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Monthly Market News

Monthly Market News January 2021 - Market trends

By Johan Gallopyn - Investment Desk Analyst
The equity markets made a good start in January, but the momentum flagged as the month progressed. Sector performances also shifted in the course of the month.

Our expert, Johan Gallopyn, provides an analysis of the trends in January.

Equity market trends: early gains are lost

The equity markets were quick off the mark at the beginning of the year. Investors focussed on the potential of more fiscal support in the United States after the Democrats managed to secure a majority in the Senate, while vaccinations allowed optimism for a reopening of the economies. European equities and the Emerging markets were the main beneficiaries of this 'normalization scenario' during the first two weeks of the month. Cyclical sectors that benefit most from this scenario outperformed.
In the second half of the month, however, European stock markets performance was lacklustre due to less favourable economic figures, sharp containment measures and a hesitant start of the vaccinations. The American stock market indices - from growth stock market Nasdaq to the large Russell 3000 index -, however, reported new record levels. With the somewhat uncertain economic situation in the short term and the standstill of the upward interest trend in the US, growth equities, again, took the lead over cyclical companies.
During the last week, gains from earlier in the month were lost, with the exception of the Emerging markets. The markets became somewhat nervous after small investors had united through social media to evoke a 'Short squeeze' against large investors (such as hedge funds) that had sold certain shares without owning them. In addition to the stock price explosion of the concerned equities, the result for the broader market is that those large investors reduce their exposure to other equities in order to comply with margin calls. This may have resulted in downward pressure on equity prices for the market in general.
At the end of the month, approximately one-third of the companies of the S&P500 had published their results for the fourth quarter. In general, they were better than expected, but, on the whole, the companies were not rewarded for this with a positive price response. This may indicate that much of the good news has already been incorporated into the prices.

Bond market trends: short-lived jump in rates

In the first half of the month, the American 10-year rates exceeded 1.1% for the first time since March of last year. The rise by almost 25 bps can be attributed to an increased likeliness that new fiscal support programs may be approved by Congress in the course of the year and to comments by some Fed members. The stimulus enthusiasm dampened somewhat in the second half of the month, but the 10-year rates were able to hold above 1%. The German 10-year rates remained flat around -0.55%.
As regular as clockwork, the political instability in Italy has returned. The Conte administration fell after coalition partner Italia Viva withdrew due to a dispute about the use of funds the country is receiving from the European stimulus package. It will now be considered whether another majority may be achieved without having to call elections. The rate difference between Italian and German 10-year government bonds rose in the past few weeks with some 20 bps but fell back slightly at the end of the month.
Spreads of corporate bonds remained quite stable in January as well, both for the investment grade and for the high-yield segment. They are now at their pre corona levels of February 2020. The spreads remained narrow in the context of numerous corporate emissions.

Central banks: on hold

Central banks of the major countries held a policy meeting in the past month, but no changes to the monetary policy were announced or even suggested.
At the beginning of this year, some members of the Federal Reserve appeared to suggest that the central bank would start to reduce its asset purchases sooner than expected. Chairman Powell, however, reiterated that talks of tapering are premature and that the central bank would communicate with the markets well in advance when the time comes. The Fed will have to remain very careful with its communication in order to prevent repeating the 2013 scenario (Taper tantrum).

Currencies: limited fluctuations

The dollar strengthened somewhat in January, after the weakness of the past months. As the Democrats managed to win the (smallest possible) majority in the Senate, after all, chances of a more extensive stimulus plan were growing.
The Chinese currency continues its rise against the dollar. In the past month, the renminbi gained 1.5%, with the rise since the low at the end of May last year now exceeding 10%. The currency is supported by the strong economic figures and the possible stricter monetary policy later this year since the central bank is planning to shift its focus from supporting the economy to managing financial risks. In December, the country realized a record surplus on its trade balance.
The currencies of the Emerging markets saw a mixed month. In particular the Brazilian real and the South-African rand weakened due to unfavourable corona news and worries about the impact of the health crisis on the financial situation of both countries.

Commodities: surprise by Saudi-Arabia pushes up oil prices

The price of Brent oil rose in the beginning of the last month rather considerably to more than 55 dollars per barrel due to the unilateral decision of Saudi-Arabia to reduce the number of barrels produced by 1 million in February and March. By doing so, the country managed to convince the other OPEC+ countries not to increase production. In the light of the renewed stricter corona measures in many countries, a higher supply would have made oil prices vulnerable.
The price of gold rose briefly to 1,950 dollars per ounce at the beginning of January, due to the final surge in political tensions in the US. However, the precious metal could not maintain its performance and ultimately closed the month slightly lower.
Industrial metals were stable in January, with the exception of nickel which saw its price rise by approximately 7%. The metal continued its surge of last year, due to the expected structural increase in demand for use in electric car batteries.
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