The Daily Update: The Week Ahead

Last week markets traded with more of a risk-off bias as a combination of factors weighed on sentiment. This included some disappointing US earnings reports, a step up in market volatility and concern about the meteoric rise of GameStop’s share price as retail investors through chat groups such as Reddit’s r/wallstreetbets targeted it, and increased uncertainty as Jerome Powell cautioned that the recovery is uncertain and dependent on the success of a vaccine roll-out. With the advent of new virus strains it may be the case that new versions/boosters are required while vaccine supply is constraining the rate of the current vaccination programmes. The S&P500 and Nasdaq indices ended the week down 3.31% and 3.49% respectively and the VIX index of volatility increased, closing out the week at 33.09, up from 21.91 last week. Global equity markets broadly ended the week lower too. The backdrop of risk-off supported USTs: the yield on the UST 10 year tightened 2bps to 1.07% at Friday’s close having traded below 1% mid-week when risk-aversion escalated.

The unfolding GameStop situation attention superseded what would normally have been a focus on the IMF’s updated forecasts and Wednesday’s FOMC meeting. The GameStop saga has captivated market observers as retail investor activity drove up its share-price triggering a short squeeze and impacting some hedge funds. The online broker Robinhood restricted trading in the securities on Thursday which sparked an outcry, although Robinhood is reported to have raised USD1bn to help meet additional clearing house margin requirements and allowed some trading again on Friday only to then impose restrictions again. This retail versus Wall Street tussle looks to have further to play out and has triggered some increased volatility in markets and some de-risking in the meantime.

The US Q4 GDP data showed the economy grew at a 4% annualised rate although the economy declined 3.5% yoy in 2020 which was the largest decline since the just after the Second World War. However, the IMF’s latest forecasts predict that the US and China will recover strongly from the pandemic with their economies at the end of 2022 only 1.5% smaller than the pre-pandemic path predicted. The IMF expects the global economy will now grow by 5.5% in 2021 (up from 5.2% it predicted in October) and will slow to 4.2% growth in 2022 although it warned there was still ‘extraordinary uncertainty’ about the year ahead. The Fed left both interest rates and the pace of asset purchases unchanged at last week’s meeting and noted signs of a slowdown in economic activity due to the pandemic. In the press conference, Federal Reserve Chair Jerome Powell countered market perceptions about inflation running away, saying significant forces have restrained global prices for decades and that dynamic is not likely to change. When asked if Congress's latest USD900bn fiscal relief package would be inflationary, he stressed inflation has averaged less than 2% for a quarter of a century due to advancements in technology and aging demographics. ‘It's very unlikely anything we see now would result in troubling inflation’.

In Europe, French, German and Spanish Q4 GDP data came in stronger than expected but with the virus still rampant and heavy restrictions in place the growth outlook for Q1’21 is uncertain particularly given a slow start to a vaccination programme and problems of securing supplies. AstraZeneca warned of a shortfall for vaccine delivery to the EU sparking a row and threats from the EU to impose export restrictions on vaccines produced in Europe. Giuseppe Conte also resigned as Italy’s PM: talks are underway to try and form another government. Elsewhere, in China the focus has been on monetary policy after the PBoC has been withdrawing liquidity from the market with market participants questioning whether policymakers are wary of the risk of too much liquidity and asset bubbles. Yi Gang, the PBoC Governor, speaking last week noted: “We will keep a delicate balance between supporting the economic recovery, at the same time, preventing risk,” and that “We will ensure that policy is consistent and stable and will not exit from supporting policy prematurely”.

In the week ahead, the Biden policy announcements continue to be a focus. Of note last week, the Biden administration announced a delay to the Trump administration’s Chinese military investment-ban policy which will now not come into effect until May 27th while it undertakes a review. Meanwhile, Biden’s USD1.9tn stimulus package looks to be struggling to get the necessary votes in the Senate for approval on a bipartisan basis in its current size and form. 10 Republican senators are reported to have written to Biden with an alternative proposal although it is expected to be much smaller than Biden’s proposal. Biden will soon have to choose whether to compromise or proceed using the budget reconciliation process to try and pass his plan. Key US data releases this week include the January manufacturing ISM on Monday and the January ISM services index on Wednesday. On Friday the January US non-farm payroll data is due with the Bloomberg survey looking for 50,000 jobs to be added following the 140,000 fall in jobs in December. Elsewhere, China’s January PMI indices released on Sunday/Monday came in weaker than expected. And in Europe, a slew of PMI data for January is due, along with the Euro area Q4 GDP release will be of interest on Tuesday, the Euro area HICP inflation for January on Wednesday and the ECB’s economic bulletin is due to be published on Thursday. The RBA and BoE meetings will be the key central bank meetings held on Tuesday and Thursday respectively with no change expected to policy. Andrew Bailey BoE Governor is also due to speak later in the week with Luis de Guindos on a webinar about central banks and recovery post-Covid. Fed speakers include Loretta Mester, James Bullard, Patrick Harker, Charles Evans, Mary Daly and on Wednesday Janet Yellen outlines the Treasury Quarterly Funding Strategy.