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Welcome to 2021!
Into the 1st week of trading of the new year, politics will be in focus: markets will be waiting for the Georgia election results (Tuesday) which will decide the fate of the US Senate. Consensus is for a Republican controlled Senate. A Democratic sweep would reduce political uncertainty, but would also mean higher corporate taxes, further fiscal stimulus and more regulation (which should be a negative for stocks).
Beyond that, market participants will be cautious as Brexit requires the largest transfer of share trading in more than 20 years, as EU banks must trade euro-denominated shares inside the bloc from tomorrow, forcing them to switch trading platforms.
But trading isn’t expected to really commence until after Friday’s NFP report. Analysts are expecting further slowdowns in the labour market, with consensus pointing to only 159K on the back of renewed pandemic-linked restrictions.
Themes for the Week
- US Politics: focus will be mostly on run-off elections in Georgia which will decide who controls the Senate.
- Non-Farm Payrolls: markets are pricing in worse employment numbers for the US due to restrictions.
- Brexit side-effects: cross-border trading will see the largest disruption in 20 years on Monday, with potential hiccups in equities and derivatives trading this week. Caution is advised.
Data in the Week Ahead:
- Opec Meetings (Mon)
- ISM PMI (Tue) à With weaker Empire State and Philly Fed, this print should be weaker.
- BOE’s Bailey Speech (Wed)
- FOMC Minutes (Wed)
- ISM Services PMI (Thur)
- CAD Employment Change (Fri)
- US Non-Farm Payrolls (Fri)
Correlation Report:
Comment: Correlation tables are still highlighting inverse correlation amongst equity markets and bonds while there is increasing correlation amongst commodities and USD movements.
On the Radar:
The recent moves over the holiday period may not mean much, so caution is advised. With that said, US equities maintain their upwards bias as does Crude Oil. In FX, Comm-Dolls area the leaders alongside GBP.
The markets seem convinced that the USD will continue to weaken in 2021, and that stocks will continue to benefit from vaccines and government spending. Usually, these “high conviction trades” are tested early on, so don’t get married to your positions.