Markets kick off 2021 with a bang

Happy New Year!

After contemplating on what might be next for the markets during the holiday period, stock market investors are apparently in the same bullish mood as they were before despite growing concerns over valuations and the economy. The disconnect between economic reality and the markets have thus broadened, all thanks to cheap central bank and government money flooding the financial markets.

In 2020, risk assets rallied sharply following the initial lockdowns in March, as governments and central banks unleased record stimulus packages and other measures to support the recovery. Investors shrugged off further rounds of the virus resurgence and lockdowns and looked forward to more normal times ahead amid widespread vaccine distribution.

At the start of this year, it looks like investors are once again ignoring the rapid upsurge in COVID cases, especially given the lack of any other bearish news flow. So, stock prices continue to be bid.

Along with stocks, gold and silver have also started the new year with a bang as the dollar has extended its falls. The ongoing risk-rally means investors are continuing to swap their dollars for more risk sensitive currencies such as commodity dollars and emerging market currencies. As a result, the dollar index has fallen to levels not seen early 2018. This in turn, has helped to push prices of buck-denominated precious metals even higher.

In FX, the focus will be on the pound as the UK starts life outside of the EU. The pound has started the first day of the year in a cautious mood, rising only slightly against the dollar and falling against the euro. The latest lockdowns have dampened investor enthusiasm towards the pound, especially as PM Boris Johnson has warned of “tougher” new measures to control COVID surge across the UK. But I reckon the currency is still likely to rise further over time, as investors continue to price out the risks of a no-deal Brexit. As a minimum, I think 1.4000 is where the GBP/USD could easily rise to before we see any real troubles.


Source: ThinkMarkets and TradingView.com