Week in Review: Investors Look Past Extraordinary Scenes from Capitol Hill

Global equity markets started the year off strongly, with major indexes hitting fresh record highs. The market’s optimism may seem misplaced, given the bad news that has accompanied the start of 2021, including extraordinary scenes from Capitol Hill along with the discovery of a more easily spread variant of the novel coronavirus first spotted in the U.K. together with another variant emerging out of South Africa.

The positive gain in stocks is a reminder that the market ultimately takes its direction from fundamentals (the economy, corporate profits, interest rates) and highlights the importance of a long-term view. Increased prospects for significant U.S. fiscal stimulus under the incoming Biden administration appeared to be the major factor driving the week’s gains after the Democrats gained further control.

On Wednesday, it was confirmed that the Democrats have secured a Senate majority following a pair of narrow run-off victories in Georgia. This means the Democrats now control both the House of Representatives and the Senate, together with Joe Biden emerging as the victor in the November presidential contest, a scenario known as a “blue wave”.

The U.S. Capitol was stormed by rioters as supporters of President Donald Trump disrupted proceedings in which lawmakers were formalising the election victory of President-elect Joe Biden. In unprecedented scenes, Congressional security drew firearms inside the chambers of the American legislature.

Prime Minister Boris Johnson ordered a full return to lockdown as infections and hospitalisations in the UK are surpassing levels seen in the first wave last year. Similarly, Germany extended its lockdown restrictions to January. Meanwhile, the European Medicines Agency approved a second coronavirus vaccine developed by Moderna for the EU area.

The World Bank cut its 2021 global economic growth outlook from 4.2% to 4.0%, citing  that the trajectory of coronavirus infections and global debt accumulation represent the two most significant variables in its forecasts.

Markets started the year strongly with major indices posting decent weekly gains. In the U.S., the Dow Jones (+1.61%), S&P 500 (+1.83%) and the Nasdaq (+2.43%) all ended the week stronger. Similarly, in Europe, the Euro Stoxx 50 (+2.60%) and FTSE 100 (+6.39%) posted stellar returns, along with Japan’s Nikkei 225 Index (+2.53%) and China’s Shanghai Composite Index (+2.79%).

It is also worthwhile mentioning that Brent Crude (+8.59%) posted its biggest weekly gain since late September due to OPEC+ agreeing to keep total oil production flat. Following the meeting, Saudi Arabia then surprised the market by announcing that it will unilaterally cut an additional 1 million barrels per day of crude production, which was the driver behind the sharp increase in oil prices.

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Market Moves of the Week

New vehicle sales in South Africa dropped by 10.1% on an annual basis, in December. New vehicle sales had recorded a drop of 12.0% in the prior month.

Local markets followed their global counterparts higher, with the JSE All Share Index ending the week up +6.92%, led higher by the resource (+13.31%) and industrial (+4.70%) sectors. The financial sector (+2.06%) also posted healthy weekly gains. The rand lost ground against developed market currencies, trading at R15.29 to the U.S. Dollar (+4.04% depreciation) by Friday market close.

Market Moves of the Week -10 Jan 2021
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Chart of the Week

Despite further deterioration in the global virus situation - including the spread of a more transmissible virus strain - Goldman Sachs Global Investment Research expect a strong global economic recovery later this year as a result of a declining sensitivity of GDP to negative virus developments, supportive fiscal and monetary policy, and successful vaccination campaigns. Although vaccination rollouts are off to a slow start in many countries, Israel’s rapid inoculation campaign which has led to a vaccination pace of nearly 2% of the country’s population per day - provides a replicable roadmap for other high income countries. By employing a similar roadmap, most developed markets should be able to vaccinate large shares of their population by August despite the initial slow start.

Chart of the Week - 10 Jan 2021

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