highlights
- U.S. Equities kicked off 2021 on a positive note with all major indexes finishing the week up over 1.5%.
- The Russell 2K was the standout performer gaining nearly 6% over the course of the week, following November and December’s ferocious rally in which the index gained 18% and 8.5%, respectively.
- Saudi Arabia stated they would unilaterally cut output by 1Mbpd over the next two months in order to help support oil prices.
- Non-farm payrolls fell 140K in December with weakness in the leisure and hospitality services.
- Many of the FAANG names ended lower on Monday after underperforming last week amid “censorship” announcements.
- The Euro STOXX index gained 2.8% last week as investors looked beyond lockdowns and focused on the recovery. The CAC 40 Index gained 2.8%, while the DAX index advanced 2.4% and the Amsterdam Exchange was up 3.3%.
- China issued a new regulation lifting the need for Chinese companies to comply with foreign authorities. Parties who believe they have been harmed by a company or a person’s compliance with a foreign sanction will be able to file lawsuits in China. The Shanghai Composite Index gained 2.8% last week.
- In Japan, Prime Minister Yoshihide Suga, declared a state of emergency in Tokyo and surrounding areas amid rising COVID-19 cases. Restaurants and bars will close at 8:00 pm, and all residents will be requested to stay home after that time. The Nikkei 225 was up 2.5% last week.
- Last week, Brazilian stocks reached all-time high, boosted by higher commodity prices, a weak dollar and a low interest rate environment. The Brazil Ibovespa Index surged 5.1%.
LAST WEEK
U.S. Equities kicked off 2021 on a positive note with all major indexes finishing the week up over 1.5%. The Russell 2K was the standout performer gaining nearly 6% over the course of the week, following November and December’s ferocious rally in which the index gained 18% and 8.5%, respectively. Crude gained nearly 8% after a surprise announcement from Saudi Arabia stated they would unilaterally cut output by 1Mbpd over the next two months in order to help support oil prices in the face of the continued weak demand. Yields rose across the curve as the 10-year U.S. note pushed above 1% for the first time since March (it ended the week at ~1.13%).
GEORGIA SENATE RACE
Price action throughout the week seemed to follow the bull narrative (more details below) and looked to be underpinned by the political developments in Georgia, where two Democratic Senators came out victorious, bringing the Senate to a 50-50 tie (Vice President Elect Kamala Harris will be the tie breaker). Following the victories in Georgia, expectations for increased stimulus and government spending ramped up in the near-term while infrastructure spending is anticipated further down the line.
SECTOR PERFORMANCE
Value and cyclical names outperformed on the most recent bout of fiscal stimulus hopes. Energy was the best performing sector (on an output cut from Saudi Arabia) on the week followed by Materials, Financials, Consumer Discretionary and Healthcare, all which outperformed. Materials were supported by strength in industrial metals following the narrow Democratic runoff victories in Georgia. Financials were a standout following an increase in yields as banks helped buoy the group with the Bank (BKX) index closing up just under 9%.
VACCINE ROLLOUT & ECONOMIC DATA
Another major story throughout the week surrounded the worsening COVID-19 trends and the much slower-than-anticipated rollout of the vaccine. While the vaccine distribution is well behind schedule due to a number of factors, Dr. Fauci said while this is initially disappointing, the administering of the vaccine is expected to gain traction and could be on schedule in the next week or two.
With the worsening Coronavirus trends, Non-farm payrolls saw their first decline since April. Non-farm payrolls fell 140K in December, worse than consensus expectations, which called for an increase of anywhere from 50K-100K. December’s miss was largely attributed to weak job numbers in the leisure and hospitality services, which has been one of the industries hit hardest by COVID-19 virus.
DYNAMICS THROUGHOUT THE WEEK
There were a few interesting dynamics seen throughout the week which included:
- SMID caps outperforming other indices by roughly 400 bps from Monday’s lows
- Volatility was the best performing factor, measured in 1-month, 3-month, or 1-year intervals, largely due to outperformance of midcap Healthcare.
- Overall market volumes were outsized, each day’s volumes were well above what we have averaged sing early Corona-volatility, and double what we saw in the first week of 2020.
- Off exchange, trading surged to roughly 48% of all trading versus 43% in 2020.
- In general, many institutional managers were still adding risk, and long-only managers remained focused on value-driven names.
THIS WEEK
Domestic equities finished lower to start the week after U.S. indices posted solid gains for first week of 2021. Consumer Discretionary and Communication services, such as social media, were among the big underperformers in the session. Treasuries were mainly weaker following last week’s steepening that pushed 10Y yields past the 1% mark. Gold finished up 0.8% after declining 2.54% last week. Many of the FAANG names ended lower on Monday after underperforming last week amid “censorship” announcements by Twitter regarding President Trump’s, Amazon, Apple, and Google. Google suspended Parler from their App store and web hosting services.
BULL NARRATIVE OR BEAR NARRATIVE
There was no single catalyst behind Monday’s weakness, but concerns surrounding stretched valuations picked up steam following the continued rally. Market bulls continue to point to:
- Vaccine optimism
- Central Bank liquidity
- Fiscal stimulus
- Positive expectations for economic and earnings growth
- Persistence of the FOMO theme
On the other side of the table, the bear market narrative argument hinges on:
- Valuation concerns which have been exacerbated by upward pressure on yields
- Hurdles and logistical problems faced with the vaccine rollout
- Worsening Coronavirus trends
- The potential for tax/regulatory worries regarding Biden legislative agenda (although this remains a fairly low probability)
- Caution about timing of eventual Fed tapering despite Fed officials reiterating their willingness to support markets for however long is needed
POLITICAL HEADLINES
The weekend did not lack political headlines and mainly focused on Democratic calls for Trump to be removed from office or face a second impeachment. New articles of impeachment were introduced into the House on Monday with House Speaker Nancy Pelosi saying she would proceed if Vice President Pence does not invoke the 25thamendment process to remove President Trump from office. It is highly unlikely that he will invoke the 25th amendment, and the articles of impeachment seem to have little meaning behind them with just eight days before President- elect Joe Biden will be sworn in to office. The footage and actions seen last week have largely been ignored by Wall Street, and instead, investors appear to be focusing on Biden’s fiscal stimulus plan which is set to be introduced on Thursday.
THIS WEEK INTERNATIONAL
Last week, global equities gained 2.6% as the weaker Dollar drove expectations for a global recovery. Value stocks led the rally with Energy up 8.1%, Materials up 6.5%, and Financials up 3.9%. The service sector slightly weakened in December due to restrictions and lockdown measures. The JPMorgan Global Services PMI remained above 50.0 in December, marking it the sixth consecutive month. The CEO confidence index improved to the highest level since March 2020. There are pockets of the market where valuations are stretched, but for now, the music keeps playing.
EUROPE
The Euro STOXX index gained 2.8% last week as investors looked beyond lockdowns and focused on the recovery. The CAC 40 Index gained 2.8%, while the DAX index advanced 2.4%, and the Amsterdam Exchange was up 3.3%. The European Central Bank (ECB) policy makers will meet on January 21st to set the tone for the annual monetary policy.
In the United Kingdom (UK), Bank of England Governor Andrew Bailey, said that while he remains neutral on the Brexit decision, the trade deal negotiated could cost the UK as much as 4% of economic output in the long term. The FTSE 100 gained 6.3% last week.
The UK’s Financial Conduct Authority (FCA) warned cryptocurrency investors that they should be “prepared to lose all their money” due to the speculative nature of the investment. The statement threw cold water on cryptocurrencies, as Bitcoin fell as much as 21% over Sunday and Monday. UK’s finance ministry opened a consultation on regulating crypto and stablecoins.
In Switzerland, the Swiss National Bank (SNB) posted $24 Billion profit from foreign currencies and gold investments last year. The SNB was very active as it acquired foreign currencies worth more than 100 billion francs in the first three quarters of 2020. Last month, the United States added Switzerland to its list of currency manipulators. SNB officials said they will continue their interventions in the currency market to prevent unwanted appreciation of the Swiss Franc. The Swiss Market Index gained 0.8% last week, led by financials.
APAC
China issued a new regulation lifting the need for Chinese companies to comply with foreign authorities. Consequently, parties who believe they have been harmed by a company or a person’s compliance with a foreign sanction will be able to file lawsuits in China. The rule was issued after rumors of the delisting of some Chinese companies from U.S. exchanges erased billions of dollar of market capitalization. The Shanghai Composite Index gained 2.8% last week.
In Japan, Prime Minister Yoshihide Suga, declared a state of emergency in Tokyo and surrounding areas amid rising COVID-19 cases. Restaurants and bars will close at 8:00 pm, and all residents will be requested to stay home after that time. The government also plans to slash the number of commuters by 70% by promoting remote work. These new restrictions will possibly offset the benefits of the ongoing fiscal stimulus program. Some economists currently forecast an economic contraction in the first quarter given real household spending is slowing down, disposable income is diminishing and new lockdowns were imposed. The Nikkei 225 was up 2.5% last week.
EMERGING MARKETS
Last week, Brazilian stocks reached all-time highs, boosted by higher commodity prices, a weak dollar, and a low interest rate environment. Emerging market ETFs inflows contributed to the momentum, as valuations in the category attracted value investors. Brazilian President, Jair Bolsonaro, expressed his skepticism regarding the vaccine and said his administration would not make it mandatory. He said, “It’s nonsensical, these are experimental vaccines with no scientific evidence. You can’t impose this on people”. Brazil now registers over 8.1 million cases and 203,100 deaths. The Brazil Ibovespa Index surged 5.1% last week.
In Colombia, the Mayor of Bogota, Claudia Lopez, issued a lockdown order for all but essential workers to relieve the health care system that is currently overwhelmed. She said “it’s hard to start the year with these measures, but it depends on everyone that we get through the second wave quickly.” Colombia has the second highest number of COVID-19 cases in Latin America, behind Brazil, with over 1.7 million cases. The pandemic plunged Colombia in a deep recession that prompted the government to borrow funds to support the economy. Bloomberg reported that last month, Colombia drew down $5.4 billion from its flexible credit line with the International Monetary Fund. Colombian stocks rose 1.1% last week.
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