The markets’ uptrend is still going strong during December. Stoxx50 is up 2.36% and -4.50% YTD. During November Stoxx50 had an impressive gain of +18.06%. S&P500 is up 3.27% for December and +15.80% YTD.
Global Macro & Markets Overview – December 2020
An end to the Covid-19 crisis is now in sight, but the path to recovery may still be bumpy over the coming quarters as governments grapple to control the virus, particularly as seasonal factors make this more difficult through the winter. In Europe, significant restrictions to curb the spread of the virus look to have been effective, with new infections now falling sharply from their latest peak. In the US, the situation has continued to escalate, with new cases continuing to rise and deaths following.
In December’s ECB meeting it was reinstated that the key ECB interest rates are expected to remain at their present or lower levels until the Governing Council has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2 per cent. The Governing Council has also decided to increase the envelope of the pandemic emergency purchase programme (PEPP) by €500 billion to a total of €1,850 billion. It also extended the horizon for net purchases under the PEPP to at least the end of March 2022. In any case, the Governing Council will conduct net purchases until it judges that the coronavirus crisis phase is over.
In the US there are two key policy implications from a Joe Biden victory.
- it is expected that the incoming president will take a more diplomatic and less confrontational approach in foreign policy matters, preferring to build pressure in a multilateral way and avoiding tariff measures, which come with greater economic costs, when possible.
- The US will reunite with its global peers in the effort to combat climate change, with the president-elect intending to re-join the Paris Climate Agreement on day one of his administration.
FED’s extraordinary monetary policy will likely remain in effect until the U.S. recovers from the pandemic’s economic effects, which will probably take some time. It’s not expected, at this time, that the Fed will implement negative interest rate policy in the foreseeable future. Powell and Fed officials have stated that they prefer using other policy tools—additional quantitative easing (QE), forward guidance, yield curve control (YCC) and targeted credit purchases—over NIRP (Negative Interest Rate Policy) to deal with the economic downturn.
With unemployment still significantly elevated versus pre-COVID levels, more action will be needed from both fiscal and monetary policy makers even as vaccine distribution begins this month. It is likely that the current pace of Quantitative Easing (QE) will continue throughout 2021 even as the economy recovers.
The recovery in risk assets has puzzled many investors, suggesting that capital markets may have disconnected from fundamentals. This premise is confirmed by the negative correlation between S&P 500 returns and US economic growth for the first time in post-war history. It is assumed that this is not a new paradigm of investing, but rather a reflection of the extraordinary stimulus deployed into the economy from monetary and fiscal authorities.
The record degree of concentration in the US equity market has continued to rise as mega-cap tech companies have led the 2020 rally. The five largest US companies (Facebook, Apple, Amazon, Microsoft and Google-or FAAMG) now comprise nearly a quarter of the S&P 500 Index market capitalization.
For the first time, policymakers in a wide range of emerging countries have been able to follow their developed market counterparts, allowing fiscal deficits to widen, easing policy rates, injecting liquidity into their financial systems, and even implementing quantitative easing. Historically, many emerging market countries were not able to use these tools because they weaken currencies, thereby exacerbating foreign currency debt burdens in local currency terms and giving rise to inflation.
China’s industrial production, fixed asset investment and exports are all above pre-COVID-19 levels, while retail sales are only very slightly below. Surprisingly, China’s service sector is back to around prepandemic levels, and domestic airline flights are back to full capacity.
Chinese onshore defaults kept rising since 2014 but remain relatively low by international standards, with 36 defaults totalling approximately RMB 130bn in 2019. Strong government support, lower interest rates and plentiful liquidity in the first half of 2020 reduced the pace of defaults. However, with the pandemic contained, market interest rates have normalized while government support has faded. This increased the challenges for highly indebted corporate bond issuers to pay coupons and issue new debt. While some of these issuers are rated AAA by onshore rating agencies, they do not have international ratings. Despite domestic and international rating agencies using the same rating scale, domestic rating agencies typically place considerable weight on the implicit presence of government support for bond issuers and rely less on organizations’ financial data.
The FP Asset Management Aggregate Macroeconomic Index for the G8 countries has slightly improved during December.
