The markets look across the valley
With three vaccines about to reach the market and the beginning of a smooth transition of the US presidency, Wall Street set new record highs last week, despite a strong resurgence in infection rates in the US.
On a weekly basis, the S&P 500 Index appreciated by 2.2% and the EuroStoxx 600 by 0.9%. The dollar and gold both weakened. The 10-year US Treasury yield remained nearly unchanged.
Hopes conquer fears
Last week was marked by a number of significant events: first, the announcement of a third vaccine. Second, the tweet of President Trump asking his administration to do what is needed for the presidential transition. And finally the first appointments of Joe Biden's future administration. News of the appointment of former Fed Chair, Janet Yellen, as Treasury Secretary, was well received by the markets.
This good news offset the alarming growth of new Covid-19 cases in the US, which bodes ill for the economic prospects in the near term.
The sector rotation continues. The small caps index (the Russell 2000) gained 4.6% over the week. This was a better performance than the Nasdaq 100 Index (+2.8%), which, unlike the Dow Jones Industrial (above 30,000 last Thursday) and the S&P500, has not hit new record highs of late.
Last Friday, Black Friday marked the start of the year-end Sales in the US. Despite the resurgence of Coronavirus cases across the pond, hopes remain high on the back of an increase in consumer savings during the health crisis. Money that people have not spent on travel and leisure could be spent on consumer goods.
Gold in decline
Since its high in early August, gold has shed 14% and is trading at less than $1800 an ounce. The precious metal was sold on hopes that the global economic recovery would continue to boost appetite for risky assets such as equities and commodities. This is reducing the need for safe havens.
Will the vaccines roll-out mean the end of gold's rally? We cannot say for certain. The key questions concerning gold are: will central banks put an end to their ultra-accommodative monetary policies? Will real rates rise again?
Vaccines may stamp out the health crisis but cannot make the negative economic fallouts vanish immediately. Bankruptcies and rising indebtedness will continue to weigh on the economy for a long time. They will force central banks to remain extremely accommodative, even with inflation remaining slightly above their 2% target, for quite a long time. Negative real rates and inflation concerns should put wind into gold's sails.
A packed week ahead
The key event is on Friday: the US jobs report should give us a rough idea of the damage to the labour market caused by the second wave of the Coronavirus. Initial jobless claims were up for the second week in a row. The impact could be quite bad insofar as a fiscal package will probably not be announced before Joe Biden's inauguration as President-elect on 20 January.
On Tuesday, the publication of the ISM Manufacturing Index (purchasing managers' index) and the ISM Services Index on Thursday could also be market movers.
On Monday and Tuesday, OPEC, Russia and the group's associate members (OPEC +) will decide whether they extend their production restrictions by 7.7 million b/d for another quarter. The price of a barrel of oil soared on the news of the imminent arrival of effective vaccines, with the Brent surpassing $48/bbl.
On Tuesday we await the inflation figures for the euro area. The economists' consensus is for a fourth month of deflation, forecasting a 0.3% fall in prices in November. This should spark a reaction from the ECB. The minutes of the last central bank meeting, published last week, comforted expectations of further monetary stimulus.
Britain's foreign minister said on Sunday evening that Brexit trade talks with the EU were in their ‘last week'. Really? Despite the progress announced, there are still a number of major disagreements, including the fishing rights in British waters. The markets have remained sceptical and the underperformance of the London stock market has been substantial. In the event of some good news on this front, the rise could be significant.