Markets last week |
The week saw the emergence of the individual US investor as a force to be reckoned with. Large numbers of speculators gathered on the Reddit forum WallStreetBets and bet against the short positions taken by hedge funds, often giving these professional investors big losses, due to the sheer volume of individual share trading. Although the focus was mostly on a small number of small-capitalisation stocks, it triggered a frenzy of activity driving US equity volumes to all-time highs. The high profile of these moves coincided with a market correction, although it was not the main cause behind it. In US politics, while the Republican leadership backed down on threats not to cooperate with the Democrats on fiscal stimulus, the Democratic leadership indicated its willingness not to seek a broader approval if necessary, despite the fact that not all of Biden’s plan is likely to qualify for the go-it-alone route, including US$160bn for vaccines and testing and a proposed minimum-wage hike. Markets began to expect a long haul of political wrangling before any legislation is enacted. On Wednesday, as mentioned, the risk-appetite correction began, with a laundry list of possible causes such as doubts about fiscal policy, the rather gloomy Federal Reserve (Fed) statement, short squeezes turning into risk aversion, plus disappointments from Apple and Tesla. Enormous day-to-day as well as intra-day volatility drove some trading platforms to ban purchases of certain stocks in a bid to stop the roller-coaster rides, causing an uproar not just among market investors but also politicians. All of this happened amid the strongest share-trading volume registered in decades and almost fully ignored the comments made by Fed Chair Jay Powell about being patient with inflation. So far, the Q4 reporting season has been quite positive, with strong earnings beating estimates in both the US and Europe, by about 21% and 19%, respectively. This is based on a small sample of companies (30% of the US market and only 10% of the European market). In both areas, nearly 80% of companies reported earnings beating estimates. Markets were not too impressed, though, in part due to weaker forward guidance from reporting firms. The US dollar rose, as copper fell and equities were down some 4%. UK small caps were more resilient, but as government bond yields were steady and the gold price did not rally, there was no hiding place in this correction. |
The week ahead |
Monday: ISM manufacturing PMI in the US Our thoughts: US manufacturing has followed China’s upswing and is on a tear. The last reading was above 60, a truly exceptional level, with underlying components soaring, such as new orders, production and prices paid, and also supplier deliveries indicating some possible bottlenecks ahead. There was a hint that some of this activity may have been in anticipation of potential increases in taxes from the incoming Biden administration. It will therefore be interesting to note whether the lofty levels are maintained this month or show a dip. Also, the employment component last time managed to hoist itself above the 50 threshold, between contraction and expansion and, in light of recent movements in jobless claims, the employment aspect of this survey will be crucial to watch. Thursday: Bank of England meeting Our thoughts: the Bank of England (BoE) does not normally make waves in its announcements. The level of interest rates and the amount of asset purchases are highly unlikely to be touched this time, but it’s the commentary that we should be awaiting with at least some curiosity. Not that long ago, markets were forecasting negative rates from the Bank of England. BoE Governor Andrew Bailey made some comments suggesting a low probability of such an event, but without totally closing the door on the option. In light of the post-Brexit economic reality, US election results and the weaker economic backdrop on the Continent, the commentary will be parsed for indications of future policy moves. This will have an impact on the gilt market, sterling and UK equities. Thursday: US Q4 non-farm productivity and unit labour costs Our thoughts: the productivity-cost equation is vital to corporate profitability and economic growth. If productivity is higher than unit labour costs, high growth can take place without unwanted inflation. Q2 saw a massive outperformance of non-farm productivity over unit labour costs, sadly reflecting the large number of jobs lost, and Q3 managed to keep productivity above labour costs. As a result, corporate margins recovered almost to pre-COVID levels. Q4 will be scrutinised for the relationship between these two forces, as an indication of future corporate profitability when we return from lockdowns. The current expectation for productivity is highly negative for Q4 with unit labour costs rising sharply. We are sceptical of such a sharp reversal between these two datapoints. |
Markets for the week |
|
Central banks/fiscal policy |
The Fed repeats its message of patience, but is anybody listening? The US Fed held interest rates and asset purchases steady, commenting that it was too early to have a discussion about whether to taper these purchases. Fed Chair Jay Powell mentioned that risks remain in 2021 from COVID. Although productivity has been boosted and the banking system has held up well, economic activity is still unsatisfactory. Powell noted that inflationary moves this year could be viewed as transient, due to inevitable bottlenecks when the economy reopens. The Fed would need to see inflation above 2% for some time before acting and is likely to look through any near-term inflation scare. Markets fell while Powell was speaking. The European Central Bank (ECB) stepped up its scrutiny of credit risk at banks to get a better sense of their preparation for a potential wave of loan defaults. The ECB asked lenders for additional information on their corporate lending in 2020, to ensure that they can withstand a possible surge in defaults. |
United States |
Sentiment index joins housing optimism as jobless claims fall Housing: historically low mortgage rates keep fueling the booming housing market: 30-year mortgage rates have been below 3% since July. The Case-Shiller index of property values in 20 cities climbed 9.1% from a year earlier, the biggest jump since May 2014, following an 8% gain in October. Nationally, the Case-Shiller index gained 9.5% in November, also the most since 2014. The Federal Housing Finance Agency reported that its price index rose 11% in November from a year ago, the most in data going back to 1992, and up 1% compared with October. New home sales in December rose 1.6% from 829K to 842K. Pending home sales eased 0.3% in December, but year-on-year were up 22.8%. Broad surveys: the Conference Board’s index of sentiment increased to 89.3 from 87.1. Expectations rose to a 3-month high of 92.5, while current conditions decreased to 84.4, the worst reading since May. The number of Americans saying jobs are hard to get was at the highest level since May and yet the share of respondents who saw better business conditions ahead increased to a 3-month high of 33.7% from 29.5%. The share anticipating more jobs during that period climbed to 31.3%, also the highest since October. Respondents indicated they were more likely to make big purchases in the months ahead, with those expecting to buy a new car rising to 10.7% from 9.8%, and more respondents said they intended to buy a home. The University of Michigan sentiment survey was almost unchanged at 79.0, from 79.2, with current conditions lower and expectations slightly higher. The leading index was less buoyant at +0.3% in December vs. +0.7% the previous month. Regional surveys: the Richmond Fed manufacturing index fell from 19 to 14. The Dallas Fed survey was also softer, at 7.0 vs. 9.7. The Kansas City Fed manufacturing activity index rose from 14 to 17. The MNI Chicago PMI surged from 58.7 to 63.8. Orders and trade: US durables orders rose 0.2% in December, with non-defence capital goods orders ex aircraft up 0.6%. The advance goods trade balance improved marginally from US$85.5bn to US$82.5bn. Employment: initial jobless claims improved from 914K to 847K and continuing claims from 4,974K to 4,771K. Personal income (including government transfers) rose 0.6% in December as personal spending fell -0.2%. Growth: US GDP growth in Q4 was estimated at 4.0%, missing slightly higher estimates, with personal consumption rising 2.5% and the price index 2.0%. Inflation: the PCE (personal consumption expenditures) deflator rose from 1.1% to 1.3% in December with the PCE core deflator (which is the inflation gauge followed by the Federal Reserve) rising from 1.4% to 1.5%. The University of Michigan 1-year inflation expectations remained at 3.0%. |
United Kingdom |
Retail sales and car production depressed Employment: the claimant count rate rose a smidge by 7K compared to 38K last month revised down from 64K. Retail sales: CBI and BRC sales numbers did not look good. The CBI distribution series fell: reported sales went from -3 to -50 and total distribution reported sales from -2 to -44. The BRC shop price index year-on-year was down 2.2% in January vs. -1.8% in December. Autos: UK car production fell to the lowest since 1984 at 921,000 units. |
Europe |
No good surveys The German IFO survey fell from 92.2 to 90.1 with both the current assessment and expectations dropping. Also in Germany, the GfK consumer confidence index fell from -7.5 to -15.6. French consumer confidence eased from 95 to 92. Confidence levels in the eurozone were mixed at a low level: consumer confidence was unchanged at -15.5, economic confidence eased from 92.4 to 91.5, industrial confidence marginally improved from -6.8 to -5.9 and services confidence slipped from -17.1 to -17.8. |
China/India/Japan/Asia |
Soaring Chinese profits contrast with weaker surveys and gloomy Japanese data China: industrial profits rose 20.1% year-on-year in December vs. 15.5% the previous month. PMIs fell, but manufacturing was more resilient. The manufacturing PMI eased from 51.9 to 51.3 but the non-manufacturing PMI slumped from 55.7 to 52.4. The unofficial Caixin manufacturing PMI also fell from 53.0 to 51.5. Japan: the leading index and coincident index were almost unchanged at 96.4 and 89.0, respectively. Retail sales dropped 0.8% in December, adding to a 0.3% fall for the year. Industrial production fell 3.2% year-on-year, construction orders down 1.3%, housing starts down 9% and the consumer confidence index went from 31.8 to 29.6. |
Oil/Commodities/Emerging Markets |
President Biden signed an executive order banning drilling on US federal land and water for the next 60 days, in addition to an executive order that prohibits new leasing on these federal lands and water. This should limit new production in the US and impact global supply and help oil prices. OPEC and its allies are estimating that their oil output cuts in January were followed almost perfectly by its members, reducing crude supplies by 7.2 million barrels a day or 7% of global supplies. Copper and other industrial metals joined the market falls last week. |
About Author
How can we help you?
If you would like to speak to one of our advisers, please get in touch today.