- Joe Biden has been sworn in as the 46th president and wasted no time in unveiling his spending plans.
- Stocks hit record highs thanks to the prospect of $1.9 trillion in stimulus, but bitcoin has tumbled.
- Investors will get a first look at 4th quarter US GDP and the Federal Reserve meets for the first time in 2021.
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Here are the big themes we’re looking at in the coming week, plus a chart of Big Tech performance around the world.
Joe Biden takes office with a $1.9-trillion bang
With Wednesday’s swearing-in, Biden becomes the 46th president of the United States and has not delayed kicking off his agenda. His proposed $1.9 trillion stimulus package was enough to coax more all-time highs from the global equity markets, with records in the S&P 500, the MSCI Asia ex-Japan index and Europe’s STOXX 600 close to where it was when the pandemic hit last year, despite an alarming rise in cases of COVID-19 and new lockdowns.
Janet Yellen, Biden’s pick for treasury secretary, is urging the incoming government to spend big and worry about all the debt that will inevitably create later.
How much the final package is, how those proceeds will be distributed, and what direct impact that will have on growth all remain to be seen. It’s enough, however, for the stock market to be looking past inconvenient economic truths like nearly one million Americans still filing for unemployment benefits a week. A number of other indicators have shown there is resilience to the recovery, with housing starts hitting 14-year highs and manufacturing activity in the mid-Atlantic region picking up to three-month highs.
How did the US economy finish 2020?
This coming week, the markets will get the first look at US economic growth in the turbulent fourth quarter of 2020. After having contracted by a record 31% in the second quarter, when coronavirus lockdowns were at their harshest, the economy has since largely bounced back. At the last count, it was still 3.5% smaller than it was before the pandemic struck. The forecast is for growth of 4.4%.
The data won’t reflect the impact of the $892 billion aid package that was agreed in late December after months of torturous stand-off in Washington DC. But the prospect of Biden’s $1.9 trillion bazooka has given Wall Street’s big banks cause for optimism. Goldman Sachs raised its forecast for 2021 growth to 6.6% from 6.4% previously, while JPMorgan’s chief global strategist David Kelly believes nominal GDP could expand by 11.4% year-on-year by the end of December.
“Extended, expanded and enhanced unemployment benefits through September should significantly reduce poverty until the pandemic winds down,” Kelly said.
Bitcoin gets the blues
It was a bad week for bitcoin bulls last week. The price fell by 12%, marking its biggest one-week fall since late August. It’s still up nearly 270% in the last 12 months, so it’s not all doom and gloom. But the chorus of voices of those calling for greater scrutiny of cryptocurrencies generally is growing. This past week, Yellen said bitcoin and its ilk were “mainly” used in illegal financing and should be “curtailed.”
“Cryptocurrencies are a particular concern. I think many are used – at least in a transaction sense – mainly for illicit financing,” she said.
Bitcoin is the most crowded trade at the moment, according to a recent survey of asset managers by Bank of America, and it feels like the most likely direction for the price is lower in the coming week.
“I expect the need to see a further pullback before we see significant bullish momentum build, which would then be a good time for new buyers to enter the market and push prices higher again,” DailyFX analyst Daniela Sabin Hathorn said.
Ditch the dollar and buy everything (and anything)
With another almost $2 trillion in stimulus coming that will boost growth and help keep borrowing rates low, the dollar can’t cut a break. Money managers are sitting on top of their biggest short position in almost a decade and even with the back-up in 10-year Treasury yields above 1.1%, risk appetite and Biden-based euphoria are running high and investors are back to the “buy everything” trade, largely at the dollar’s expense.
Junk bond yields have hit record lows, a basket of unprofitable tech companies has gone parabolic and the sovereign debt of Italy – where the government has just narrowly avoided total meltdown – is more expensive than that of the US. The dollar index is around its highest in six weeks, but just two weeks ago, it was at its lowest since early 2018 and the bears are firmly in control right now.
Can the Fed taper the tantrum?
With the prospect of swifter economic recovery, comes a rise in Treasury yields that for many is reminiscent of 2013’s “Taper Tantrum” – the sharp spike higher in yields that ensued after the Fed indicated it would start to wind down its asset-purchasing program that started with the great financial crisis of 2008/2009.
The Fed’s roster of officials are in pre-meeting blackout until the first monetary policy meeting of the year takes place on Wednesday, followed by a press conference hosted by chair Jerome Powell. But a host of central bankers, including Fed board members Lael Brainard and Richard Clarida, have signaled the Fed isn’t in any rush to wind down its current program, under which it buys $120 billion a month in Treasuries and mortgage-backed securities.
“Market anticipation of Fed tapering picked up sharply in early 2021, but we think a reduced pace of asset purchases could still be a year away, depending on the evolution of US growth and inflation. This likely means no taper announcement before 2H at the earliest,” Bank of America rate strategists Ben Randol and Ralph Axel Bofa said in a note last week.
Chart of the Week – There’s more to Big Tech than FAANGs
Big Tech is all the rage. The Apples, Amazons, Teslas, and Microsofts are among the best-performing stocks, not just of 2020, but of the past few years. However, valuations are high and the FAANGs aren’t the only way for investors to sink their teeth into this sector. Asia’s tech giants perform just as strongly and, with valuations that are almost half those of their New York-listed counterparts, are far less pricey.
Next week’s events:
January 26 Microsoft, J&J, Visa, LVMH, NextEra, Starbucks, 3M
January 27 Apple, Tesla, Facebook, Boeing
January 28 McDonald’s
January 29 Caterpillar
January 26 UK employment
January 27 Federal Reserve rate decision and press conference
January 28 Euro zone consumer confidence; US GDP – Q4 advanced
January 29 US core PCE