Weekly Market Commentary (January 11– January 15)
Global Market Highlights
The major US benchmarks ended the week in negative territory, but the S&P 500 was able to hit an intraday high on Thursday. The energy sector pulled back sharply by the end of the week, but was able to lead gains within the S&P 500 index, helped by a large decline in domestic oil inventories. IT shares were also weak as payment processors underperformed and the communication services sector also declined thanks to the underperformance of the social media companies Facebook and Twitter who have banned President Donald Trump. The tense political situation was the major driver of sentiment this week and investors kept on eye on the removal of Donald Trump from the White House. Donald Trump was impeached a second time on Wednesday, the first president in history.
On Thursday, Joe Biden announced plans for a $1.9 trillion stimulus package, which surprised markets to the negative. There were also a few questions raised about this new stimulus package such as how quickly the new administration could execute on the plan and if the Republican opposition would be able to slow or reduce the size of the package.
The week also marked the unofficial start of the Q4 earnings season, as large banks reported their quarterly performance on Friday. According to statistics, analysts are expecting a 6.8% decline in overall earnings for the final quarter and for 2020, analysts are expecting a 13% drop in earnings.
The steeper decline on Friday was not only influenced by the new Biden stimulus package proposal, but retail data also showed a 0.7% decline in December, which is more than expected and marks the third consequent monthly decline. Weekly jobless claims, reported Thursday, hit 965,000, the highest level since mid-August. The manufacturing sector remained in much better shape, with industrial production surging 1.6% in December, roughly three times consensus estimates. Colder December weather and a snapback in utility demand drove part of the gains, however. The Fed Chair affirmed that the central bank has no plans to raise interest rates anytime soon and would first need to see inflation remain above 2% for some time.
For the week, markets declined as the S&P 500 index dropped 0.92%, the Dow Jones Industrial Average shed 0.91%, while the Nasdaq Composite index dropped 1.54%.
Equity markets in Europe also fell as the number of new coronavirus infections have been rising. The European Stoxx Europe 600 index ended the week 0.81% lower, the German Dax 30 index dropped 1.86%, while in the UK the FTSE 100 index shed 2%, as data suggested that the economy shrank in November.
Governments in Europe continued to put in place tighter restrictions to tackle the spread of the virus and as a new highly infectious variant of COVID-19 has emerged it is very important to limit the possibilities of the virus spreading. Italy will extend its state of emergency until the end of April and in Switzerland, they also announced tighter measures. In the Netherlands, they would extend lockdowns until February.
Europe has been the epicenter of political turmoil as Italy’s coalition government lost its parliamentary majority when three ministers from the Italia Viva party resigned. Political analysts said that if Conte cannot form a new majority coalition, a general election would ensue, barely five months after the government took office. Furthermore, the Dutch coalition government, led by Prime Minister Mark Rutte, resigned en masse ver a child-care subsidies scandal. National elections are expected to take place in March.
The German GDP contracted by 5% in 2020, which is less than originally expected, as COVID-19 restrictions curtailed activity. Recovery and a wave of stimulus measures during the year helped the economy, although growth stagnated in Q4.
Asian markets were mixed for the week as in Japan the Nikkei 225 index gained 1.4% for the week, while in China the CSI 300 large-cap index declined 1.4% and the Shanghai Composite index shed 0.6%.
At the BoJ’s quarterly meeting, Governor Kuroda told participants that the Japanese economy was improving at a moderate pace despite the recent resurgence of the virus. He said the economy was showing signs of recovery and the financial system remained stable. However, he believes that the impact of the coronavirus inside and outside of Japan demands caution. Kuroda said that he expects the central bank’s interest rate targets to remain at their current levels and that the BoJ will continue to expand policy until the consumer price index exceeds 2%. He also affirmed that the central bank would closely monitor the effects of the pandemic and would not hesitate to implement additional easing as warranted.
Loosened government lending policies and financial support during the pandemic contributed to the lowest number of Japanese corporate bankruptcies in 31 years. However, the number of small- and medium-sized business bankruptcies increased markedly, especially in the dining and tourism segments.
Chinese stocks fell as the U.S. added another nine Chinese companies to its investment blacklist on Thursday, taking the total to 44 names that the Trump administration claims have ties to China’s military. Shares of Chinese internet leaders Alibaba and Tencent were volatile on reports that they too would be added to the U.S. blacklist, though this had yet to happen by Friday. Shares of Xiaomi, a well-known domestic consumer electronics and smartphone maker, fell sharply on its unexpected addition to the list. Banks, however, rose following strong fourth-quarter earnings.
Disappointing news regarding CoronaVac, a coronavirus vaccine produced by private company Sinovac, surfaced during the week after Brazilian scientists reported that the vaccine’s efficacy rate was just over 50%, far below previously reported levels. News of the vaccine’s reduced efficacy dealt a setback to China’s biotech ambitions and Beijing’s campaign to win allies through global health diplomacy, since it will take longer to attain herd immunity in the countries that have ordered CoronaVac for their populations.