Market attention will swing to the inauguration of Joe Biden this week

1. Biden plans bonfire of the vanities in first 10 days.

2. China growth picks up in Q4, retail sales soft.

3. News around vaccines and cases weigh on sentiment.

A sluggish start for stocks after a choppy and nervous second week of trading in 2021 highlights concerns about the trajectory of global economic recovery this year. European stock markets nudged lower as investors wait for new bullish catalysts amid renewed COVID-19 worries with cases in China on the rise and delays to vaccine rollout in Europe. Joe Biden’s $1.9tn stimulus package has now been discounted, and in Europe we are still waiting for the €750bn rescue package to be disbursed, which won’t be assisted by political upheaval in the Netherlands, Italy and Germany, as Armin Laschet won the race to succeed Angela Merkel. Oil prices slackened amid the broad risk-off tone, with WTI back to a $52 handle and Brent under $55, despite economic growth in China picking up in the fourth quarter. Gold tracked a little higher around $1,830 after a test of $1,800 overnight, with US bond markets shut for the day.

Losses should be limited with US markets shut for the Martin Luther King Day holiday after closing down on Friday to end a choppy week. Indeed the DAX in Frankfurt nudged gently into the green after an hour of trading, with other major bourses paring earlier losses. On Friday, the S&P 500 declined 0.72% to 3,768, whilst the small cap Russell 2000 dropped 1.5% as the reflation-rotation trade reversed slightly as retail sales numbers disappointed. US retail sales declined by 0.7% in December from November, indicating much slower consumption growth than expected.  

We’re getting lots of noise around vaccines, which is to be expected, and is likely a factor in some of the nervy price action. For example, Pfizer is temporarily cutting supply in Europe as it upgrades its Puurs facility in Belgium. Meanwhile, AstraZeneca will deliver Britain with 2m doses a week from mid-Feb, later than the end of Jan timeline envisaged. Meanwhile lockdown restrictions get tighter. All this of course is rather by-the-by, as the underlying narrative remains that vaccines will deliver a return to near-normal sometime this year. It might be a bit slower in some places, but for the market the fact it is going to happen is all that really matters. 

The dollar nudged up with the WSJ reporting that Janet Yellen is expected to reaffirm the US administration’s commitment to market-determined foreign exchange rates and will not actively seek a weaker dollar. This may not matter too much, but if she were not to stress this point it could see USD weaken. GBPUSD sank to session lows at 1.35250, the lowest since Jan 12th. EURGBP also bounced off the key horizontal support at 0.8866-67, the line that has held since last June. EURUSD is testing support at the Dec 9th low around 1.2060.

China’s economy grew by 6.5% in the fourth quarter of last year, better than before the pandemic. This helped the world’s second-largest economy notch 2.3% GDP growth in 2020. But the backwards looking data is probably less important for the market right now than the fact cases are on the rise again and China has locked down 28m people to combat the spread. And consumers remain circumspect – despite the pickup in growth in Q4, retail sales in China declined by 3.9%.

Market attention will swing to the inauguration of Joe Biden this week. Violence is a concern, but the US authorities won’t allow a repeat of the Washington mob. Biden himself plans a bonfire of the vanities, with a series of executive orders in his first 10 days designed to wipe away the sinful past of the Trump era. This will also see the president take greater control of vaccinations.  

We’ll also be watching the ECB meeting on Thursday for signs of concern about the pace of recovery in the Eurozone. Clearly the picture has worsened since the ECB last met, but there is not a lot more Christine Lagarde and co can do for the real economy. The central bank expanded and extended its pandemic emergency purchase programme last time and doesn’t have much ammunition left. Getting the €750bn recovery fund out to where it’s needed is proving painfully slow. 

Equities 

Earnings season on Wall Street hits full speed this week. Netflix (NFLX) reports tomorrow Jan 19th, with average earnings per shares (EPS) estimated at $1.40 on revenues of $6.6bn, up 20% year-on-year. Whilst the company has been a big winner from the pandemic as subscriptions leapt with consumers stuck at home, there are worries about the service going forward. 

One, is it as good as it used to be? The library content is shrinking, and competition is far more intense these days. Churn is a big concern with one survey showing 32% of respondents indicating they are likely to cancel Netflix in the next three months. This is well up on previous levels and indicates perhaps a degree of subscription fatigue among consumers. Whilst Netflix remains first among equals (people with more than one VOD subscriptions almost invariably have a Netflix account), it’s facing much sterner competition from the likes of Disney, which is throwing some serious effort into new content and has the advantage of established brands and intellectual property like Star Wars. 

Two, we’re heading into the other side of the massive pull-forward in demand that really drove the 2020 subscriber growth. Paid net adds hit 26m in the first half but had declined to just 2.2m in Q3. Netflix ended Q3 with 195m paid subscribers and expects a further 6m net adds in Q4 to reach 201m in total. Key will be the subscriber growth in Latin America and Asia Pacific, where growing broadband penetration rates are supportive of ongoing growth. Whilst Netflix has had some notable local-language successes, it will need to keep repeating these to keep growing – content remains king. 

Major US earnings releases