Markets Dec 27

Markets this week: Volatile end to historic year but optimism swirls

Trial results of several vaccine that promise an end to the pandemic could trigger a rally in virus-impacted stocks in the week ahead although the January-5 runoff races in Georgia, US, would keep markets volatile till the year-end

Markets this week: Volatile end to historic year but optimism swirls
In response to the arrival of Covid vaccines, equity gauges are close to all-time highs, and the stocks of companies in industries most impacted by virus restrictions have been rallying in anticipation of a return to normal. Photo: Reuters

(ATF) Economic events

Financial markets will remain volatile in the final week of 2020 as the pandemic waxes and wanes with the progress of the numerous vaccine candidates offering investors hope for the New Year.

“Welcome news on COVID-19 vaccines arrived near the end of a difficult and volatile 2020. Trial results of several vaccine candidates suggest greater than 90% effectiveness, promising an eventual end to a global pandemic that has disrupted the lives of so many of us,” said JP Morgan Private Bank in a report.

In response, many equity gauges are close to all-time highs, and the stocks of companies in industries most impacted by virus restrictions have been rallying in anticipation of the benefits that a return to normal will bring. And despite stratospheric price-earnings multiples, the rally is seen extending its run.

“Yes, equity valuations are high, but we believe high valuations are deserved. They may even be the new normal as long as global central banks stay accommodative and long-term interest rates remain near secular lows. We think both are good bets over the medium term. We believe stocks are likely to generally outperform fixed income and cash in 2021,” said the report.

The data calendar is scant although Sunday’s release from China showed the world’s second largest economy remains buoyant with its recovery momentum intact. It reported industrial firms’ profits grew robustly in November for a seventh month of gains in the only major economy in the world to report positive growth in 2020. This is leading many to predict it would overtake the United States as the world’s biggest economy faster than expected. China, the world’s second largest economy, is now forecast to overtake the US by 2028, five years earlier than expected earlier.

US politics has not faded from investors’ horizon with much at stake at the January 5 runoff races in Georgia that will determine whether Republicans maintain control of the Senate.

“A possibly better scenario for stimulus would be if the Dems took control of the Senate after the January 6th run-offs in Georgia. If so, then we might see an interim measure followed by a much larger stimulus package after inauguration day on January 20th when Biden takes the keys after better-than-expected PMI data,” said Derek Holt Vice-President, Scotiabank Economics.

Fund flow

The latest fund flow data showed the spread between inflows into risky and safe assets has been in positive territory for one of the longest periods since 2017.

“Investors continued to rush into global equities aggressively while gradually withdrawing from Money market funds after a long period of positioning,” said Jefferies & Co. strategists in a note.

“Meanwhile recent inflows into Corporate bonds and Commodities have slowed down as investors have already accumulated a strong position over the past 12M. Govt bonds continued to see a moderate addition.”

But analysts reckon that the liquidation from US MMFs, which fuelled the post-US elections rally, has not fully unwound the more than one trillion and a half dollar inflows seen between March to mid-May, and that the ongoing decline in 90-day treasury yields suggests that the short end of the US yield curve is awash with money. These indicators flashed more gains ahead for markets.

“2021 political and economic calendar is conspicuously quiet of major events. A glance through the 2021 calendar shows just as many headline sporting competitions as politic events! Notwithstanding Covid-19’s impact on the global economy, investors will be relieved in having a clear field of view without any election distractions,” the Jefferies note said.

Economic data calendar

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