It has been an eventful Christmas and New Year period (though not, of course, for all of us in lock-down at home), with the final days of Trump’s presidency descending into riot.
His last ridiculous act, awarding himself a military guard of honour as he left Washington, being so typical of the man. It would appear that his histrionics cost the Republicans control of the Senate with the loss of the two Georgian Senators. But it is not going to be plain sailing for the Democrats, their Senate control is as thin as is possible and they lost seats in Congress. Let’s hope that the Biden Presidency can bring some sanity back to Washington, he appears to have made a positive start.
Stock markets have largely ignored the politics and moved further ahead, the S&P 500 being up around 4% over this period. But, as markets returned to worrying about the pandemic and the availability of vaccines, the rotation back into ‘value’ sectors (the ‘reflation’ trade) has begun to run out of steam. The financials stalled, along with the motor companies (not Tesla of course) and oil majors, while the pharmaceuticals rallied strongly along with technology. The NASDAQ faltered in early January, but has roared ahead again over the past week. Japanese stocks were a good feature again, while UK and European stocks lagged with their more cyclical make-up.
Most interesting to watch is progress in international interest rates. US 10 and 30-year rates moved up into the New Year as the 10-year moved decisively through 1% before fading to 105bp now and the long bond jumped almost to 1.9% before fading to 1.8% currently. In contrast, the UK 10-year remains at 27bp while European rates have edged up a shade but remain negative in all the major centres. The credit markets remain in buoyant mood with spreads well supported.
Sentiment appears to be negative for the US dollar, but it has not fallen any further overall in the New Year, sterling has held its post-Brexit deal rally. Oil prices have continued their erratic recovery with a strong move this period, while copper prices continue to make serene progress.
As 2021 gets going, we appear to be facing a number of short-term hurdles that could easily prove to be problematic. The wretched coronavirus is proving to be a tough opponent and, though good progress is being made with vaccines in some countries (thankfully including the UK), this is patchy and supply problems are an issue. The necessary closures while this works through are going to delay the start of a recovery, certainly in Europe. Meanwhile, there are some uncomfortable warning flags flying in equity markets that need to be watched, such as the prevalence of ‘SPACs’ (special purpose acquisition companies), IPOs and social media induced moves in small caps. Equity valuations are stretched in a number of areas, though this is to be expected as we emerge from a recession and against a background of rock-bottom interest rates, but upsets would not be welcome against this background.