In the weeks ahead, sentiment towards stocks will likely remain positive, especially in Europe. With a Brexit deal secured and COVID vaccines being rolled out (with relative success in the UK), investors are likely to look through the short-term economic risks arising from the current lockdowns. In fact, there was a bit of good news for a change as the number of people catching the virus fell in the UK, albeit from exceptionally high levels. The so-called R rate was estimated to be between 0.8 and 1 on Friday, meaning the outbreak is now shrinking if the official estimates are correct. But there is still a long way to go. Lockdowns are unlikely to end until deaths start falling and in any case until more people are vaccinated, especially in the high-risk category. This will probably keep the upside limited for risk assets.
3 factors to watch in the week ahead:
- Corporate earnings – especially from tech giants
- Macro data
- Bond yields
Keep an eye on bond yields
There has been a subtle upwards shift in benchmark 10-year government bond yields since the start of the year. Specifically, it has been the European yields starting to catch up after yields in US, Australia and New Zealand had all started to perk up from around November.
The rising yields in Europe suggest bond market investors are no longer expecting any further stimulus from the European Central Bank. This makes some sense as the ongoing vaccine rollout means the pandemic and lockdowns can, hopefully, be declared over at some point later this year. We have also secured a Brexit deal while a massive European Union fiscal package is forthcoming. The need for the ECB to continue offering as much support is thus diminishing. This should mean higher yields from here.
For investors, the key concern – for the lack of a better word – is that the ECB’s slower pace of purchases of government debt, potentially causing yields to rise further, may put upward pressure on the euro. This, in turn, could weigh on inflationary pressures and hurt Eurozone exports.
However, to suggest bond yields will stage a sharp rally – or bond prices will sell-off sharply – is very premature. While yields can stabilise further, it is worth remembering that they sit near historically low levels and central banks will be keen to keep them low for a long time to come.
In other words, conditions remain ripe for equities to continue outperforming, especially if the rollout of vaccines, or removal of the lockdowns, happen faster than expected. For FX investors, the positive signals from the equity market will likely keep haven currencies depressed, allowing the likes of the euro and pound to following the commodity dollars higher.
Corporate earnings galore
There will be plenty of fourth quarter corporate earnings results to keep stock market investors busy in the week ahead. Among others, we will hear from big tech giants Microsoft, Apple and Tesla, as well consumer stocks, providing us invaluable insights about the health of consumer and business spending.
Here are the earnings highlights for the week ahead:
- Tuesday: AMD, Microsoft, Starbucks, Johnson and Johnson and GE, among others
- Wednesday: Apple, Tesla, Facebook, Boeing and Sina Corp
- Thursday: Visa, Mastercard, McDonalds and American Airlines
- Friday: Chevron and Caterpillar
Economic data highlights
While the earnings calendar is quite busy, there is not a lot on the agenda for macro investors. Still, there are a handful of macro pointers to keep a close eye on. Here are the highlights:
- Monday: German ifo Business Climate
- Tuesday: UK Claimant Count Change and Average Earnings Index
- Wednesday: German GfK Consumer Climate and FOMC statement and press conference
- Thursday: US Advance GDP (first estimate), unemployment claims and New Home Sales
- Friday: Flash GDP estimates from France and Spain; German unemployment; US personal spending and income
South African Markets In focus
By Kearabilwe Nonyana
In these unprecedented times it seems like there are parallels to lived reality and the reality in financial asset pricing. The market is in such robust health that if you had to speak to a technocrat and explain all the risk factors both real and perceived he would be shocked at the hefty valuations that risk assets are at. With this backdrop it was an eventful week filled with global and local data points and global geopolitical events which have propelled markets to record highs. The local JSE was filled with a plethora of trading updates as well as earnings results which were so great that it boggles the mind how business leaders are navigating the difficult times we face under this extended lockdown. The JSE benchmark TOP 40 index is set to end the week on a positive note nearing its all-time highs.
The Week Ahead
The local Market will be influenced by international economic news. The market over the last couple of weeks has continually overlooked the effects of the extended lockdown, rising Corona virus cases and reduced economic activity. The Market has continued to be buoyed higher by international promises of fiscal stimulus. I anticipate that this will continue in the coming week. What will be at the forefront of market participants will be the FOMC meeting where the US interest rates will be decided. I believe the Fed will not move on interest rates until they are satisfied that the labour market is robust. They have signalled that they are not perturbed by higher-than-normal inflation if there is significant recovery in the labour market as well as economic growth. I anticipate the market to retest the upper level of the resistance it has formed at the highs but trade sideways depending on the economic data which is due during the week.
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