Duncan Donald

Fri, Jan 8

As Democrats take the clean sweep there's disorder on the streets, but not in the financial markets

From a stock perspective December ended on all time highs in most major indices across the US and Europe, and as the market paused for new year celebrations the question was more how much further will this go into the New Year. Therefore the price action on Monday was a stark disappointment with markets seemingly realigning themselves to virus fears and plunging nearly 2% with the tech heavy Nasdaq being the most severely impacted. This type of move felt heavily off-script from what we had seen the previous month. However as we have come to expect any sell off does little more than whet the appetite of buyers, and as we came into Tuesday the polls, which were indicating a blue sweep in the Georgia runoffs turned the market on its heels. 


As the election day progressed into the evening, whilst the polls were incredibly close the Democrats had their nose in front, and eventually on Wednesday the Democrat candidates were announced the victors. Meaning not only had Donald Trump lost the Presidency race, but political control of the House and Senate meaning President Elect Joe Biden will have an easier path of fresh policy approval. This brought great positivity with renewed optimism of fiscal stimulus and of course a fresher and safer pair of hands in the White House. With this boost coupled with ultra accommodative monetary policy, Stocks surged, magnified by the fresh influx of new year investment.  The concerns over taxation and regulation of the tech sector a Biden led government could bring was also shrugged off as the Nasdaq fought back to reclaim new highs proving it wasn't just the cyclical stocks in the Dow Jones and S&P 500 that would benefit from stability. 


Naturally, as with all things Trump there remained no immediate smooth transition as having revved up his support with calls of a fraudulent election for over a month now, they took to the street and stormed the Capitol building with far greater ease than would be expected, leading to five protesters being shot dead and explosive devices being found and contained. Even then, Trump took to Twitter via a pre recorded video to attempt to talk them down, whilst still maintaining the stance that they had been cheated.  Naturally his actions in the last month have been proven to be insightful of discalm, dangerous and borderline illegal and social media channels were quick to shut down his platforms with Youtube and Facebook followed by Twitter blocking his accounts. Politicians around the globe were quick to criticise the President now that his exit is confirmed and finally his inner circle of Republican stalwarts started to turn against him urging Vice President Pence to invoke Article 25 to remove him from power and ultimately impeach him. 


In what seemed like a firefighting act by the outgoing President, Trump did issue a statement acknowledging defeat and assuring there will be a smooth transition of power until the inauguration of Biden in 2 weeks time. This seemed to do enough to stop Pence invoking Article 25, as well as the fact the legal process could take longer than the time he has left in power, however the impeachment proceedings may well still go ahead post his departure to ensure that he is unable to run again in 2024. 


Despite the global embarrassment caused this week, investment into US equities sits at its highest historical levels, with returns on investment far eclipsing coupons on bonds its unsurprising we see fresh money coming in and whilst the theme for the new year seems to be for upside appreciation we have to be prepared for downside corrections along the way, with the most obvious being from Covid-19. 


In the UK it's been a turgid start to the new year with lockdowns increased to the stay at home Tier 5 as case numbers threaten to overwhelm the health service. The Government which as we have seen over Brexit and the early stages of the virus has been slow to act and coupled with a surge of a second more contagious strain of the virus has come under immense pressure. As such we only see incoming overseas passengers tested for the virus starting next week, a process that could have been introduced 10 months ago. As such despite having Brexit behind us the Pound cannot catch a bid for now.  As the new strain is discovered across the globe there is a chance that the UK could in the medium to long term perhaps be dealing with the worst of this over the next few weeks, at which point the UK’s surprisingly quicker approval and distribution of vaccine to population could stand it in good stead for social and economic recovery, at which point the Pound and the muted progress of the FTSE (versus peers over the same time period) could become attractive again. 


The main data of the week has been US Employment data, where Non-farm payrolls, Unemployment numbers and ADP numbers collectively disappointed even from the low level expected. Stateside, it would be fair to expect things to get worse being behind the curve on virus infection, but with stimulus, vaccine and stable leadership hopes the stock markets remain firm. In the currency market the US Dollar had a fightback this week pushing the Japanese Yen, Pound and Euro lower. Whilst we are seeing isolated pockets of infection in China, Japan and Australia in the last weeks, these countries' past actions to thwart spread still make them alongside the New Zealand Dollar the currencies of choice to hold. 


Have a great week and year ahead. Happy New Year!

The Week Ahead:


Monday - First up on a quiet day is RPI and CPI inflation from China. During the day we have Central Bank speakers in Tenreyro (BoE), Bostic (Fed) and the Bank of Canada Business Outlook Survey. 


Tuesday - UK BRC Retail Sales starts another quiet day. Later in the day we get BoE MPC member Broadbent speaking.  There is little of note in the US Session. 


Wednesday - In the European session we get Italian and Eurozone Industrial Production. In the US time zone its US Core and Non-core CPI. 


Thursday - First up comes UK RICS house price data. From China we get Trade Balance, Money Supply  and New Loans data. At midday we get ECB Monetary Policy Meeting Accounts before US Weekly Unemployment numbers. In the evening Jerome Powell of the Fed speaks. 


Friday - A big morning of batched UK data with Construction Output, GDP, Trade Balance, Industrial Production and Manufacturing Production. French CPI and Eurozone Trade Balance is up next alongside UK Nieser GDP Estimates. From the US we get Core and Non-core Retail Sales, Core and Non-Core PPI,  Industrial Production, Business Inventories and State Manufacturing and data from the University of Michigan.