Markets began the new year in a buoyant mood, continuing the strong trends that characterised the end of last year. Even though equities and currencies ended with some profit-taking, the week overall saw relatively strong gains, underpinned by renewed optimism about the outlook for 2021 amid a rollout in coronavirus vaccines and the prospect of greater political stability.
Among other markets, oil prices climbed during the week following the Opec meeting, which saw Saudi Arabia make voluntary additional cuts of 1 million barrels per day, while cryptocurrencies also continued their recent stellar rise with Bitcoin breaching $40,000.
Eyes were fixed mostly on Washington and the Senate race in Georgia, where the Democrats’ victory gave them control of Congress, raising expectations of even more fiscal spending on top of the $900 billion agreed earlier by lawmakers. This, combined with the ongoing rollout of Covid-19 vaccines, supported market expectations of a boost in growth, especially over the second half of the year. This reflation trade also added to rising inflation expectations that pushed bond yields higher.
These themes were little affected by the violent clashes in Washington last week, with investors focusing on the bigger picture. In fact, Donald Trump conceding the US presidential election and promising a peaceful handover of power may have reinforced the overall positive mood.
To some extent, markets also ignored the US jobs figures for December, which disappointed expectations with a 140,000 fall in non-farm payroll employment, compared with an expected rise of around 70,000. This was the first decline since April, although the unemployment rate remained steady at 6.7 per cent. With average hourly earnings rising by a higher-than-expected 0.8 per cent, this took the yearly rate up to 5.1 per cent from 4.4 per cent previously, and perhaps encouraged those looking for inflation to make a return.
The UK also continues to be in particular focus following the Brexit deal that was achieved at the end of last year, and sterling has held up well at least initially in the aftermath of that deal. There were no significant border disruptions in the first effective week of Brexit, although there have been warnings from UK government ministers that these could start to be seen in coming weeks once business starts to pick up after the new year.
While uncertainty about trade in goods has been largely resolved, there are still questions regarding services, which constitute a much bigger part of the UK economy. One interesting development in financial services last week was the news that the UK will launch legislation to bring back trading in Swiss shares on to the London Stock Exchange, having lost the ability to trade European Union shares due to Brexit.
While the EU is holding out for the UK to make its regulatory standards “equivalent” to EU standards, this latest step suggests that the UK is far from willing to fall into line with the EU and will seek opportunities elsewhere in the world rather than become a “rule-taker” in financial services from Brussels.
These are issues for the future, however, and the race to beat the coronavirus is the more immediate concern. The UK has stolen a march on other European countries when it comes to starting a vaccination programme, aiming to have nearly 25 per cent of the UK population vaccinated by mid-February, including all of the most at-risk groups. In contrast, many EU countries have been slow to get their programmes under way, creating impatience among populations about governments' responses.
Should this divergence continue being seen, it may start to show up in forecasts for growth this year, which, in turn, could be reflected across currency markets. This could see sterling rallying further, especially if the Brexit risk premium continues to unwind. If the reflation trade in the US continues, which seems likely, this should keep the dollar under some strain –and lead to a tussle between the euro and the pound over who wins out.
Tim Fox is a prominent regional economist and financial markets analyst, and an adviser to Switzerland-based St Gotthard Fund Management