Global equity markets started the new year on a good note only to give back all gains last week on overvaluation concerns and high volatility. January was marked by stricter economic lockdowns and border barriers across Europe to limit the spread of new COVID-19 variants. In North America, vaccine roll-out delays and stock shortages have escalated during the power transition. Newly elected President Joe Biden has unveiled a $1.9 trillion spending plan that would include $1400 stimulus checks. Democratic lawmakers are now trying to push for an even bigger stimulus response.
Canada
The S&P/TSX Total Return Index ended the month of January down 0.32% after President Joe Biden decided to remove the permit for the controversial Keystone XL oil pipeline between Canada and the US. Health Care, Energy, and Utilities led the way while Staples, Materials, and Industrials lagged.
The Canadian loonie fell 0.34% against the US greenback despite crude oil rising 7.58% last month. The Canadian dollar weakened after the US unveiled a $1.9 trillion relief package. Many economists think this stimulus will fuel inflation and pressure the Fed to lift interest rates earlier than anticipated.
Overall, the Canadian economic data was positive. In November, the Gross Domestic Product (GDP) was stronger than anticipated, indicating the economy would cope better than expected with renewed restrictions. The unexpected GDP strength boosted the Canadian government bond to 10 months high. Building permits dropped in December, but not as much as predicted. Finally, consumer confidence has risen to its peak since last March but remains much lower than pre-COVID-19.
Regarding monetary policy, the Bank of Canada kept its interest rate target on hold at 0.25%. Governor Tiff Macklem said that the Canadian economy is on track to restore the damage caused by the pandemic within two years and does not require extra assistance, even amid a surge of new COVID-19 cases.
United States
The S&P 500 Total Return index ended January down 1.01% on overvaluation concerns ahead of the Q4 2020 earnings season. Volatility also surged in the last week, causing investors to take a risk-off stance. Energy, Health Care and Discretionary led the way while Staples, Industrials and Materials lagged.
Donald Trump’s 45th presidency ended on a sour note. Two weeks before his departure, he incited a deadly insurrection against the US Capitol over false claims about the election results. He was also impeached for a second time for his role in this attack against democracy. He left as the worst-performing US president with an approval rating of 34%, according to Gallup.
Newly elected President Joe Biden didn’t waste time. He quickly introduced a $1.9 trillion relief program that will accelerate vaccination efforts across the country and deliver financial assistance to those affected by the pandemic. The plan includes a third stimulus check of $1,400. Democratic policymakers are trying to push for an even bigger response: recurring monthly payments that could reach $2000 per month until the pandemic is over.
On the macro front, we have seen mixed economic data. The US economy grew at an annualized rate of 4% in Q4 2020, leaving the economic output only 2.5% below its level of last year. However, the nonfarm payroll data showed a 140K employment drop in December for a record 9.37 million job loss in 2020. Most of these losses are concentrated in the leisure and hospitality, two sectors that should benefit from the ongoing vaccination campaign.
Regarding monetary policy, Chairman Jerome Powell said the Fed is committed to pursue its low interest rate policy until an economic recovery becomes more apparent. He acknowledges the economic has stumbled in the recent months. Officials are going forward with their program to keep buying Treasury and mortgage bonds in a bid to keep long-term borrowing rates low and support the economy.
International
The MSCI ACWI Ex-US Total Return Index ended the month of January up 0.23% despite vaccine supply shortages and a continued rise in new COVID-19 cases. Telecom, Info Tech and Discretionary led the way while Staples, Financials and Utilities lagged.
In Europe, new coronavirus strains have contributed to a consumer panic. As a result, the economic prospects dropped after EU countries prolonged their lockdowns. The eurozone economic data is reflecting this, and both business and consumer confidence plunged. According to estimates, the PMI of the eurozone decreased from 49.1 to 47.5 in January. This last reading represent the third monthly decline and the worst deterioration since November.
In this challenging macro environment, ECB President Christine Lagarde, vows to support the eurozone with accommodating policies that should instill growth in 2021. She stands ready to adjust all monetary instruments if necessary and when appropriate. She made a warning at the end of the month about the future consequences of prolonged lockdown actions.
Lastly, Joe Biden has delayed a ban imposed by Donald Trump on ADR companies having military ties with China until May 27th. The list of blacklisted firms grew to 44 companies in the last days of the Trump administration, including oil giant China National Offshore Oil Corporation (CNOOC) and China’s largest semiconductor and smartphone maker Xiaomi.
The Portfolio Management Team