The indicators seemed to be in the green at the beginning of the year. January 6 will be remembered as the day the Capitol was invaded in Washington. But for years to come, the Georgia by-elections held on the same day will be more important.
Control of the House of Representatives, the Senate and the White House is in Democratic hands. The “blue wave” that materialised at the last minute raised hopes of new supplies of cash to boost the economy. Although the package put together by the Democrats seems unlikely to pass the Senate without adaptations.
GameStop even changes macro perceptions
At the end of the month, however, the events surrounding the irrational boom in the GameStop video game shop chain raised doubts. Will the financial support the population is receiving really serve the real economy, or rather fuel speculation in the financial markets? The interests at stake, as well as the revealed dysfunctions, could even shake the financial system.
The next episodes in this battle between small investors and hedge funds, as well as the fate of other potential targets, will probably give answers in February. It is already certain that the events surrounding the GameStop stock have gained importance far beyond the purely anecdotal.
Inflation could return faster than expected
These concerns about the misallocation of resources are reflected in some of the inflation forecasts. They are quite tangible in the evolution of the ten-year Treasury bill rate. For the first time since March 2020, the rate broke through the 1% mark, and has remained above it ever since. According to J. Safra Sarasin, the prospect of rising inflation will be a key driver of equity market performance in 2021.
The FED may even allow inflation to temporarily jump above 2% without intervening. Real rates, currently negative, are expected to rise as economies reopen after the Covid-19 confinements.
These fears are also reflected in safe havens. Some investors wary of fiat currencies have turned to Bitcoin. Highly volatile in January, it reached new all-time highs. A more traditional safe haven, gold had only targeted $2,000/ounce at the beginning of the month.
Vaccination in uncertain times
The development of the coronavirus makes the consensus timetable uncertain. The latter foresees a return to normal in the second half of 2021. The mutations of the virus are causing new lockdowns, especially in Europe, the duration of which is totally uncertain.
At the same time, vaccine deployment is proving slower than hoped. New, effective vaccines will be needed to speed up the process and achieve herd immunity in time.
Persistent gap between industry and services
In the meantime, the lockdowns foster opposite development in the PMI indices. Manufacturers confirm that they are much less affected than during the period of first sanitary measures in spring 2020.
The main Markit indices are all above 50 points, i.e. in the expansionary zone. World trade, and thus product demand, remains dynamic.
This is especially true for China, which is driving global demand. The period in which the Middle Kingdom was seen as the country most affected by Covid-19 turned out to be rather short-lived. After a return to growth as early as the second quarter of 2020, China even reported a 2.3% year-on-year increase in 2020 GDP.
In contrast, the services sector, which depends on human interaction, has a gloomier outlook once again. The same Markit PMI indices for services are all below 50 points, indicating a recession.
Consumer confidence shaken by the confinements is not helping either. If consumers remain positive, they may also shift their purchases from services to goods that are less restricted by the health measures, such as furniture or appliances. This also responds to the renewed importance of the home due to the need to spend more time there than usual.
