12.02.2021 - As of noon on Friday, global equities largely treaded water this week, consolidating recent gains at close to record levels. The yield on the benchmark US 10-year note rose 3 basis points from last Friday to 1.19% while the price of a barrel of West Texas Intermediate crude oil rose 1.25% to $58.05. Volatility, as measured by the Cboe Volatility Index (VIX), was unchanged from a week ago at 21.75.
MACRO NEWS
Powell suggests Fed will be sidelined for some time In an address to the Economic Club of New York, US Federal Reserve Chair Jerome Powell underlined what the central bank's new approach to setting monetary policy will be. Powell said the Fed will not consider raising rates until both "broad and inclusive" full employment and core inflation rates sustainably rise above the bank's 2% target. Markets anticipate that the Fed will allow the economy to "run hot" for a time, traditionally a supportive backdrop for many risky assets. Powell noted that the official US employment rate, 6.3%, understates the true level of unemployment, which he estimates to be closer to 10%.
Spreads tighten over prospect of Italian unity government Spreads between benchmark German 10-year bunds and same-maturity Italian BTPs fell below 90 basis points this morning as markets were cheered by news that the Five Star Movement, the largest party in Italy's Parliament, has backed the formation of a unity government headed by former European Central Bank President Mario Draghi. Draghi is expected to reveal his cabinet choices later today and to lay out his governing agenda in Parliament next week.
UK economy ends bad year on up note Amid a very difficult battle against the coronavirus, the British economy contracted 9.9% in 2020, its worst annual showing since 1709. However, the economy grew a better-than-expected 1% in Q4 despite a strict lockdown. On Friday, Bank of England Chief Economist Andy Haldane said that he expects a sharp rebound in economic activity this year as the vaccine rollout gathers pace. The economy, he opined, is like a coiled spring, ready to release enormous amounts of pent-up financial energy. Haldane observed that unlike in past recessions, many UK households had strengthened their finances during the course of the pandemic due to forced restrictions on spending. Companies, too, have amassed substantial war chests, he said, also commenting that as uncertainty over Brexit and COVID recede, and with a boost from government spending, these factors should support a solid economic rebound as early as this spring.
Biden, Xi break ice The leaders of the United States and China spoke at length by phone this week, the first such conversation since US President Joe Biden's inauguration in January. The White House says Biden, speaking to Chinese President Xi Jinping, focused on concerns about China's coercive and unfair economic practices and said the US will keep tariffs in place for now. Xi, according to China's readout of the call, dismissed out of hand US concerns over Taiwan, Hong Kong and Xinjiang. Separately, the Biden administration said it will look at adding targeted new restrictions on certain sensitive technology exports to China. Later, the US president told a bipartisan group of senators that China will "eat our lunch" unless Congress moves on a substantial infrastructure package.
QUICK HITS
COVID-19 case counts and hospitalizations continue to decline in the US, though the US Centers for Disease Control and Prevention this week warned states not to lift restrictions too quickly. So far, nearly 10% of Americans have received at least one dose of the coronavirus vaccines available. This week, the Biden administration announced it had sourced an additional 100 million vaccine doses from Pfizer and the same number from Moderna.
The monthly US budget deficit widened to an estimated $165 billion in January, compared with $33 billion in January 2020 and $144 billion in December, the Congressional Budget Office estimated this week. In the first four months of the 2021 fiscal year — which started 1 October — the federal deficit rose 90%, to $738 billion, the CBO added.
Fears of a resurgence in US inflation cooled somewhat this week after the Consumer Price Index rose 0.3% in January from December, in line with expectations, and held steady when stripping out food and energy costs.
European Commission President Ursula von der Leyen admitted this week that the European Union was slow to authorize coronavirus vaccines and was too optimistic regarding vaccine production. A slow vaccine rollout is expected to contribute to a double-dip recession in the EU as lockdowns hamper economic growth.
So far in 2021, special purpose acquisition companies (SPACs) have raised almost twice what traditional IPOs have. SPACs have issued $38.3 billion in shares versus $19.8 billion for traditional IPOs. In Europe, traditional IPOs are off to their fastest start in five years, with €8.4 billion raised year to date in 16 deals.
The European Parliament approved the European Recovery and Resilience Facility, paving the way for the dispersal of funds beginning midyear.
EARNINGS NEWS
With 74% of the constituents of the S&P 500 Index having reported for Q4 2020, blended earnings per share (which combines reported data with estimates for those that have yet to report) shows that earnings growth is running at 2.8% while sales have also risen 2.8% compared with the same quarter a year ago, according to data from FactSet Research. Bloomberg News reports that Q4 earnings are exceeding expectations by 18%.
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Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.
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