INSIGHTS

Duncan Donald

Fri, Jan 15


As the inauguration looms, Government and Central Bank stimulus boosts the Equity markets further

As outgoing President Donald Trump remains in the headlines, the impact of his actions and ultimate eventuality of his term drifts from the focus of the markets, with all eyes and drivers shifted to the soon to be inaugurated President elect Joe Biden. With the ceremony next week (20th January) security will be at its highest level to try and ensure angry protesters from both sides are kept subdued and of course avoid a super spreader event. The impeachment of Trump this week for the second time means he will be departing the White House having lost the election and both the House of Representatives and Senate for the Republican party, as well as being the first President in history to have achieved a brace of impeachments, such a legacy has even some hardened Republicans encouraged at a more stable incoming President, willing Biden to bring economic and social stability in the US. 

 

Biden has begun his pre-inauguration tenure with a strong start, bringing a $1.9 trillion dollar stimulus package to the fore, thus ensuring those suffering due to the economic impacts of the pandemic are sufficiently supported. He is seeking bipartisan support for this package but there may well prove to be questions raised about who will carry the can in the form of taxes to make this happen. This enormous stimulus package was very much expected meaning it bore little impact on the equity markets which have on the whole enjoyed another strong week. It was a week of speakers from the US Federal Reserve with the party line trotted out by all contributors that the Federal Reserve remained in no hurry to taper stimulus and hike rates until inflation sits above 2% again. So with the Government and Central Bank stimulus firmly in place, it's of little surprise that the equity markets are enjoying the buoyancy that we are seeing, indeed the house view remains that we continue to see upside, but in the shorter term there could well be scope for downside corrections with the pace of appreciation slowing somewhat. The swiftly rising cases of the virus in the States could be the most obvious cause and of course any scenes of violence across US cities over the inauguration period are a concern and we wonder if we could see position lightening into the start of next week, potentially drawing the indices off of these highs. 

 

It's also been a tough week for the Euro, with Brexit out of the way the galvanising factor of European solidarity has diminished and the cracks are starting to show with outbreaks of political turmoil in Italy and Holland, bringing the Euro significantly lower.  If we add to that rising case numbers across the block with Germany in particular recording their highest daily deaths since the spring and Merkel discussing a “mega lockdown” alongside an increased curfew in France. There are also concerns that the vaccine is not being rolled out fast enough with distribution across the collective bloc adding fuel to in-fighting. For this reason the Euro could well see further downside pressures over the coming weeks, with the ECB minutes this week clearly showing that recent price appreciation in 2020 is cause for concern. 

 

In the UK the Covid infection and death numbers remain unpleasant to say the least. Being front and centre of the second wave and aggressive mutation of the virus is bearing significant implications on the statistics. But the markets are taking solace from the fact for all the UK Governments' faults over the last year, they have been proactive in the handling of vaccination approval and distribution meaning the UK could be well placed to emerge from this sooner. The next few weeks infection numbers will be crucial as we look to see them first plateau before reversing following the heightened lockdowns as the vaccination effects are awaited.  It does seem the markets are looking ahead and the Pound has enjoyed a stronger week briefly touching the 1.3700 area against the US Dollar, and touching critical support levels around 0.8865 against the Euro. Domestically, Prime Minister Boris Johnson does remain under pressure with Conservative peers questioning his roadmap of progression for both the virus and Brexit as we start to see procedural delinquencies of the trade deal start to come to light. 

 

Next week all eyes will be on the US with hope that political sanity can be resumed and a smooth transition of power. There is suggestion that Trump could resign early to stave off the secondary impeachment, but that remains far from what we have come to expect of the nature of the man. 

 

The Week Ahead:

 

Monday - A busy start to the trading week with the UK Rightmove House Price data up first before a plethora of Chinese data: Industrial Production, Unemployment, Retail Sales and GDP. Industrial Production from Japan is up next. With the US being on holiday the main event in the afternoon is BoE’s Andrew Bailey speaking a Eurogroup meetings throughout the day. 

 

Tuesday - ECOFIN meetings run throughout the day. Eurozone data comes with Europe and Germany's ZEW Economic Sentiment data, Eurozone Current Account numbers, German CPI and Italy's Trade Balance. In the US session we get Canadian Manufacturing and Wholesale Sales and BoE MPC member Haldane speaks. 

 

Wednesday - From the UK we get CPI, PPI, RPI and HPI data, with German PPI and Eurozone Core and Non-Core CPI. The US session will be focussed mainly on Joe Biden's inauguration as President, but also brings the Bank of Canada rate decision and late on Japanese Trade Balance. 

 

Thursday - Australian Employment and Unemployment data and a BoJ rate decision kicks the day off. From the UK we get Gfk, Credit Conditions and CBI numbers. The ECB rate decision comes at 12.45 with Lagarde's conference 45 mins later. From the US its weekly Unemployment and Philly Fed as well as Building Permits and Housing Starts.  Later in the afternoon we get Eurozone Consumer Confidence and BoE’s Andrew Bailey  bere New Zealand's CPI numbers. 

 

Friday - Retail Sales from Australia and Manufacturing PMI from Japan comes first. In the European session we get UK Retail Sales, PSNB and Manufacturing and Services PMI’s. From Europe we get Services and Manufacturing PMI’s from Germany, France and the Euro bloc. In the US session we get PMI’s from the US as well as Home Sales data as well as Canadian Retail Sales. 




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