A negative tone is still lingering in the markets following a sour end to the week, which saw a commodity sell-off and equity jitters on account of excess speculation, political tensions as the US heads into the US Presidential inauguration, and lockdown blues with the potential for harsher measures on the horizon. The big question is whether this is a natural pause in a relatively stable market, or a sign of structural concerns and a faltering recovery. 

While it seems most of the mainstream media has firmly sided with Joe Biden, a small fringe of Trump supporters are expected to display outrage during this Wednesday’s Presidential inauguration. At all costs, the incoming administration wants to avoid a repeat of the storming of the Capitol, which saw six people die and has widely impacted the credibility of the US political system. The National Guard has been called out in 50 states in preparation for the worst, as markets continue to watch with bated breath for the next milestone in this transition of power.

The outgoing administration is doing more than whipping protesters into a frenzy and perpetuating conspiracy theories. The outgoing President and his team are trying to create indelible marks in domestic and foreign policy that the subsequent administrations will have a hard time reversing. It should come as no surprise, given the unconventional and hurried appointment of Amy Coney Barrett to fill the late Ruth Bader Ginsberg’s seat on the Supreme Court. That was, however, more a breach of procedural courtesy, rather than an outright reversal of behavioural norms. In the lame duck phase of Trump’s presidency, he should be making no proactive actions in respect of the incoming administration, but quite the opposite is happening. Current Secretary of State, Mike Pompeo, and the Trump team have been escalating the political battle against China and Cuba in the closing days of their reign, setting many people on edge.

Bottom line: Aside from trepidations over Trump’s White House exit, some market signs have pointed towards uncertainty of asset valuations. When successful vaccines were announced late last year, the market started pricing a return of normality in 2021, but some of those assumptions may have been a bit too optimistic. Brent Crude is nearly at the pre-Covid territories of February 2020, following a strong appreciation in the last six weeks of the year. Bear in mind, this elevation in expectations is coming at a time when the western world has been in lockdown for nearly a year, and restrictions are only getting stricter in this last vaccination phase. The counterfactual argument may point towards ultra-loose monetary policy and numerous national stimulus efforts, but fiscal policy was late to the party well before the coronavirus arrived. Markets are right to pause for some due consideration. Most probably, once a smooth transition takes place this week (touch wood), the period of self-reflection will end and sooner than it should. 

The week ahead

GBP

Sterling continued to nudge higher last week, weathering the storm of Dollar strength. It’s expected GBP could continue on this path higher after some highly anticipated targets set by the UK’s Covid-19 vaccination plan were laid out. However, negative interest rates have also been in the spotlight after Bank of England Monetary Policy Committee member, Silvana Tenreyro suggested negative rates were a viable tool. Central bank Governor, Andrew Bailey has also made it clear that he expects GDP growth to be weaker than November forecasts because of weak mobility indicators. In the short-term, market sentiment will likely remain the key driver of the currency. When UK Consumer Price Inflation and Purchasing Managers’ Index stats are released later this week, the focus could shift towards post-Brexit manufacturing sentiment. Meanwhile, the services sector seems likely to remain in contractionary territory because of the national lockdown.

• CPI data will print on Wednesday with forecasts for a 0.5% reading, up from the 0.3% figure released in December on the back of the UK’s November lockdown.
• Friday’s Manufacturing PMI is expected to come in at 53.1, down from the previous month’s 57.5 but still remaining in expansionary territory. Meanwhile, the Services PMI is forecast to fall further to 45.5 from 49.4, unsurprising given the third UK national lockdown is in full swing.

EUR

The Euro fell lower at the end of last week as risk aversion crept into trading; a combination of US Dollar strength and a Euro sell-off nudged the EUR/USD pair lower. Shipment delays of the Covid-19 vaccine, Italy extending its lockdown until the end of March, and Germany considering tighter restrictions are all events which are putting pressure on the common currency. Considering the Italian government coalition appears to teeter on the verge of collapse, there could easily be a move lower in the coming weeks.

• Wednesday’s European Central Bank monetary policy statement and follow-up press conference are both events which could impact intraday trading for the common currency.
• On Friday, both Germany and France will release Manufacturing PMIs, with Germany expected to show 57.3 in January compared to December’s 58.3. While France’s manufacturing PMI is forecast to print at 50.3 compared with 51.1 from the previous release. The German Services PMI is anticipated to fall to 45.1 in January down from last month’s 47.0, while France’s reading is forecast to hold steady at 49.1, unchanged from the previous reading.

USD

The US Dollar Index rallied more than 0.6% last week, a second weekly advance, which suggests a move to risk-off assets. Joe Biden will be sworn in as the 46^th President, and sentiment towards fiscal policy will likely grow brighter. However, the new President will face a huge task to roll out vaccinations across the US, where demand is far outstripping supply in the current conditions. There are several announcements this week in addition to the highly-anticipated inauguration, including unemployment claims and both Manufacturing and Services PMIs which promise a slowing in domestic activity.

• Initial Jobless Claims are due for release on Thursday for the week through 16^th January, with projection of a 832k reading, down from 965k, indicating stable employment growth.
• Friday’s Manufacturing PMI’s are forecast to be 56.6 in January, down from 57.1 in December, although still residing in growth territory. While the Services PMI is also projected to fall to 53.7 from 54.8, again, still in expansion territory.

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