A cautious start to a busy week

Following a solid start to the year, investors are turning more cautious as data continues to be released, corporates present their outlook for 2021, President-Elect Joe Biden sets out his economic plan, and most importantly developments around Covid-19 continue.

Asian stocks traded mixed today despite data showing that China’s economy bounced back strongly in the final quarter of 2020. The world’s second-largest economy reported 6.5% growth in Q4, well above estimates of 6.1%. Industrial production also beat expectations in December rising 7.3%, but retail sales could not catch up with the trend, growing only 4.6% versus analysts’ forecast of 5.5%.

Overall, China is the only major economy to achieve a rapid turnround and this is essentially due to the measures taken to control the pandemic. Whether the country will continue to achieve rapid growth in the following quarters, depends largely on the changing pandemic dynamics both internally and overseas.

US equity futures are dipping lower following two consecutive days of declines. Data on Friday showing retail sales declining 0.7% in December was a warning signal to equity bulls, given consumer spending in the US makes up about two-thirds of the country’s economic output.

The $1.9 trillion anticipated fiscal stimulus from Biden’s administration was the key support to risk assets and allowed Wall Street to remain disconnected from Main Street. However, the new President’spledge on wealthy individuals and corporations to pay their “fair share” in the form of taxes was unsettling. Markets knew that Biden wanted to raise taxes sometime in the future but taking such a step in the current environment will likely trigger a significant selloff if approved by the Senate.

US markets are closed today due to Martin Luther King holiday, hence we are not seeing big moves in FX. Expect volatility to ramp up heading into Biden’s inauguration on Wednesday, especially if riots turn violent.

Elsewhere investors will keep a close eye on earnings from Morgan Stanley and Bank of America after bank shares took a hit on Friday. Intel, Netflix and Procter & Gamble are also on the earnings calendar this week.

Investors will learn on Thursday how the European Central Bank responds to extended lockdowns on the continent. While we do not expect to see any changes to interest rates, the bond purchasing program may be expanded further. Any increase in asset purchases or verbal intervention associated withthe Euro’s strength may put additional pressure on the single currency.