Overview

1. Vaccine rollout is slow amid surging COVID-19 cases

2. President Joe Biden Takes Office

3. US and European central banks hold rates steady

4. Economic recovery stalls

5. Equities shaken by retail trading frenzy

6. Tech continues to outperform, banks mixed

Policy & Geopolitics

Central banks keep policy frameworks unchanged

Following its two-day December meeting, the Federal Reserve (the “Fed”) maintained interest rates near zero and assured that it will continue to buy at least $120 billion in Treasury and mortgage-backed securities monthly until there is evidence of “substantial further progress” towards its inflation and employment goals. The Fed plans to give sufficient notice before reducing purchases to avoid a repeat of the “taper tantrum” panic of 2013, when US Treasury yields spiked following news that the Fed might taper asset purchases. At a Fed policy meeting on January 27, Fed Chairman Jerome Powell said that market concern over eventual tapering by the Fed is “premature.” Unemployment projections were reduced further despite the recent spikes in COVID-19 cases, as the economic recovery has been better than expected so far, albeit at a slowing pace. However, with sluggish vaccine rollouts, Mr. Powell said that the “the pandemic still provides considerable downside risks to the economy.”

On January 14, President Joe Biden announced his $1.9 trillion COVID-19 relief plan to help the US through the pandemic. President Biden’s plan calls for a $1,400 stimulus payment per person, which would bring the total amount of direct payments in the past few months to $2,000, as promised when the first stimulus bill was approved by former President Donald Trump in late December. The package would also include a $400 weekly unemployment insurance supplement through September. Most of the fiscal injections would be used to aid households, vaccine distribution, and state and local governments.

After the January 21 policy meeting of the European Central Bank (the “ECB”), interest rates were unchanged at -0.5% and the expanded stimulus program unveiled in late December to buy up to €1.85 trillion of eurozone bonds through March 2022 continued as the euro area struggle with lockdowns after the second wave of COVID-19. For the past five months, inflation in the euro area has been at record lows, well below the 2% target, especially as a stronger euro made imports cheaper. At a press conference in January, ECB President, Christine Lagarde, said, “The pandemic continues to pose serious risks to public health and to the euro area.” The economic outlook of the ECB became gloomier since the December policy meeting amid lockdowns, slow vaccine distribution and persistently high COVID-19 cases.

Joe Biden takes office

On January 20, Joe Biden and Kamala Harris were sworn in as President and Vice President of the United States just two weeks after the insurrection at the US Capitol when hundreds of Donald Trump supporters stormed the Capitol to stop a joint session of Congress from formalizing President Biden’s win. Since his first day in office, President Biden has signed several executive actions on COVID-19, immigration, climate change, etc.

January 5: Reverend Raphael Warnock won the Georgia US Senate runoff, winning Democrats control of the White House and Congress.

January 6: Hundreds of Donald Trump supporters and far-right groups stormed the Capitol building to stop a joint session of Congress from certifying the Electoral College vote.

January 14: The House of Representatives voted to impeach President Donald Trump for inciting the attack against the US Capitol. Donald Trump became the first US President to be impeached twice.

January 20: President Joe Biden and Vice President Kamala Harris are inaugurated at the US Capitol. Former President Donald Trump left Washington earlier that day, missing President Biden’s inauguration. On his first day in office, President Biden signed executive orders to rejoin the Paris Agreement, require mask-wearing on federal property, coordinate a government-wide COVID-19 response, and others focused on immigration, student loans, and racial injustice.

January 25: Janet Yellen, former Chair of the Fed, was confirmed by the Senate as the first woman Secretary of the US Treasury Department.

Macro Indicators

Labor market signals to a slowing economic recovery

The US labor-market recovery stalled in December after seven consecutive months of job growth with rising state-imposed restrictions following a resurgence of COVID-19 cases. Unemployment was unchanged at 6.7%. Non-farm payroll declined by 140,000 in December for the first time since April. Weekly initial unemployment claims had been declining since their peak in March and April at the start of the pandemic but began climbing again in October as the pandemic accelerated across the US. In the week ending January 9, claims jumped more than 100,000 to 926,000, the largest weekly increase since March, as many pandemic aid programs ended in 2020. In the week ending January 23, claims fell by 67,000 to 847,000.
Eurozone unemployment fell to 8.3% in November from 8.4% in October. However, economic recovery was disrupted by the resumption of lockdowns after the resurgence of COVID-19 cases.

Global economic activity slows amid second wave

The US economic recovery lost momentum in Q4 as more states reimposed restrictions following the surge of COVID-19 cases to record highs. The US economy contracted 3.5% in 2020 for the first time since the financial crisis in the largest contraction since the end of World War II in 1946. Q4 2020 GDP dropped 2.5% year on year (YoY) but grew an annualized 4% quarter on quarter (Dow Jones estimate was 4.3%), driven by consumer spending, exports, residential investment and nonresidential fixed investments, despite declines in government spending and investments.
US retail sales growth fell for a third consecutive month in December to 0.7%. The recovery slowed in Q4 2020 largely due to the spreading pandemic and the delayed approval of fiscal stimulus. The new aid package which provides direct aid to households and businesses and funding for vaccine production and distribution should boost economic growth in the second half of 2021.

Annualized Eurozone GDP declined 2.8% in Q4 2020, far behind the US and China. The eurozone economy contracted 6.8% in 2020, compared to a 3.5% decline in the US and a 2.3% rise in China. The outlook for Europe continues to be gloomy with the sluggish vaccine rollout, surging COVID-19 cases, new COVID-19 variants, and extended lockdowns.
Existing home sales in the US rose 0.7% in December to a seasonally adjusted annual rate of 6.76 million after falling 2.5% in November.
The seasonally adjusted Core Consumer Price Index (CPI) increased 0.4% in December after rising 0.2% in November. Gasoline prices comprised more than 60% of the CPI increase. Inflation should remain subdued as short-term demand falls following the resumption of COVID-19 restrictions in the US. Euro area consumer prices fell 0.3% for a fifth consecutive month YoY in December and core CPI was unchanged at a record low 0.2%.
The IHS Markit US Manufacturing Purchasing Managers’ Index (PMI) jumped to 59.1 in January 2021 from 58.3 in December, exceeding market forecasts of 56.5. The IHS Markit Euro Area Manufacturing PMI fell slightly to 54.7 in January 2021 from 55.2 in December, moderately exceeding market forecasts of 54.5.

Sovereign bond prices remain high

The 10-year US Treasury yield rose 0.25% since the start of 2021, peaking to 1.19% on January 12, the highest since March 2020, before closing at about 1.11%, after Democrats took control of the Senate following the surprise win in the Georgia elections. Markets were previously assumed a divided Congress would hamper policy changes and yields dropped as COVID-19 cases continued to rise without agreement on the stimulus. 10-year inflation expectations, measured by Treasury Inflation Protected Securities (“TIPS”), jumped to 2.13%, consistent with the Fed target and the highest since October 2018. This put significant pressure on real yields which reached record low negative territory to −1.06% at month end.
Germany’s 10-year bund yields closed the month at -0.52% , its least negative territory since November, after positive vaccine news.

Financial Markets

Equities mixed; shaken by unusual retail activity

US equity markets stalled in January following a strong rally in November and December driven by positive vaccine news and more political certainty in the US. The S&P 500 declined 1.1%, mostly during the last week of the month, as the speculative frenzy in retail-driven stocks such as GameStop and AMC stoked fears about market instability and speculation. Nasdaq rose 1.4%, despite a relatively large decline during the last week of the month, suggesting that fears of trading mania largely offset a strong earnings season. The vaccine supply bottleneck and the weaker-than-expected effectiveness of the Johnson & Johnson vaccine also dampened the vaccine-fueled optimism since November 2020.

European equity markets had their first monthly decline in three months. The STOXX Europe 600 and the UK FTSE100 declined 1.0% and 2.3%, respectively, reversing part of a vaccine-propelled rally at the end of 2020. In Asia, the Hong Kong Hang Seng index, the Chinese SSE Composite Index and the Japanese Nikkei 225 Index rose 4.2%, 0.3% and 0.8%, respectively, primarily due to China’s robust economic growth (the only major economy that grew in 2020) and increasing flows into growing Asian markets.

In January 2021, markets were shaken spectacularly by the power of digitization and the democratization of information. WallStreetBets, a group on Reddit, led massive coordinated short squeezes on stocks like GameStop and AMC, which had been sold short by hedge funds due to declining business models that were worsened by the pandemic. At its January 27 peak, GameStop stock had surged 1,420% since the beginning of the year, causing short sellers to incur billion-dollar losses and several brokerages to impose trading restrictions. Coordinated retail investing may change hedge fund models and call for government intervention.

Credit spreads continue tightening

Investment grade (IG) spreads remained at 1.03% while high-yield (HY) spreads tightened slightly to 3.84%. First-lien spreads to maturity contracted to LIBOR + 3.79% from LIBOR + 4.02% while second-lien spreads contracted to LIBOR + 7.42% from LIBOR + 7.91%. The yield-to-maturity of first-lien and second-lien debt remains below year end 2019 levels due to near-zero interest rates and unprecedented Fed support for the fixed income market.

Oil rallies on vaccine hopes, but remains in bear market

Spot WTI and Brent crude oil prices have been stable since the start of January, rising 7.1% and 6.0%, respectively, to $51.98 and $54.91 per barrel at month end. Although the stimulus package and vaccine distribution should support oil demand, the recovery depends on how the pandemic situation evolves. Rising COVID-19 infections, extended lockdowns, and slow vaccine rollout present major risks to oil demand recovery.

US dollar weakens, gold falls further, and Bitcoin surges

The US dollar continued to decline into 2021 to its weakest since 2018, with the ICE US Dollar Index down 13.5% since its March peak to 89.4 on January 4 against a basket of currencies, before rising again to 90.4 at month end. Gold prices dropped 2% in January to $1,858 per ounce, despite edging higher since early January, driven partly by a strengthening US dollar, rising bond yields, and President Biden’s new stimulus package. Meanwhile, the price of Bitcoin increased 40% to a record $41,940 earlier this month, as investors sought inflation hedges and safe havens. A week after hitting a record high, Bitcoin fell over 10% in one day to $34,200. Despite indications of wider institutional acceptance of Bitcoin, its recent volatility suggests that it may not be there yet.

Earnings
Technology delivers strong earnings; Tesla mixed

Apple reported a 21% YoY increase in fiscal Q1 2021 (ending 26 December 2020) revenues to a record $111.4 billion, 8% above estimates, while earnings per share (EPS) of $1.68 were 19% above estimates. Besides 5G iPhone sales, there was double-digit sales growth for every product. CEO Tim Cook said that results could have been even better were it not for the COVID-19 pandemic and subsequent business shutdowns.
Amazon also reported record Q4 2020 revenues of $125.6 billion. Q4 2020 EPS of $14.09 beat estimates by 95%. Stellar results were driven by a surge in holiday spending, continued pandemic-related ecommerce demand, and Prime Day. Amazon announced that Amazon Web Services CEO, Andy Jassy, will replace Jeff Bezos as CEO in Q3 of 2021 and Jeff Bezos will become executive chairman.
Facebook beat estimates but warned that the changes in the Apple iOS 14 privacy settings (asking users to opt in for data collection rather than opt out) would hinder its ad targeting and a worsening pandemic could impact its business later in Q1. Sales grew 33% YoY to $28.1 billion, beating estimates of $26.44 billion, while EPS of $3.88 were above the consensus estimates of $3.22. CEO Mark Zuckerberg announced that Facebook is working to reduce political content in its News Feed in response to the insurrection at the US Capitol on January 6.
Alphabet reported record Q4 2020 revenue of $56.9 billion, 7% above the consensus estimates, and EPS of $22.30, well above estimates of $15.90, driven by a 22% YoY increase in advertising revenues (Search and YouTube). Google faces threats from regulators in the US and abroad as it faced three government antitrust lawsuits in the US in Q4 of 2020.
Microsoft revenues of $43.1 billion and EPS of $2.03 were above expectations by 7% and 24%, respectively. Cloud business revenue, including Azure and GitHub, grew 23% YoY. Productivity and business processes, which include Office products and LinkedIn, grew 13%. Following the release of Xbox Series X and Series S in November, personal computing revenue, which includes search ads, Surface and Xbox, grew 14% YoY.
Tesla narrowly beat Q4 2020 revenue estimates but missed earnings estimates. Q4 EPS of $0.80 was 22% below consensus estimates of $1.03 and revenue of $10.74 billion was 3% above estimates, driven largely by robust growth in vehicle deliveries and regulatory credit revenue. With two new factories opening in Texas and Germany and its expansion in China, the average annual growth in vehicle deliveries is expected to be 50%.

Financials mixed but less cautious

Of the traditional large commercial banks, JP Morgan and Citibank beat consensus earnings estimates by 45% and 55%, respectively, as both banks released reserves to cover potential loan losses caused by the pandemic after positive news regarding stimulus and vaccines. JP Morgan revenues were $30.2 billion compared to a $28.7 billion forecast, while Citibank revenue of $16.5 billion just fell short of the expected $16.7 billion.
The EPS of Morgan Stanley and Goldman Sachs exceeded estimates by 51% and 62%, respectively, as their trading and market-making operations remained resilient amidst the pandemic. Goldman revenues were $11.7 billion compared to an expected $9.9 billion, driven by a 40% YoY surge in equities trading revenues. Morgan Stanley revenues of $13.6 billion beat estimates of $11.5 billion, outperforming across all divisions, including wealth management, investment management, equities trading, and fixed income trading.
Visa, Mastercard and American Express performed better than expected, a positive sign of economic recovery. Visa revenues were $5.7 billion compared to $5.5 billion expected, and EPS of $1.42 was above the expected $1.28. Mastercard revenues were $4.1 billion in revenues against $4.0 billion expected, and the EPS of $1.78 was well above the $1.52 Wall Street estimates. American Express revenues were $9.4 billion compared to analyst expectations of $9.3 billion, while the EPS of $1.76 was above the expected $1.31. However, sentiment was reserved, describing 2021 as a “transition year,” dismissing any upbeat guidance on the prospects of a swift recovery with the vaccine rollout.

Energy and Industrials remain challenged

Large energy companies such as Exxon and Chevron reported Q4 2020 losses as COVID-19 continued to take a heavy toll on energy markets. Both companies maintained dividend payouts, announcing that their large quarterly losses were mitigated by aggressive cost cuts and some rebound in demand. The two oil giants have been in merger discussions over the past 12 months. President Biden’s push to suspend oil and gas leasing on federal lands is likely to put pressure on US energy companies.
Caterpillar, often considered a barometer for an economic cycle, also beat expectations with revenues slightly better than forecasts at $11.2 billion, and EPS of $2.12 in EPS well above average analyst estimates of $1.50 and the highest estimate of $1.77. Caterpillar expects a strong jump in global construction activity.

Sentiment

Consumer and market sentiments drop

The Consumer Sentiment Index of the University of Michigan dropped to 79.0 in early January from 80.7 in December following the insurrection at the US Capitol and the surge in COVID-19 cases and deaths.
The VIX jumped 62% to 37 on January 27 from 23 on January 26, its highest since November and the biggest rise in two years, as retail traders bought into heavily shorted stocks like GameStop, AMC and BlackBerry inflicting huge losses upon short-selling hedge funds. Other possible drivers of the VIX spike may relate to record mega-cap tech earnings of Apple, Tesla, and Facebook.
The month-end Fear and Greed Index (which uses seven factors including market momentum, safe-haven demand, and junk bond demand) showed “fear” at 34. Safe-haven demand showed extreme fear in one of the weakest periods for risky stocks relative to safer bonds in the past two years.

COVID-19

As of January 26, 2021, the number of global COVID-19 cases has surpassed 100 million. Almost a year after the first COVID-19 cases were confirmed, cases continue to rise across the world. On January 15, the global COVID-19 death toll surpassed 2 million. New coronavirus variants have been detected in several countries. The highly contagious UK variant detected in December has been detected in China and the US. Another variant identified in South Africa and Brazil has been detected in the US. The US is still the worst-affected country in terms of case numbers, followed by India and then Brazil.
January was the deadliest month for the pandemic in the US with almost 80,000 deaths in January, bringing the cumulative death toll to 400,000. On January 25, President Biden barred the entry of non-US citizens from South Africa and extended travel restrictions from Europe, Brazil, and the UK as new strains were being identified. On the same day, California lifted its statewide stay-at-home order and curfew, despite having the highest number of COVID-19 cases. The number of new cases and deaths have been declining since their January 12 records, but remain elevated. The rollout of COVID-19 vaccines in the US has been slow. As of January 8, more than 22 million vaccines had been distributed in the US and 6.7 million had received their vaccines at that point.
Countries across Europe started the year with lockdowns and curfews to fight rising COVID-19 infections. France, the second worst-affected country in Europe after the UK, tightened restrictions further with a 6PM-to-6AM nation-wide curfew on January 16. Bars, restaurants, and cinemas remain closed. Germany extended the nationwide lockdown until February 14. The UK reported record 1,325 COVID-19 deaths on January 8. Vaccine supplies in Europe were critically low as deliveries of AstraZeneca and Pfizer vaccines were delayed.

The Month Ahead

1. President Biden’s First 100 Days
2. Vaccine rollout
3. Fiscal stimulus in the US and Europe

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