Equity markets saw a strong start to the year globally, with major indexes hitting fresh record highs last week. Investors were mainly keen on political development in the United States with Trump supporters storming into the U.S Capitol in an attempt to stop the senate from confirming Joe Biden’s win of the January presidential election.
United States
The major indexes continued to march to record highs despite one of the most tumultuous weeks in the nation’s political history. Small-caps outperformed large-caps by a wide margin, and value stocks outpaced growth shares. Energy stocks led the gains within the S&P 500 Index, after Saudi Arabia made a surprise announcement that it was unilaterally cutting oil production by 1 million barrels per day. A surge in longer-term Treasury bond yields boosted financials shares by holding out the promise of improved lending margins, but rising rates weighed on the small real estate sector.
The extraordinary assault on the U.S. Capitol on Wednesday afternoon seemed to unsettle markets, but only moderately—the Cboe Volatility Index (VIX) briefly spiked from around 22 to nearly 27 but remained below its levels from earlier in the week. The market gave back a portion of its early-day gains, but our traders noted that the possibility that Tencent Holdings and Alibaba Group Holding may be added to the list of Chinese companies to be delisted by the New York Stock Exchange also seemed to weigh on the broad market. On Thursday, the focus seemed to return to the anticipated fiscal impetus, helping lift the S&P 500 to its best daily gain since late November, while the tech-heavy Nasdaq Composite Index surged 2.6%
The bond market appeared unmoved by the poor jobs report, with the yield on the benchmark 10-year Treasury note continuing to move higher in its wake. For the week, the yield jumped roughly 20 basis points and hit its highest level (around 1.12%) since March. (Bond prices and yields move in opposite directions.) The broad municipal bond market proved resilient despite the sell-off in U.S. government bonds
Europe
Better-than-expected German industrial production and trade figures for November, together with stronger factory orders data, signaled that the economy may have expanded in the fourth quarter. Industrial output rose 0.9% in the month versus a consensus forecast of 0.7%. Exports grew 2.2%, beating a forecast for 1.0% growth and a monthly increase of 0.8% in October. Imports climbed 4.7%, compared with 0.3% in the previous month. Factory orders rose 2.3%.
The Italian government is planning to draw EUR 200 billion from the EU’s coronavirus emergency fund and EUR 22 billion from other EU programs to help revive its economy, according to a draft document seen by Reuters. The plan needs Cabinet approval, but it has been criticized by coalition partner Italia Viva, led by former Prime Minister Matteo Renzi, who wants more spent on health care and infrastructure. He also wants the government to seek a loan from the eurozone bailout fund to help hospitals.
Asia
Chinese stocks began the year on a strong note, with the CSI 300 Index of large-cap stocks up 5.5% and the Shanghai Composite Index adding 2.8% since December 31. Nevertheless, sentiment was shaken after the New York Stock Exchange said it would move ahead with delisting three Chinese telecommunications companies, reversing itself for the second time in one week, following an executive order by President Donald Trump. Reports that the Trump administration was considering adding Chinese internet leaders Alibaba and Tencent to a U.S. investment blacklist also tested investors’ nerves and marked an escalation in the Trump administration’s effort to increase restrictions on U.S.-listed Chinese companies.
China’s regulators introduced a cap on bank loans to the real estate sector for the first time. The move comes after micro or local property curbs in recent years did little to dampen a buoyant property market. Under the new rules, loans to developers may not exceed 40% of total credit for large banks, while mortgage exposure should not exceed 32.5%. In economic readings, the Caixin manufacturing Purchasing Managers’ Index declined to a weaker-than-expected 53 in December, a three-month low. The services gauge also came in below consensus.
Japanese stocks posted strong gains for the week. The Nikkei 225 Stock Average advanced 2.5% (695 points) and closed at 28,139.03, recording another multi-decade closing high. The large-cap TOPIX Index and the TOPIX Small Index, broader measures of the Japanese stock market, also performed well. The yen weakened and closed near JPY 104 versus the U.S. dollar.
The World Bank’s January 2021 Global Economic Prospects report forecasts global economic growth of 4.0% in 2021, following the 4.3% contraction in 2020. The World Bank lowered the gross domestic product (GDP) growth targets for about half of the countries worldwide. The latest 2021 global forecast was revised from its earlier 4.2% growth target. The World Bank said, in a worst-case scenario, if infections accelerate or the vaccination process is delayed, global growth could be as low as 1.6%. It believes that the trajectory of the coronavirus and debt accumulation represent the two most significant variables in its forecasts. The World Bank forecasts a 5.3% contraction for Japan’s economy in calendar year 2020 and 2.5% GDP growth in 2021. In comparison, in 2021, the U.S. GDP is expected to be 3.5%, the eurozone GDP 3.6%, and China’s economy could expand 8%.
Other key financial markets:
- Saudi Arabia – Saudi stocks, as measured by the Tadawul All Share Index, returned about 0.5% in the five trading sessions since the close of business on Thursday, December 31. The market is closed on Fridays and Saturdays. on Tuesday, OPEC and non-OPEC oil-producing nations, which are referred to collectively as OPEC+, agreed after protracted discussions to keep total oil production flat, with Saudi Arabia compensating for a marginal increase in output by Russia and Kazakhstan of 75,000 barrels per day with a deepening of its own cuts. Saudi Arabia then surprised the market by announcing that it will unilaterally cut an additional 1 million barrels per day of crude production, which led to a sharp increase in oil prices.
- Mexico – Mexican stocks, as measured by the IPC Index, returned about 6%. Shares were lifted in part by strength in U.S. equities, as Joe Biden—who is expected to be less aggressive on trade and immigration issues than President Trump—was certified by Congress as the winner of the November 2020 presidential election. Biden will be inaugurated on January 20. On Thursday, the government reported that Mexico’s inflation data for December were mostly in line with expectations, although pricing pressures were a bit softer in the second half of the month. Headline inflation was reported at a 3.15% year-over-year rate compared with 3.33% in November. Core inflation was still relatively high at 3.8% year-over-year; this was up from 3.68% in the previous month but below the 3.9% to 4.0% range that has prevailed since June.
