Stock markets finished the second week of January having reached all-time highs, overlooking fairly gruesome US labor market data, the ongoing explosion in cases …
Stock markets finished the second week of January having reached all-time highs, overlooking fairly gruesome US labor market data, the ongoing explosion in cases of COVID-19 and unprecedented political turmoil in the final days of Donald Trump’s presidency, as he faces impeachment – again. Reflation has been the name of the game across the markets and anything even remotely economically sensitive has surged, including small-cap stocks, oil and gas and, of course, cryptocurrencies, particularly following Joe Biden’s plans for a $1.9 trillion stimulus package. Next week brings a heady mix of the political, the macroeconomic, the corporate, and the crypto. Here’s five things we’ll be watching January 20 bids farewell to one of the most controversial US presidents in living memory. After four years in the White House, Trump will bow out, leaving Biden as the 46th president. Trump will also be the first US president to be impeached twice over his role in the storming of the Capitol by violent supporters of his on January 6 who attempted to stop the counting of the electoral college votes. The siege has had little impact on the financial markets, as the S&P 500 hit record highs, buoyed by economic optimism and hopes that COVID-19 vaccines will eventually offer a permanent route out of lockdowns and mobility restrictions. Even though Trump says he won’t attend the inauguration, there will be more troops in Washington DC on the day than in Iraq and Afghanistan combined to quell any potential security threats. After having lain dormant for years, inflation could be making a comeback. Market-based expectations for inflation have picked up sharply in the latest week, as a steady rollout of COVID-19 vaccines has helped feed a sense of optimism that, while things are pretty grim right now, they are about to turn a corner. With a Democrat-controlled Congress, investors believe there will be less pressure on the Federal Reserve to step in and provide extra support to the economy, whether that is via a rate cut or an increase in its bond purchases that help keep credit cheap. Bond yields have marched higher and yield curves – the difference between short-dated and long-dated bond yields – have steepened, dragging the dollar higher and reflecting this perception that inflation will start to take root as the economy recovers, which eventually, in theory, will merit a rate rise. But for now, investors need not fret too much about a damaging inflationary spiral.
