Week Ahead – An Extraordinary Start to the Year

Attention slowly shifting from US politics

What an extraordinary start to the year. While next week should be much quieter, it won’t be without action. US politics is unlikely to go quiet with talk continuing of possible impeachment proceedings against President Trump, Covid is wreaking havoc once again and earnings season gets underway on Friday.

Country

US

The US is supposed to be entering the peak of the holiday COVID surge, but it could get much worse now that more states have found the highly contagious UK virus variant.  ICU space is tightening across many states and it seems only a matter of time before lockdown efforts are implemented.

For many traders, this week is all about Fed Speak as policymakers will have 11 different events to voice any changes to their outlook now that it seems the economy will finally get more fiscal support.  The Fed will also release their Beige Book on Wednesday.

The main economic data event of the week will be if the December retail sale report showed a third consecutive month of declines.  Many investors will also pay attention to Friday’s bank earnings to get the latest assessment on strength of the US consumer.

US Politics

After the Capitol riot and Trump’s concession that a new administration will be inaugurated on January 20th, Wall Street will keep the focus on President-elect Biden’s appointments and clarity on his 100-day agenda.  Impeachment proceedings may dominate the headlines, but will have little impact on financial markets.

EU

ECB minutes the only notable release next week. The vaccine rollout is continuing after eventually receiving approval, while restrictions continue to be severe during a brutal winter wave.

Brexit

The UK and EU agreed a Brexit deal late in December but coming so late in the day means it’s only gone into force on a provisional basis. The European Parliament will scrutinize the deal, but ratification is expected to be a formality, given MEP’s have been kept in the loop on the progress of negotiations throughout.

Talks aren’t over yet, with negotiations now starting on the UK’s access to the EU on financial services, which the former is hoping will be wrapped up by March. This was not included in the initial agreement which focused primarily on goods. The UK is hoping to be granted equivalence but this is far from guaranteed, with the EU reportedly concerned about the countries desire to diverge away from its rules.

UK

It’s looking a little bleak for the UK at the moment, with the country back in lockdown until at least the middle of February and London Mayor Sadiq Khan claiming the city is at crisis point due to pressure on the hospitals, with the number already 35% above April’s peak. On the upside, the UK this week approved its third Covid-19 vaccine, with Moderna following Pfizer and AstraZeneca in gaining authorization.

While this won’t address any immediate problems in the country, it will contribute to the optimism from the second quarter, although its approval was already built into expectations.

The country may have averted one crisis in agreeing a Brexit deal late in December but it’s very much in the middle of another and there will once again be significant economic consequences of the latest measures, which were arguably inevitable regardless of the new strains.

Turkey

Turkish markets and the currency are back in favour over the last couple of months, following the personnel changes and rate hikes that went a long way to restoring confidence. In recent years, the country has never been too far away from a crisis but those risks have seemingly subsided in the near-term.

China

China inflation expected to move back above 0.0%, mostly due to increasing commodity prices. Thursday Balance of Trade. A fall below $70 billion could trigger fears that international demand is falling and be negative for China equities.

Equity markets are struggling to digest the US delisting of China telcos and their removal from important tracking indices from MSCI/S&P, while a number of payment apps were also banned in the US.

More importantly, antitrust investigations on Alibaba/Ant Financial are weighing on tech sector giants such as Tencent. The Chinese government has ordered the censoring of news around its antitrust investigations. China equities to underperform until more clarity is gained.

THe PBOC is showing signs that it is becoming less tolerant of Yuan appreciation, based on this week’s CNY fixes. A US Dollar rally due to higher US yields could see a major squeeze of long CNY, long Asian currency positions next week.

India

A continued rise in US yields may offset recent INR strength. The currency has shown signs of waning upside momentum this week, and could face further depreciation next week.

India releases Industrial Production on Monday which is expected to recover modestly. WPI on Wednesday will show that India continues to struggle with stagflation, notably because of food price increases. The recent oil rally will add to those woes.

Overall India continues to grapple with a stagflationary environment complicated by a Covid-19 fall in domestic consumption and a weak financial sector.

New Zealand 

No significant data, Currency may correct lower if US yields continue rising next week.

Australia 

Covid-19 fears are rising as a community case of the UK variant in Brisbane will lead to a city lockdown for three days from this evening. Cases are decreasing in Victoria and NSW. An escalation, particularly in Queensland over the weekend, will mute Australian equities which have suffered today.

Retail Sales should bounce back by 7.0% next week, and Westpac Consumer Confidence will outperform reinforcing Australia’s domestic recovery, as commodity prices reach multi-year highs. Covid-19 will probably subsume that data however.

Japan

Shortened week with a public holiday on Monday. Japan Machinery Orders and PPI are expected to be quite negative, as reduced international demand and weak November bonuses sap international and domestic consumption. A Covid-19 state of emergency in Tokyo modest in scope and hardly a lockdown worth mentioning. Only an explosion of virus cases will undermine the equity rally.

Japan equities have rallied to multi-decade highs, coat tailing the US markets and as a prime beneficiary of the expected global recovery in 2021. We do not expect that sentiment to change markedly next week.

Monitor USD/JPY which has rallied over 1.0% in 24 hours after the Democrat clean sweep and Biden Presidency confirmed.That has pushed US yields higher with the Yen being very sensitive to yield differentials. A further move higher in the US 10-year next week could see a test of long-term resistance at 104.70, opening up a potentially large USD?JPY short squeeze.

Key Economic Events

Monday, January 11th

• Atlanta Fed President Bostic talks about his economic outlook for 2021.  Dallas Fed President Kaplan speaks
• Bank of England policy maker Tenreyro discusses negative interest rates.
• The annual JPMorgan Healthcare Conference begins 4-day event.

Economic Data

• Mexico industrial production
• Bank of Canada Business Outlook Survey, Canadian Survey of Consumer Expectations
• Australia Melbourne Institute inflation, retail sales
• China CPI, PPI
• Turkey current account balance, unemployment
• New Zealand REINZ House Sales to be released this week
• China Money Supply, New Yuan Loans, and Aggregate Financing to be released this week

Tuesday, January 12th

• Fed’s Rosengren, Kaplan, and Kashkari speak on “Racism and the Economy
• Boston Fed President Rosengren presents an economic overview at a Boston Chamber of Commerce event.
• BOE Deputy Governor Broadbent speaks on the coronavirus and spending.

Economic Data

• Bank of France industrial sentiment
• Japan BoP
• Norway GDP
• South Africa manufacturing production
• India industrial production, CPI

Wednesday, January 13th

• ECB President Lagarde speaks at an online conference on the EU economy post-Covid and post-Brexit.
• UK PM Johnson is due to appear before Parliament’s influential Liaison Committee.
• Riksbank First Deputy Governor Skingsley participates in a panel discussion on the coronavirus pandemic.
• Philadelphia Fed President Harker discusses the economic outlook during a virtual event hosted by the Chamber of Commerce for Greater Philadelphia.
• The 11th Gulf Intelligence “Global” UAE Energy Forum 2021: Energy Outlook 2021

Economic Data

• US Dec CPI M/M: 0.4% estimate v 0.2% prior, Monthly budget statement, Fed Beige Book
• EIA crude oil inventory report
• New Zealand ANZ commodity price
• Japan money stock, machine tool orders
• Czech CPI
• Eurozone Industrial production
• South Africa retail sales
• Turkey industrial production

Thursday, January 14th

• Boston Fed President Rosengren to speak at “Recover Boston: The Road Ahead – Economic Issues in 2021,” hosted by the Boston Business Journal. Atlanta Fed President Bostic moderates a panel on small business recovery.
• Federal Reserve Chairman Jerome Powell speaks at Princeton University virtual event.
• Samsung holds the Unpacked 2021 event reveals Galaxy S21 series

Economic Data

• US initial jobless claims
• ECB Monetary Policy Meeting Accounts
• OPEC monthly oil report
• New Zealand building permits
• Germany 2020 GDP Y/Y: -5.1% estimate v 0.6% prior
• U.K. RICS house price balance
• Japan core machine orders, PPI
• India wholesale prices
• China Dec trade balance, Exports: 15.0% estimate v 21.1% prior, Imports: 5.0% estimate v 4.5% prior

Friday, January 15th

• US retail sales are expected to remain soft for a third consecutive month despite the holiday season as restrictive measures weigh on businesses and activity.
• Earnings season kickoffs with JPMorgan, Citigroup, and Wells Fargo report before the bell.
• Germany’s Christian Democratic Union, Chancellor Angela Merkel’s party holds a virtual convention. To pick a new head on January 16th.

Economic Data

• US Dec Retail Sales m/m: -0.1% estimate v -1.1% prior, Jan Empire manufacturing: 3.8 estimate v 4.9 prior, PPI, industrial production, Jan Prelim University of Michigan sentiment: 79.5 estimate v 80.7 prior
• Oil: Baker Hughes rig count
• Canada existing home sales
• New Zealand food prices
• Japan tertiary industry index
• UK GDP, industrial production, trade balance
• Swedish CPI
• Polish CPI
• India trade

Sovereign Rating Updates:

• UK (Fitch)
• Russia (S&P)
• Finland (Moody’s)