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Market Commentary January 2021

Posted: 26th January 2021   |   Share

By Sarah Ryman

Covid Vaccine

Mamma Mia – Here we go again! The 2018 movie release / the opening track of ABBA’s third album or what went through our minds on tuning into Boris Johnsons national address on the 4th January? 

As Coronavirus cases rose rapidly across the country the UK found itself entering 2021 dusting off the home schooling, getting the kit ready for PE with Joe Wicks and start to grapple for online grocery slots once more with a distinct impression of déjà vu.

Economies continue to struggle against the tide of infections and ongoing support from government and central banks is necessary as many countries clamber to get the rate of infection (R number) below one.

UK

UK Manufacturing activity increased for the seventh month in December.  Given the broader economic picture this seems likely to be as a result of Brexit transition stock piling, the purchasing managers index reading was 57.5 (a reading over 50 indicates growth).  The figure was a 37-month high but this may reverse over coming months as coronavirus continues to drag down the economy.  We have seen UK mortgages soar to the highest level since before the 2008 financial crisis, house prices ended 2020 on a record high and construction activity continued to recover.  The Services sector however contracted further in December and according to the British Chambers of Commerce (BCC) the UK could be heading for a double dip recession.    

Retail sales have suffered their worst year on record in 2020 as a result of Covid-19 lockdown measures.  The flash IHS Markit / CIPS purchasing managers’ index for services, which is a barometer of economic health, fell to 38.8 in January compared with 49.4 in December.  This is the lowest level since May.  With services making up 80% of the UK economy this also supports the likelihood of a double dip recession. 

The UK economy shrank by a further 2.6% in November according to the Office for National Statistics which also highlighted that gross domestic product was 8.5% below its pre-pandemic peak.  Whilst there had been some recovery over the prior six months further restrictions have increased the pressure on the economy as the need to roll out vaccinations as swiftly as possible mounts.  Unemployment has risen to 5% which is the highest level in five years. 

EUROPE

Chancellor Angela Merkel has warned of further “tough measures” up to Easter to defeat the pandemic in Germany.  The EU’s medicines regulator says that it could decide to authorise the AstraZenica / Oxford University vaccine on 29th January as the area tries to ramp up vaccinations.  Germany’s health ministry has pushed back on the vaccines efficacy reports. 

The IHS Markit flash composite purchasing managers’ index for the Eurozone reading released this month was 47.5 reflecting a sharp drop in Eurozone business activity and demonstrating that most businesses have reported contraction.

The European central bank left interest rates unchanged.  A weak growth profile and subdued inflation is keeping pressure on the central bank.  There is little room to manoeuvre with rates already in negative territory at -0.5% and these look likely to remain for some time alongside a need for liquidity support.

US                                                                             

Joe Biden was sworn in as the 46th president completing a somewhat tumultuous transfer of power.    With US jobless claims back up to levels last seen in August Joe Biden has pleaded for Congress to ‘act now’ on a new, additional, $1.9 trillion economic rescue plan to help weather the Covid storm, stabilise the economy, boost testing and the vaccination rollout programme. 

The historic second impeachment of the outgoing president as a result of his encouragement of behaviour that resulted in the Capitol being attacked was welcomed by many and scorned by others. Nonetheless US stock markets enjoyed a Biden rally with equities reaching new highs.  US inflation is expected to remain subdued.

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