Testing Earnings Season Ahead
Updated: Jan 22, 2021
Market highlights: Week ending 15th January 2021
A quiet week in trading by current standards saw U.S. Stock indexes drop between 1% and 1.5%. Declining retail sales and employment figures became the area in focus despite more stimulus proposals.
A decline in U.S. retail sales in December marked the third consecutive monthly decline, highlighting the recent loss of momentum within the U.S. economy. This economic pullback was reinforced by the recent reversal of weekly unemployment claims figures. Following months of positive news, renewed measures to slow the spread of COVID-19 saw weekly claims jump to 965,000.
Another week, another stimulus proposal. This week, Joe Boden announced a potential $1.9 trillion coronavirus relief package. The ‘American Rescue Plan’ includes direct payments of $1,400 to most Americans, increasing the unemployment benefit and the minimum wage.
Small-cap stocks continued their recent run of form, with the Russell 2000 small-cap index posting a modest gain while large-cap indexes such as the S&P 500 and the NASDAQ Composite index both fell 1.5%.
Following a 10-month high of 1.187% on Tuesday, yields on the 10Y treasury fell over the second half of the week but still remain above the 1% mark. Worse than expected retail and unemployment data diluted the risk-on sentiment that had reduced recent demand for Government Bonds.
A strong week for the Dollar saw the recent rise in Treasury yields, the Biden blue wave and a risk aversion towards other currencies push the greenback towards a one-month high. While Trump has publicly railed against Dollar strength for years in a bid to create a more competitive export market, Janet Yellen, Biden’s pick to take over the U.S. Treasury, is expected to revert to a more orthodox hands-off approach. With that said, headwinds still exist for the Dollar over the medium-to-long term.
Bitcoin’s initial venture above $40,000 was short-lived as the crypto plunged to just over $30,000 on Monday. While the pace of this 20% decline was impressive, it wasn’t altogether surprising when you look at the speed of the ascent to $40,000. Bitcoin recovered well to finish up the week at around $35,000.
Quarterly earnings season is upon us once again, and if the initial reports from the big U.S. Banks are anything to go by, we could be in for a volatile spell. Despite better-than-expected profits from JP Morgan, Citi and Wells Fargo, shares in all 3 declined. This market reaction suggests that expectations are high as investors seek justification for increased valuations amidst an uncertain economic outlook. This increasing pressure to see an improving narrative in 2021 will mean that those who fall short of future expectations will likely see their share price duly punished.