimulus package from incoming President Joe Biden, which included $1,400 of cheques to individuals to boost spending. Although this package was much bigger than expected, it did little to move the market, as there were question marks around how quickly they could move on it and how much Republican opposition might slow or reduce the package.

Economic data was not very good last week. US retail sales came in a lot worse than expected for December at -0.7% (vs expectations of 0%) and made for the 3rd straight monthly decline, with the drop coming (worryingly) not from COVID-19 restrictions but from online sales. In addition to this, weekly jobless claims in the US also came in worse than expected: hitting their highest level since mid-August, with a 965,000 print. UK data was not great, but was generally better than expected, with the 2.6% monthly decline in GDP being better than the -4.6% number that economists had been expecting.

Chair of the Federal Reserve Jerome Powell spoke last week which seemed to quell recent concerns about tapering by the Federal Reserve in the face of rising inflation expectations. Powell affirmed that the Fed had no plans to raise rates anytime soon and would need to see inflation remain above 2% for some time. To that end, US CPI came out last week at 1.4% and has averaged just 1.7% over the last 10 years. This is significant when one considers that in August last year, the Fed announced they would move to “average inflation targeting”, where it “seeks to achieve inflation that averages 2% over time”. Given this, we remain of the view that the Fed will not be raising rates in a hurry and will maintain their $120 billion bond-buying programme throughout this year.

China had their monthly data dump this morning, with growth surprising on the upside: coming in at 2.3% for 2020, which makes China the only major economy to avoid contraction last year. Looking at the other macro data, China’s December industrial output came in better than expected at +7.3% yoy (vs. +6.9% yoy), retail sales came in lower at +4.6% yoy (vs. +5.5% yoy expected) and fixed asset investment also came in a touch lower than expected (2.9% vs expectations of 3.2%).

Asset Returns

Equities & Oil: returns are all in base currency, save for global and emerging which are in GBP. Bond returns are all shown in GBP. Gold in GBP. Source Bloomberg.

The graph below shows the 10-Year US Treasury yield minus the 2-year Treasury yield. The US yield curve has steepened significantly of late and is now back at levels not seen since Summer 2017; this steepness in the yield curve is one of the reasons that concerns about inflation have risen and “value” shares have started to perform better.

Source: Psigma / Bloomberg

Rory McPherson
Head of Investment Strategy