Optimism remains despite COVID-19 surge
Earnings season is under way and will become an increasing focus in the coming weeks. New variants of COVID-19 are causing major surges across many countries which is forcing more severe and extended restrictions. Economies are coping well under the circumstances but will come under much more strain in the months ahead.
US
The US is still seeing disturbing news on the COVID front and the economy is starting to show further signs of weakness from the third coronavirus wave. Too many parts of the country are low on ICU beds and concerns are that the slow vaccine rollout will mean lockdown efforts may intensify in the coming weeks.
The Markit flash PMI readings are expected to show softness in both the manufacturing and service sectors. Initial jobless claims are clearly trending higher and could top a million this week. The housing market will remain the bright spot of the economy but both housing starts and existing home sales will show some seasonality weakness.
Risk appetite may also get some strong cues from this earnings season. Corporate America got a pass last year, but companies may be punished for failing to provide some guidance. Big earnings results will come from Netflix (NASDAQ:NFLX), Intel (NASDAQ:INTC), Goldman Sachs (NYSE:GS), Bank of America (NYSE:BAC), Alcoa (NYSE:AA), and IBM (NYSE:IBM).
US Politics
Joe Biden becomes the 46th President of the United States, and Kamala Harris is sworn in as vice president. Biden outlined a $1.9 trillion proposal for COVID relief package that he will try to push quickly through Congress. Biden wants to get his cabinet quickly approved by the Senate, but some time will need to be dedicated to the impeachment trial of former-President Trump.
EU
The EU is facing stricter lockdowns as the virus continues to rapidly spread across many countries. New variants that have accelerated the spread elsewhere are likely to exacerbate the problem which will likely lead to restrictions being tightened and prolonged.
While COVID-19 represents a significant threat to the economy in the first quarter, the ECB is unlikely to act, especially next week, having announced a raft of stimulus measures last month. This could make it a slightly low-key event, although investors will be looking for hints about what’s to come in the months ahead, given the threat of the new strains. Expect the usual ready and willing rhetoric.
UK
The economy coped much better with the November lockdown than it did in April/May last year and compared to expectations. The current lockdown is more strict again so will likely take a heavier toll but with vaccines rapidly being rolled out, restrictions are expected to ease significantly early in the second quarter which should support the recovery.
Next week brings retail sales and PMI data later in the week, with the highlight probably being BoE Governor Andrew Bailey’s appearance on Thursday. Bailey recent hinted that negative rates are being discussed but not on the horizon.
Turkey
The lira remains relatively stable against the US dollar this month after making up plenty of lost ground since the middle of November. High inflation remains a problem for Turkey but the central bank has shown a willingness under new leadership to raise rates in order to fight it. They may need to do so again should inflation remain stubbornly high.
China
China 1 and 5-year Loan Prime Rates decisions on Wednesday. They will be unchanged and any change would be a huge shock.
The PBOC is showing signs that it is becoming less tolerant of Yuan appreciation, based on this week’s CNY fixes. A US Dollar rally due to higher US yields could see a major squeeze of long CNY, long Asian currency positions continue into early February.
New Zealand
Inflation data Friday expected to fall. Only a rise above 1.50% would impact the Kiwi or local stocks negatively. Currency may correct lower if US yields continue rising next week.
Australia
COVID-19 fears have receded as an outbreak in NSW brought under control and Brisbane and Victoria State report no new cases.
Data highlight is employment on Thursday. The rate of growth is expected to slow to 50k from 85k. Volatile data with only a fall into negative territory scaring the AUD and Australian equities.
AUD/USD has broken its uptrend and further hikes in the US 10-year next week could see AUD/USD long positioning get severely squeezed.
Japan
Japan mulls expanding COVID-19 state of emergency nationally. Equities have shrugged this off as Japan’s definition of state of emergency is very much a lock-down light. We do not expect that sentiment to change markedly next week.
Heavy data week featuring Industrial Production, PMI’s and Balance of Trade. All are expected to show a slowdown as the knock-on effects of US and European market restrictions seep into the data. Low market impact. Bank of Japan rate decision Thursday expected to be unchanged at -0.10% with no change to QE. A change to yield curve control would see yen rally but is a miniscule probability.
A further move higher in the US 10-year next week could see a test of long-term resistance at 104.50 tested.